UNITED STATESSECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549

FORM 10-QSB/A
  (Amendment No. 1)

(Mark One)

|[X]   |  | QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
|----- |  | ---------------------------------------------------------------------
|      |  | ACT OF 1934                                                          
|     
|      |  | For the quarterly period endedSeptember 30, 2005                     
|     
|     
|[   ] |  | 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:000-51294METAMORPHIX, 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. Yeso  No:x

Check whether the registrant is a shell company (as
defined in Exchange Act Rule 12b-2). YesoNo:x

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): YesoNo:x

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|                              |                                                                                      |    |   |                                                             |  | Page No.
|----------------------------- | ------------------------------------------------------------------------------------ | -- | - | ----------------------------------------------------------- |  | --------
|PART I. FINANCIAL INFORMATION |                                                                                      |   
|                              |                                                                                      |   
|ITEM 1.                       |                                                                                      |    |   | Consolidated Condensed Financial Statements (Unaudited)     |  |         
|                              |                                                                                      |    |   |                                                             |  |         
|                              | Consolidated Condensed Balance Sheets as of September 30, 2005 and December 31, 2004 |    | 5
|                              |                                                                                      |    |  
|                              | Consolidated Condensed Statements of Operations for the Three and Nine Months        |    |  
|                              |                                                                                      |    |   | Ended September 30, 2005 and 2004                           |  | 6       
|                              |                                                                                      |    |   |                                                             |  |         
|                              | Consolidated Condensed Statements of Cash Flows for the Nine Months Ended            |    |  
|                              |                                                                                      |    |   | September 30, 2005 and 2004                                 |  | 7       
|                              |                                                                                      |    |   |                                                             |  |         
|                              | Notes to Consolidated Condensed Financial Statements                                 |    | 8
|                              |                                                                                      |    |  
|ITEM 2.                       |                                                                                      |    |   | Management's Discussion and Analysis or Plan of Operation   |  | 14      
|                              |                                                                                      |    |   |                                                             |  |         
|ITEM 3.                       |                                                                                      |    |   | Controls and Procedures                                     |  | 18      
|                              |                                                                                      |    |   |                                                             |  |         
|PART II. OTHER INFORMATION    |                                                                                      |   
|                              |                                                                                      |   
|ITEM 1.                       |                                                                                      |    |   | Legal Proceedings                                           |  | 18      
|                              |                                                                                      |    |   |                                                             |  |         
|ITEM 2.                       |                                                                                      |    |   | Unregistered Sales of Equity Securities and Use of Proceeds |  | 19      
|                              |                                                                                      |    |   |                                                             |  |         
|ITEM 3.                       |                                                                                      |    |   | Defaults Upon Senior Securities                             |  | 19      
|                              |                                                                                      |    |   |                                                             |  |         
|ITEM 6.                       |                                                                                      |    |   | Exhibits                                                    |  | 19      
|                              |                                                                                      |    |   |                                                             |  |         
|SIGNATURES                    |                                                                                      | 20

2

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EXPLANATORY NOTE

We are filing this  Form
10-QSB/A (Amendment No. 1) for the quarterly period ended September 30, 2005
in response to the SECs comments on the filing of our Amendment No.
1 to Form 10-SB which are applicable to this filing. The changes made are reflected
in Part I, Note 8 to the Notes to Consolidated Financial Statements under Director
and Officer Indemnification; Part II, Item 1 under Legal Proceedings; and Part
II, Item 3 under Defaults Upon Senior Securities.

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 feedlot operator, and the Monsanto Company, or Monsanto, the worlds second largest swine breeder.  We describe these agreements in more detail under Licenses, Acquisitions, and Collaborative
Agreements. We also have agreements to provide DNA testing services for the American Kennel Club, the worlds largest canine registry, United Kennel Club, American Angus Association, the worlds largest beef cattle registry, Red
Angus Association, 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.

3

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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 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/A (Amendment No. 1) that are not descriptions of historical facts are
forward-looking statements within the meaning of the safe harbor provisions of the Private
Securities Litigation Reform Act of 1995.  Reference is made in particular to the description of our plans and objectives for future operations, assumptions underlying such plans and objectives, and other forward looking terminology such as
may, expects, believes, anticipates, intends, estimates, projects, or similar terms, variations of such terms or the negative of such terms.  Forward-looking
statements are based on managements current expectations. Actual results could differ materially from those currently anticipated due to a number of factors, including those set forth under Description of Business.
The safe harbors for forward looking statements provided by Section 21E of the
Exchange Act do not apply to statements made in this Form
10-QSB/A (Amendment No. 1). 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

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PART I. FINANCIAL INFORMATION

ITEM 1. Consolidated Condensed Financial Statements (Unaudited)

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

|                                                                     |  | September 30, |              |   | December 31, |  
|-------------------------------------------------------------------- |  | ------------- | ------------ | - | ------------ | -
|                                                                     |  | 2005          |              |   | 2004         |  
|ASSETS                                                               |  |               |              |   |              |  
|CURRENT ASSETS:                                                      |  |               |              |   |              |  
|Cash and cash equivalents                                            |  | $             | 101,024      |   |              | $
|Accounts receivable                                                  |  |               | 256,181      |   |              |  
|Prepaid expenses and other current assets                            |  |               | 121,772      |   |              |  
|Total current assets                                                 |  |               | 478,977      |   |              |  
|                                                                    
|PROPERTY AND EQUIPMENTNet                                           |  |               | 1,600,763    |   |              |  
|GOODWILL                                                             |  |               | 3,739,870    |   |              |  
|INTELLECTUAL PROPERTY RIGHTS                                         |  |               | -            |   |              |  
|LEASE SECURITY DEPOSITS                                              |  |               | 203,024      |   |              |  
|DEFERRED DEBT ISSUE COSTS                                            |  |               | 5,233,677    |   |              |  
|                                                                     |  |               | 10,777,334   |   |              |  
|TOTAL ASSETS                                                         |  | $             | 11,256,311   |   |              | $
|                                                                    
|LIABILITIES AND STOCKHOLDERS EQUITY (DEFICIT)                       |  |               |              |   |              |  
|CURRENT LIABILITIES:                                                 |  |               |              |   |              |  
|Accounts payable and accrued expenses                                |  | $             | 8,078,964    |   |              | $
|Accrued compensation                                                 |  |               | 6,636,410    |   |              |  
|Accrued dividends                                                    |  |               | 1,525,555    |   |              |  
|Short-term notes payable                                             |  |               | 2,930,627    |   |              |  
|Notes payable to officers and directors                              |  |               | 1,584,498    |   |              |  
|Deferred revenue                                                     |  |               | 1,323,328    |   |              |  
|Celera purchase obligation                                           |  |               | 2,030,149    |   |              |  
|Accrued interest                                                     |  |               | 2,684,157    |   |              |  
|Total current liabilities                                            |  |               | 26,793,688   |   |              |  
|                                                                    
|LONG-TERM NOTES PAYABLE, net of discount of $5,649,941 and           |  |               |              |   |              |  
|$7,000,745 at September 30, 2005 and December 31, 2004, respectively |  |               | 15,273,381   |   |              |  
|CELERA PURCHASE OBLIGATION                                           |  |               | 3,867,860    |   |              |  
|ACCRUED INTEREST                                                     |  |               | 1,131,557    |   |              |  
|OTHER LONG-TERM LIABILITIES                                          |  |               | 185,584      |   |              |  
|Total liabilities                                                    |  |               | 47,252,070   |   |              |  
|                                                                    
|COMMITMENTS AND CONTINGENCIES (Note 8)                               |  |               |              |   |              |  
|                                                                    
|STOCKHOLDERS EQUITY (DEFICIT):                                      |  |               |              |   |              |  
|Convertible Preferred stock, $0.001 par value22,000,000 shares      |  |               |              |   |              |  
|authorized as of September 30, 2005 and December 31, 2004,           |  |               |              |   |              |  
|7,326,715 and 7,238,315 shares issued and outstanding as of          |  |               |              |   |              |  
|September 30, 2005 and December 31, 2004, respectively               |  |               | 59,918,771   |   |              |  
|Common stock, $0.001 par value75,000,000 shares authorized as of    |  |               |              |   |              |  
|September 30, 2005 and December 31, 2004, 20,369,719 and             |  |               |              |   |              |  
|9,488,878 shares issued and outstanding as of September 30, 2005 and |  |               |              |   |              |  
|December 31, 2004, respectively                                      |  |               | 20,370       |   |              |  
|Additional paid-in capital                                           |  |               | 77,032,579   |   |              |  
|Accumulated other comprehensive loss                                 |  |               | (71,288      | ) |              |  
|Accumulated deficit                                                  |  |               | (172,896,191 | ) |              |  
|Total stockholders equity (deficit)                                 |  |               | (35,995,759  | ) |              |  
|TOTAL LIABILITIES AND STOCKHOLDERS EQUITY (DEFICIT)                 |  | $             | 11,256,311   |   |              | $

See notes to consolidated condensed financial statements.

5

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METAMORPHIX, INC. AND SUBSIDIARIESCONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS

(Unaudited)

|                                       |  |               | Three Months Ended |   |               |   | Nine Months Ended |              
|-------------------------------------- |  | ------------- | ------------------ | - | ------------- | - | ----------------- | -------------
|                                      
|                                       |  | September 30, |                    |   | September 30, |   |                   | September 30,
|                                       |  | 2005          |                    |   | 2004          |   |                   | 2005         
|                                      
|REVENUE                                |  | $             | 600,407            |   |               | $ | 1,036,389         |              
|OPERATING COSTS AND                    |  |               |                    |   |               |   |                   |              
|EXPENSES:                              |  |               |                    |   |               |   |                   |              
|Cost of revenue                        |  |               | 395,980            |   |               |   | 967,953           |              
|Research and development               |  |               | 1,210,509          |   |               |   | 1,128,972         |              
|General and administrative             |  |               | 2,549,823          |   |               |   | 2,578,720         |              
|Depreciation and amortization          |  |               | 75,120             |   |               |   | 3,246,570         |              
|Total operating costs and expenses     |  |               | 4,231,432          |   |               |   | 7,922,215         |              
|OTHER INCOME (EXPENSE):                |  |               |                    |   |               |   |                   |              
|Interest expense and accretion of debt |  |               |                    |   |               |   |                   |              
|discount                               |  |               | (1,383,038         | ) |               |   | (1,173,812        | )            
|Debt issue costs                       |  |               | (558,662           | ) |               |   | (443,748          | )            
|Debt conversion expense                |  |               | -                  |   |               |   | -                 |              
|Other income                           |  |               | (194,162           | ) |               |   | -                 |              
|NET LOSS                               |  |               | (5,766,887         | ) |               |   | (8,503,386        | )            
|Preferred stock dividends and          |  |               |                    |   |               |   |                   |              
|accretion of beneficial conversion     |  |               |                    |   |               |   |                   |              
|features                               |  |               | (351,604           | ) |               |   | (1,017,857        | )            
|NET LOSS ATTRIBUTABLE TO               |  |               |                    |   |               |   |                   |              
|COMMON STOCKHOLDERS                    |  | $             | (6,118,491         | ) |               | $ | (9,521,243        | )            
|Net loss per common share:             |  |               |                    |   |               |   |                   |              
|Basic and diluted                      |  | $             | (0.30              | ) |               | $ | (2.34             | )            
|Weighted average number of shares      |  |               |                    |   |               |   |                   |              
|outstanding:                           |  |               |                    |   |               |   |                   |              
|Basic and diluted                      |  |               | 20,365,586         |   |               |   | 4,069,060         |              

See notes to consolidated condensed financial statements.

6

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METAMORPHIX, INC. AND SUBSIDIARIESCONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS

(Unaudited)

|                                                                  |  |               | Nine Months Ended |  
|----------------------------------------------------------------- |  | ------------- | ----------------- | -
|                                                                 
|                                                                 
|                                                                  |  | September 30, |                   |  
|                                                                  |  | 2005          |                   |  
|                                                                 
|CASH FLOWS FROM OPERATING ACTIVITIES:                             |  |               |                   |  
|Net loss                                                          |  | $             | (20,381,633       | )
|Adjustments to reconcile net loss to net cash flows               |  |               |                   |  
|used in operating activities:                                     |  |               |                   |  
|Depreciation and amortization                                     |  |               | 2,473,174         |  
|Accretion of debt discount                                        |  |               | 1,350,803         |  
|Amortization of deferred debt issue costs                         |  |               | 1,246,403         |  
|Share-based payment expense                                       |  |               | 3,089,383         |  
|Induced conversion expense                                        |  |               | 93,696            |  
|(Gain) loss on disposal of fixed assets                           |  |               | 199,292           |  
|Changes in assets and liabilities:                                |  |               |                   |  
|Accounts receivable                                               |  |               | (13,324           | )
|Prepaid expenses and other current assets                         |  |               | (18,650           | )
|Lease security deposits                                           |  |               | 4,240             |  
|Accounts payable and accrued expenses                             |  |               | 3,529,822         |  
|Accrued compensation                                              |  |               | 2,161,321         |  
|Deferred purchase obligation                                      |  |               | 188,933           |  
|Deferred revenue                                                  |  |               | (157,503          | )
|Accrued interest                                                  |  |               | 2,019,979         |  
|Other, net                                                        |  |               | (23,137           | )
|Net cash flows used in operating activities                       |  |               | (4,237,201        | )
|CASH FLOWS FROM INVESTING ACTIVITIES:                             |  |               |                   |  
|Purchases of property and equipment                               |  |               | (2,078            | )
|Net cash flows used in investing activities                       |  |               | (2,078            | )
|CASH FLOWS FROM FINANCING ACTIVITIES:                             |  |               |                   |  
|Proceeds from debt issuances                                      |  |               | 3,390,531         |  
|Payments of debt issue costs                                      |  |               |                   |  
|Principal payments on notes                                       |  |               | (105,080          | )
|Proceeds from stock issuances                                     |  |               | 564,618           |  
|Net cash flows provided by financing activities                   |  |               | 3,850,069         |  
|Effects of exchange rate differences on cash and cash equivalents |  |               | (17,739           | )
|NET (DECREASE) INCREASE IN CASH AND CASH                          |  |               | (406,949          | )
|EQUIVALENTS                                                       |  |               |                   |  
|CASH AND CASH EQUIVALENTSBeginning of period                     |  |               | 507,973           |  
|CASH AND CASH EQUIVALENTSEnd of period                           |  | $             | 101,024           |  
|SUPPLEMENTAL DISCLOSURES OF CASH FLOW                             |  |               |                   |  
|INFORMATION:                                                      |  |               |                   |  
|Cash paid during the period for interest                          |  | $             | 91,925            |  
|NON-CASH INVESTING AND FINANCING ACTIVITIES:                      |  |               |                   |  
|Debt converted into equity                                        |  |               | 153,889           |  
|Conversion of notes and accrued interest into new notes           |  |               | 1,206,963         |  

See notes to consolidated condensed financial statements.

7

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METAMORPHIX, INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(Unaudited)



|1. | NATURE OF THE BUSINESS
      MetaMorphix, Inc. (the Company)
          is a biopharmaceutical company focused on discovering, acquiring, developing,
          and commercializing products and technologies to improve animal health,
          livestock production, and human health. The Company was incorporated
          on September 1, 1994.
      The Company has two key technology
          platforms: a) livestock genomics and b) growth 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, 2005 the Company had a working capital
          deficiency of $26,314,711 and an accumulated deficit of $172,896,191.
          The Company intends and is currently working to finance its operations
          primarily through future debt and equity financings and future revenues.
      On June 28, 2004, the Companys
          Board of Directors granted approval to Company management to pursue
          applicable steps to undertake the initial public offering, or IPO,
          process. This process is currently proceeding, although no completion
          date can be estimated at this time. If we are unable to generate positive
          operating cash flow prior to an IPO, we anticipate that the proceeds
          from the IPO will be sufficient to become cash flow positive from operations.
          However, we may be unable to successfully complete the IPO process.
      In addition, 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. Management is currently working with
          an investment banker to secure a note offering with terms acceptable
          to the Company. To date, no final offering has been completed. 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, there can be no assurance
          that it will be successful 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
          2005. 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.
|-- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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|2. | SIGNIFICANT ACCOUNTING POLICIES                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        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                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|   | Unaudited Interim Financial
              StatementsThe interim
              financial statements of the Company for the three and nine months
              ended September 30, 2005 and September 30, 2004 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 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 only of normal recurring adjustments, necessary to present
              fairly the financial position of the Company as of September 30,
              2005 and the results of its operations and its cash flows for the
              three and nine months ended September 30, 2005 and September 30,
              2004. The interim results of operations for the three and nine
              months ended September 30, 2005 and September 30, 2004, 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 issued a Statement
          of Financial Accounting Standards (SFAS) No. 157,Fair
          Value Measurement. The Statement
          defines fair value, establishes a framework for measuring fair value
          in generally accepted accounting principles (GAAP), and expands disclosures
          about fair value measurements. This Statement is effective for financial
          statements issued for fiscal years beginning after November 15, 2007,
          and interim periods within those fiscal years. The Company is currently
          evaluating the impact of adopting SFAS No. 157 on its financial statements.
      In June 2006, the Financial
          Accounting Standards Board, or FASB, issued FASB Interpretation, or
          FIN, No. 48,Accounting for Uncertainty
          in Income Taxes, which is effective
          for fiscal years beginning after December 15, 2006. FIN No. 48 clarifies
          the accounting for uncertainty in income taxes recognized in the financial
          statements in accordance with SFAS Statement No. 109, Accounting for
          Income Taxes. This Interpretation prescribes a comprehensive model
          for how a company should recognize, measure, present, and disclose
          in its financial statements uncertain tax positions that the company
          has taken or expects to take on a tax return. 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, an amendment of FASB Statements
          No. 133 and 140. SFAS No. 155
          clarifies certain issues relating to embedded derivatives and beneficial
          interests in securitized financial assets. The provisions of SFAS No.
          155 are effective for all financial instruments acquired or issued
          after fiscal year beginning after September 15, 2006. The Company is
          currently assessing the impact that the adoption of SFAS No. 155 will
          have on its operations, financial position and cash flows.
      In May 2005, the Financial
          Accounting Standards Board (FASB) issued SFAS No. 154,Accounting
          Changes and Error Corrections  a replacement of APB Opinion No.
          20 and FASB Statement No. 3(SFAS No. 154), which replaces
          APB Opinion No. 20,Accounting
          Changes, and SFAS No. 3,Reporting
          Accounting Changes in Interim Financial Statements,
          and changes the requirements for the accounting for and reporting of
          a change in accounting principle. SFAS No. 154 applies to all voluntary
          changes in accounting principles, and also applies to changes required
          by an accounting pronouncement in the unusual instance that the pronouncement
          does not include specific transition provisions. SFAS No. 154 will
          be effective for accounting changes and corrections of errors made
          by the Company in fiscal years beginning after December 15, 2005. SFAS
          No. 154 does not change the transition provisions of any existing accounting
          pronouncements, including those that are in a transition phase as of
          the effective date of SFAS No. 154. The Company does not believe the
          adoption of SFAS No. 154 will have a material impact on its financial
          statements.
      In March 2005, the FASB issued
          FASB Interpretation No. 47,Accounting
          for Conditional Asset Retirement Obligations  an interpretation
          of FASB Statement No. 143(FIN
          47), which requires companies to recognize a liability for the fair
          value of a legal obligation to perform asset retirement activities
          that are conditional on a future event if the amount can be reasonably
          estimated. The Company

9

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|   | adopted the provisions of
          FIN 47 on December 31, 2005. No conditional asset retirement obligations
          were recognized and, accordingly, the adoption of FIN 47 had no effect
          on its financial statements.
      In December 2004, the FASB
          issued SFAS No. 153,Exchanges
          of Non-monetary Assets, an amendment
          of APB Opinion No. 29,Accounting
          for Non-monetary Transactions.SFAS
          No. 153 requires that exchanges of non-monetary assets are to be measured
          based on fair value, eliminates the exception for exchanges of non-monetary,
          similar productive assets, and adds an exemption for non-monetary exchanges
          that do not have commercial substance. SFAS No. 153 will be effective
          for fiscal periods beginning after June 15, 2005. The adoption of this
          standard did not have a material impact on the Companys financial
    statements.
|-- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|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, 2005 and 2004:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    

| |                  |  |               | Three months ended |  |               |   | Nine months ended
| | ---------------- |  | ------------- | ------------------ |  | ------------- | - | -----------------
| |                  |  | September 30, |                    |  | September 30, |   |                  
| |                  |  | 2005          |                    |  | 2004          |   |                  
| | Research and     |  |               |                    |  |               |   |                  
| | development      |  | $             | 120,257            |  |               | $ | 190,805          
| | General and      |  |               |                    |  |               |   |                  
| | administrative   |  |               | 696,924            |  |               |   | 780,571          
| | Interest expense |  |               |                    |  |               |   |                  
| | and accretion of |  |               |                    |  |               |   |                  
| | debt discount    |  |               | 81,224             |  |               |   | 83,603           
| | Debt issue costs |  |               | 10,767             |  |               |   | 958              
| | Total            |  | $             | 909,172            |  |               | $ | 1,055,937        

| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Included in debt conversion
          expense in three and nine months ended September 30, 2005 were warrants
          given as an inducement to convert from debt to preferred stock with
          a calculated value of $0 and $6,147, respectively. Included
          in debt conversion expense in three and nine months ended September
          30, 2004 were warrants given as an inducement to convert from debt
          to preferred stock with a calculated value of $0 and $817,703,
          respectively.
      Share-based payments in the
          expense categories above include expense associated with stock options
          granted to employees and directors as compensation and to outsiders
          for services performed. In addition, share-based payment expense includes
          the expense recorded from the calculated value of warrants granted
          in connection with debt securities being issued and the expense recorded
          from the calculated value of penalty warrants granted, which is included
          in interest expense and accretion of debt discount. Penalty warrants
          are contractually granted when the Company fails to meet certain specified
          criteria, such as failure to repay the obligation when due, or failure
          to consummate an IPO within one year of the debt being issued.

10

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|4. | PREPAID EXPENSES
          AND OTHER CURRENT ASSETSPrepaid expenses and other current assets consist
    of the following:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|-- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|   | Prepaid expenses                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|   | Supplies inventory                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|   | Total                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|  
|5. | PROPERTY AND EQUIPMENTNET                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|  
|   | Property and equipment consists of the following:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|   | Office equipment                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|   | Production equipment                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|   | Office equipment under capital                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|   | lease                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|   | Laboratory equipment                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|   | Leasehold improvements                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|   | Less: Accumulated depreciation                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|   | Total                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|   | The Company recorded depreciation
          expense of $112,404 and $92,862 for the three months ended
          September 30, 2005 and 2004, respectively, and $347,172 and $267,597
          for the nine months ended September 30, 2005 and 2004, respectively.
          Accumulated depreciation for equipment under capital leases was $41,314
          and $23,114 as of September 30, 2005 and December 31, 2004, respectively.
      The Company closed its Canadian
          facility in September 2005. Property and equipment with a net book
    value of $225,720 was disposed of, generating a loss of $198,728.
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|6. | INTELLECTUAL PROPERTY RIGHTS                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|   | Acquired intangible assets subject to amortization
    as of September 30, 2005 and December 31, 2004 are as follows:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|   | Intellectual property                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|   | rights                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|   | Less: Accumulated                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|   | amortization                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|   | Total                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|   | Amortization expense
      related to intangible assets was $0 and $3,189,004 for the three
      months ended September 30, 2005 and 2004, respectively, and $2,126,003
      and $9,567,012 for the nine months ended September 30, 2005 and 2004,
    respectively.                                                                                                                                                                                                                                                                                                                                                             

11

---





|7. | LONG-TERM DEFERRED DEBT ISSUE COSTS
    The long-term deferred debt issue cost activity
    during the nine months ended September 30, 2005 is as follows:
|-- | ----------------------------------------------------------------------------------------------------------------------------------------------------------
|   |                                                                                                                                                           

| | Balance at January 1, 2005           |  | $ | 6,480,080  |  
| | ------------------------------------ |  | - | ---------- | -
| | Calculated value of warrants granted |  |   | -          |  
| | Other debt issue costs               |  |   | -          |  
| | Amortization to debt issue costs     |  |   | (1,246,403 | )
|
| | Balance at September 30, 2005        |  | $ | 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, as well
              as expected minimum payments to be received from subleases with
    terms in excess of one year at September 30, 2005, are as follows:

| |                                     |  | Capital |         |   | Operating |   |           | Sublease |  |   | Royalty   
| | ----------------------------------- |  | ------- | ------- | - | --------- | - | --------- | -------- |  | - | ----------
| |                                     |  | Leases  |         |   | Leases    |   |           | Income   |  |   | Agreements
|
| | October 1, 2005 through             |  |         |         |   |           |   |           |          |  |   |           
| | December 31, 2005                   |  | $       | 10,598  |   |           | $ | 241,434   |          |  | $ | (68,276   
| | 2006                                |  |         | 42,390  |   |           |   | 964,261   |          |  |   | (278,550  
| | 2007                                |  |         | 42,390  |   |           |   | 579,228   |          |  |   |          
| | 2008                                |  |         | 42,390  |   |           |   | 437,825   |          |  |   |          
| | 2009                                |  |         | 29,155  |   |           |   | 488,913   |          |  |   |          
| | 2010                                |  |         | 17,480  |   |           |   | 504,104   |          |  |   |          
|
| | Thereafter                          |  |         | 24,764  |   |           |   | 696,001   |          |  |   |          
|
| | Total payments/(receipts)           |  |         | 209,167 |   |           |   | 3,911,766 |          |  |   | (346,826  
|
| | Less: Amounts representing interest |  |         | (37,646 | ) |           |   |          |          |  |   |          
|
| | Net payments/(receipts)             |  | $       | 171,521 |   |           | $ | 3,911,766 |          |  | $ | (346,826  

| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The commitments for capital
          leases and operating leases set forth in the above table have not been
          reduced for anticipated sublease income.
      Rent expense under operating
          leases was $376,636 and $191,943 for the three months ended
          September 30, 2005 and 2004, respectively, and $943,363 and $582,682
          for the nine months ended September 30, 2005 and 2004, respectively.
          Sublease income was $26,148 and $13,541 for the three months
          ended September 30, 2005 and 2004, respectively, and $135,708 and $44,437
          for the nine months ended September 30, 2005 and 2004, respectively.
      The Company is currently
          leasing space in Savage, Maryland which it no longer occupies. This
          lease commenced on January 1, 2002 and will terminate on December 31,
          2011. The Company currently subleases this space. This sublease commenced
          on December 1, 2004 and will terminate on December 31, 2011. The sublease
          covers the primary lease obligation. MetaMorphix, Inc. has the option
          and intends to assign the lease to the sublessee and effectively terminate
    the lease on December 31, 2006.

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 or results of operations.
      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.
      On June 20, 2005, the Company
          became aware of a lawsuit and claim against us from Regions Bank for $731,000.
          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 have not occurred. We note that our September
          30, 2005 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.
      Canadian Facility ClosureThe
          Company made the decision in September 2005 to consolidate the research
          efforts of the Immunopharmaceutical business unit into the Growth Differentiation
          business unit in order to maximize efficiency, and our facility in
          Canada was closed. In connection with this closure, we accrued approximately $267,000
          at September 30, 2005 in severance benefits for the 11 employees who
    were involuntarily terminated.
|-- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|9. | DEBT                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|   | Beginning in April through
          September 2005, the Company obtained bridge loans from unrelated investors
          in the amount of $3,102,000 for working capital needs. These loans
          bear interest at 10% and are payable in one to three years. The Company
          issued warrants to purchase 239,995 shares of common stock with the
          bridge loans. These warrants have an exercise price of $4.00 per
          share, expire in April through September, 2010, and had an allocated
          value of $136,814, which was recorded as interest expense during
          the nine months ended September 30, 2005.
      Associated with the bridge
          loans obtained in April through September 2005, the Company issued
          warrants to purchase 44,998 shares of common stock to financial advisors
          for investment services. These warrants have an exercise price of $4.00
          per share, expire in September 2010, and had a calculated value of $28,882,
          which was recorded as debt issue costs during the nine months ended
    September 30, 2005.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     

13

---



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, 2005 and 2004

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

|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|

Revenue.Our revenue for the three months ended September 30, 2005 was $600,407, which was a decrease of $435,982, or 42.1%, from the $1,036,389 during the three months
ended September 30, 2004, primarily due to the timing of growth factors milestone revenue. In the third quarter of 2005, we earned $539,328 in parentage and identification genotyping services revenue, $50,001 from the recognition of three
months of Monsanto deferred revenue, and $11,078 in other genomic related revenue.  In the third quarter of 2004, we earned $523,219 in parentage and identification genotyping services revenue, $500,000 in milestone revenue related to
the Wyeth license agreement, and $13,170 in other genomic related revenue.

Cost of Revenues.Cost of revenues for the three months ended September 30, 2005 were $395,980, a $571,973, or 59.1% decrease from the $967,953 for the same period of
2004. This decrease was primarily related to the increased level of personnel costs and consumables used in the third quarter of 2004 to support the Cargill collaborative research project, which ended in 2004. The personnel costs and consumables in
the third quarter of 2004 were used to complete the project steps, which triggered milestone revenue recognition during the quarter.

Research and Development.Research and development costs were $1,210,509 for the three months ended September 30, 2005 compared to $1,128,972 for the same period in 2004.
This $81,537, or 7.2% increase was primarily due to additional personnel costs (representing those employees who had previously worked on the Cargill project and were classified as cost of revenue).

General and Administrative.General and administrative costs were $2,549,823 for the three months ended September 30, 2005 compared to $2,578,720 for the same period of 2004.
This $28,897, or 1.1% decrease was primarily due to the decrease in professional fees (due to the timing of audit and legal work), partially offset by an increase in our administrative infrastructure.

Depreciation and Amortization.Depreciation and amortization decreased $3,171,450, or 97.7%, to $75,120 for the three months ended September 30, 2005 from $3,246,570 for
the same period of 2004 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.

14

---



Interest Expense.Interest expense and accretion of debt discount increased $209,226 to $1,383,038 for the three months ended September 30, 2005 from $1,173,812 for the
same period in 2004.  This 17.8% increase was primarily due to the increase in the debt outstanding for the quarter compared to the same period in 2004.

Debt Issue Costs.Debt issue costs increased $114,914 to $558,662 for the three months ended September 30, 2005 from $443,748 for the same period of 2004. This 25.9%
increase is due to higher expense associated with amortization of deferred debt costs for the period, which related to the timing of the issuance of our 12.5% Convertible Secured Promissory Notes in 2004, as well as the value of advisory warrants
granted during the quarter.

Other Expense. Other expense increased to $194,162 for the three months ended September 30, 2005 from $0 for the same period in 2004 primarily due to the loss recorded on the
disposal of assets from MetaMorphix Canada, Inc.  In September of 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 $2,736,499, or 32.2%, for the three months ended September 30, 2005 from the three months ended September 30, 2004, due to a combination of the
factors described above, primarily due to the completion of our intangible asset amortization.

Material Changes in Results of Operations - Comparison of the Nine Months Ended September 30, 2005 and 2004

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                 | 2005             
|
| | Parentage and identification    |                  
| | genotyping service revenue      | $                
| | Genomic research project        |                  
| | milestone revenue               |                  
| | Growth differentiation research |                  
| | project milestone revenue       |                  
| | License fee revenue             |                  
| | Other genomic service revenue   |                  
| |                                 |                  
|
| | Total revenue                   | $                

Revenue.Our revenue for the nine months ended September 30, 2005 was $1,952,169, which was a decrease of $2,806,653, or 59.0%, from the $4,758,822 during the same period
of 2004, primarily due to the difference in genomic research project milestone revenue of $2,750,000.  In the first nine months of 2005, we earned $1,726,079 in parentage and identification genotyping services revenue, $150,003 from the
recognition of six months of Monsanto deferred revenue, and $76,087 in other genomic related revenue. In the first nine months of 2004, we earned $1,462,504 in parentage and identification genotyping services revenue, $2,750,000 in
milestone revenue related to the Cargill collaborative research project, $500,000 in milestone revenue related to the Wyeth license agreement, and $46,318 in other genomic related revenue.

15

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Cost of Revenues.  Cost of revenues for the nine months ended September 30, 2005 were $1,319,148, a $3,279,929, or 71.3% decrease from the $4,599,078 for the same period
of 2004. This decrease was primarily related to the increased level of personnel costs and consumables used in 2004 to support the Cargill collaborative research project, which ended in 2005. The personnel costs and consumables in 2004 were used to
complete the project steps, which triggered milestone revenue recognition throughout the year.

Research and Development.  Research and development costs were $3,638,012 for the nine months ended September 30, 2005 compared to $3,331,434 for the same period in 2004. This
$306,578, or 9.2% increase was primarily due to additional personnel costs (representing those employees who had previously worked on the Cargill project and were classified as cost of revenue) and severance accrual for MetaMorphix Canada
R&D employees, partially offset by lower stock compensation expense for employees, lower contractual analytic services, and lower patent legal fees.

General and Administrative.  General and administrative costs were $8,991,773 for the nine months ended September 30, 2005 compared to $7,234,738 for the same period of 2004.
This $1,757,035, or 24.3% increase was primarily due to the increase in our administrative infrastructure, with salaries, benefits and stock compensation expenses increasing approximately $1.2 million. General and administrative costs also
increased $407,525 due to higher professional fees associated with the completion of our audit and the filing of our Form 10-SB with the SEC.

Depreciation and Amortization. Depreciation and amortization decreased $7,373,047, or 75.8%, to $2,358,843 for the nine months ended September 30, 2005 from $9,730,890 for
the same period of 2004 primarily due to the completion of the intangible asset amortization in February 2005.  The intangible assets were related to the intellectual property associated with the Celera genomics acquisition in February 2002 which
was being amortized at a rate of $3,189,000 per quarter.

Interest Expense. Interest expense and accretion of debt discount decreased $12,963,755 to $4,065,888 for the nine months ended September 30, 2005 from $17,029,643 for the
same period in 2004. This 76.1% decrease was primarily due to the decrease in the number and value of penalty warrants issued as well as the value of contingently adjustable terms on warrants related to the 12.5% Convertible Secured Promissory
Notes.  The penalty warrants issued in the second quarter of 2004 primarily related to the Series C, D, & E bridge loans.

Debt Conversion Expense. Debt conversion expense was $93,696 for the nine months ended September 30, 2005 compared to $3,276,087 for the same period of 2004. This
$3,182,391, or 97.1% decrease relates to the volume of conversion that took place during the periods. In the first nine months of 2005, holders of our 8% and 10.9% Secured Convertible Promissory Notes converted $143,992 of principal and
interest into our Series G convertible preferred stock, with warrants attached.  For the same period of 2004, holders of our 8% and 10.9% Secured Convertible Promissory Notes converted $3,805,539 of principal and interest into our Series F
convertible preferred stock, with warrants attached.  The expense represents the fair value of the securities and warrants issued in excess of the fair value of securities issuable pursuant to the original conversion terms.

Debt Issue Costs.  Debt issue costs increased $212,839, or 14.6% to $1,672,281 for the nine months ended September 30, 2005 from $1,459,442 for the same period of 2004.
This increase is due to slightly higher expense associated with increased amortization of deferred debt costs for the period, as well as the value of advisory warrants granted during the nine months.

Other Expense. Other expense increased $182,874 to $194,162 for the nine months ended September 30, 2005 from $11,288 for the same period in 2004 primarily due to the loss
recorded on the disposal of assets from MetaMorphix Canada, Inc. In September of 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 $21,532,145, or 51.4%, for the nine months ended September 30, 2005 from the nine months ended September 30, 2004, due to a combination of the factors
described above, primarily the decrease in interest expense related to the value of penalty warrants and the value of contingently adjustable terms and the completion of the amortization associated with the Celera Genomics intellectual property.

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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, 2005 the Company has cash and cash equivalents of $101,024 and a working capital deficiency
of $26.3 million.

In the first nine months of 2005 cash used in operations was $4.2 million compared to $9.5 million in the comparable period last year. This decrease was primarily due to a $21.5 million decrease in net loss and
a $6.4 million increase in the change in accounts payable, accrued expenses, and accrued compensation, partially offset by a $7.4 million decrease in depreciation and amortization, a $3.2 million decrease in induced conversion expense,
and a $13.0 million decrease in share-based payment expense. Cash provided by financing activities was $3.9 million in the current period compared to $11.5 million in the prior year period. This decrease was due to lower proceeds from
the sale of debt and equity securities of $11.7 million, partially offset by the decrease in principal payments and debt issue costs of $4.0 million.

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

On June 28, 2004, the Companys Board of Directors granted approval to Company management to pursue applicable steps to undertake the IPO process. This process is currently proceeding, although no completion date can
be estimated at this time. While we anticipate that the proceeds from the IPO will be sufficient to fund our operations until we can generate positive cash flow from operations, there can be no assurance of that, nor that the IPO will ever occur.

In addition, 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. Management is
currently working with an investment banker to secure a note offering with terms acceptable to the Company. To date, no final offering has been completed. 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, there can be no assurance of that.

Although the Company recognizes the need to raise funds in the near future, there can be no assurance that it will be successful 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 2005. 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.

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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 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 cannot guarantee any such financing
can be obtained or, if obtained, that it will be on adequate or reasonable terms.

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 (the "Exchange Act"). 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 controls over financial reporting that have materially affected, or are reasonably likely to materially affect, the internal controls
over financial reporting.

PART II - OTHER INFORMATION

ITEM 1.     Legal Proceedings

On June 20, 2005, the Company became aware of a lawsuit and claim against us from Regions Bank for $731,000.  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 have not occurred. We note that our September 30, 2005 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.

In addition, during 2005, we settled and dismissed four lawsuits for a total cost of $105,640. There are no such cases presently pending.

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

In April through September 2005, the Company obtained bridge loans from unrelated investors in the amount of $3,102,000 for working capital needs. These loans bear interest at 10% and are payable in one to three years.
The Company issued warrants to purchase 239,995 shares of common stock with the bridge loans.  These warrants have an exercise price of $4.00 per share, expire in April through September, 2010, and had an allocated value of $136,814, which
was recorded as interest expense during the nine months ended September 30, 2005.

Associated with the bridge loans obtained in April through September 2005, the Company issued warrants to purchase 44,998 shares of common stock to financial advisors for investment services. These warrants have an exercise
price of $4.00 per share, expire in September, 2010, and had a calculated value of $28,882, which was recorded as debt issue costs during the nine months ended September 30, 2005.

ITEM 3.       Defaults
Upon Senior Securities

At September 30, 2005, $138,443 of outstanding principal under our 8% Secured Convertible Promissory Notes and $888,814 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 July 2005. 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     
|    

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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.
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| | December 15, 2006          
| | Date                       
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| | December 15, 2006          
| | Date                       
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| |                            

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