UNITED STATESSECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549

FORM 10-QSB

(Mark One)

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

For the quarterly period endedJune 30, 2006

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

For the transition period from: ________________ to
_______________

Commission file number:000-51294

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

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

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

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

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

|Class                         |  | Outstanding as of August 31, 2006
|----------------------------- |  | ---------------------------------
|Common Stock, $.001 par value |  | 20,883,149 Shares                

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

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|                                                                    |                                                                                 |    | Page No.
|------------------------------------------------------------------- | ------------------------------------------------------------------------------- | -- | --------
|                                                                    |                                                                                 |   
|PART I. FINANCIAL INFORMATION                                       |                                                                                 |   
|                                                                    |                                                                                 |   
|ITEM 1.
Consolidated Condensed Financial Statements (Unaudited)     |                                                                                 |   
|                                                                    |                                                                                 |    |         
|                                                                    | Consolidated Condensed Balance Sheets as of June 30, 2006 and December 31, 2005 |    | 5       
|                                                                    |                                                                                 |    |         
|                                                                    | Consolidated Condensed Statements of Operations for the Three and Six Months    |    |         
|                                                                    | Ended June 30, 2006 and 2005                                                    |    | 6       
|                                                                    |                                                                                 |    |         
|                                                                    | Consolidated Condensed Statements of Cash Flows for the Six Months Ended        |    |         
|                                                                    | June 30, 2006 and 2005                                                          |    | 7       
|                                                                    |                                                                                 |    |         
|                                                                    | Notes to Consolidated Condensed Financial Statements                            |    | 8       
|                                                                    |                                                                                 |   
|ITEM 2.
Management's Discussion and Analysis or Plan of Operation   |                                                                                 | 15
|                                                                    |                                                                                 |   
|ITEM 3.
Controls and Procedures                                     |                                                                                 | 19
|                                                                    |                                                                                 |   
|PART II. OTHER INFORMATION                                          |                                                                                 |   
|                                                                    |                                                                                 |   
|ITEM 1.
Legal Proceedings                                           |                                                                                 | 19
|                                                                    |                                                                                 |   
|ITEM 2.
Unregistered Sales of Equity Securities and Use of Proceeds |                                                                                 | 19
|                                                                    |                                                                                 |   
|ITEM 3.
Defaults Upon Senior Securities                             |                                                                                 | 20
|                                                                    |                                                                                 |   
|ITEM 6.
Exhibits                                                    |                                                                                 | 20
|                                                                    |                                                                                 |   
|SIGNATURES                                                          |                                                                                 | 21

2

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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. We describe these
relationships and agreements under --Licenses, Acquisitions, and Collaborative Agreements.

We
were incorporated as a Delaware corporation in September 1994. Between incorporation
and 1997, our activities consisted of research performed by Dr. Se-Jin Lee at
his laboratory at The Johns Hopkins University School of  Medicine to focus on
the discovery, characterization, development and commercialization of GDFs. 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.

3

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

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

FORWARD LOOKING STATEMENTS

Statements in this Form 10-QSB that are not descriptions of historical facts are forward-looking statements within the meaning of the safe harbor provisions of the Private
Securities Litigation Reform Act of 1995.  Reference is made in particular to the description of our plans and objectives for future operations, assumptions underlying such plans and objectives, and other forward looking terminology such as
may, expects, believes, anticipates, intends, estimates, projects, or similar terms, variations of such terms or the negative of such terms.  Forward-looking
statements are based on managements current expectations. Actual results could differ materially from those currently anticipated due to a number of factors, including those set forth under Description of Business. 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. 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)

|                                                                      |  | June 30, |              |   | December 31, |  
|--------------------------------------------------------------------- |  | -------- | ------------ | - | ------------ | -
|                                                                      |  | 2006     |              |   | 2005         |  
|ASSETS                                                                |  |          |              |   |              |  
|CURRENT ASSETS:                                                       |  |          |              |   |              |  
|Cash and cash equivalents                                             |  | $        | 123,733      |   |              | $
|Accounts receivable                                                   |  |          | 158,386      |   |              |  
|Prepaid expenses and other current assets                             |  |          | 90,812       |   |              |  
|Total current assets                                                  |  |          | 372,931      |   |              |  
|                                                                     
|PROPERTY AND EQUIPMENTNet                                            |  |          | 1,958,420    |   |              |  
|GOODWILL                                                              |  |          | 3,739,870    |   |              |  
|LEASE SECURITY DEPOSITS                                               |  |          | 204,494      |   |              |  
|DEFERRED DEBT ISSUE COSTS                                             |  |          | 4,586,560    |   |              |  
|                                                                      |  |          | 10,489,344   |   |              |  
|TOTAL ASSETS                                                          |  | $        | 10,862,275   |   |              | $
|                                                                     
|LIABILITIES AND STOCKHOLDERS EQUITY (DEFICIT)                        |  |          |              |   |              |  
|CURRENT LIABILITIES:                                                  |  |          |              |   |              |  
|Accounts payable and accrued expenses                                 |  | $        | 6,983,119    |   |              | $
|Accrued compensation                                                  |  |          | 5,119,950    |   |              |  
|Accrued dividends                                                     |  |          | 2,568,904    |   |              |  
|Short-term notes payable                                              |  |          | 2,303,588    |   |              |  
|Notes payable to officers and directors                               |  |          | 2,184,498    |   |              |  
|Deferred revenue                                                      |  |          | 1,387,474    |   |              |  
|Celera purchase obligation                                            |  |          | 2,548,688    |   |              |  
|Derivative liability                                                  |  |          | 69,588       |   |              |  
|Accrued interest                                                      |  |          | 2,450,616    |   |              |  
|Total current liabilities                                             |  |          | 25,616,425   |   |              |  
|                                                                     
|LONG-TERM NOTES PAYABLE, net of discount of $5,139,866 and            |  |          |              |   |              |  
|$5,610,299 at June 30, 2006 and December 31, 2005, respectively       |  |          | 26,080,634   |   |              |  
|CELERA PURCHASE OBLIGATION                                            |  |          | 3,530,977    |   |              |  
|ACCRUED INTEREST                                                      |  |          | 1,737,944    |   |              |  
|OTHER LONG-TERM LIABILITIES                                           |  |          | 161,891      |   |              |  
|Total liabilities                                                     |  |          | 57,127,871   |   |              |  
|                                                                     
|COMMITMENTS AND CONTINGENCIES (Note 8)                                |  |          |              |   |              |  
|                                                                     
|STOCKHOLDERS EQUITY (DEFICIT):                                       |  |          |              |   |              |  
|Convertible Preferred stock, $0.001 par value22,000,000 shares       |  |          |              |   |              |  
|authorized and 7,326,715 shares issued and outstanding as of June 30, |  |          |              |   |              |  
|2006 and December 31, 2005                                            |  |          | 59,918,772   |   |              |  
|Common stock, $0.001 par value75,000,000 shares authorized as of     |  |          |              |   |              |  
|June 30, 2006 and December 31, 2005, 20,883,149 and 20,369,719        |  |          |              |   |              |  
|shares issued and outstanding as of June 30, 2006 and December 31,    |  |          |              |   |              |  
|2005, respectively                                                    |  |          | 20,883       |   |              |  
|Additional paid-in capital                                            |  |          | 79,005,475   |   |              |  
|Accumulated other comprehensive loss                                  |  |          | (126,660     | ) |              |  
|Accumulated deficit                                                   |  |          | (185,084,066 | ) |              |  
|Total stockholders equity (deficit)                                  |  |          | (46,265,596  | ) |              |  
|TOTAL LIABILITIES AND STOCKHOLDERS EQUITY (DEFICIT)                  |  | $        | 10,862,275   |   |              | $

See notes to consolidated condensed financial statements.

5

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METAMORPHIX, INC. AND SUBSIDIARIESCONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS

(Unaudited)

|                                       |  | Three Months Ended |            |   | Six Months Ended |  
|-------------------------------------- |  | ------------------ | ---------- | - | ---------------- | -
|                                      
|                                       |  | June 30, 2006      |            |   | June 30, 2005    |  
|                                      
|REVENUE                                |  | $                  | 864,810    |   |                  | $
|OPERATING COSTS AND                    |  |                    |            |   |                  |  
|EXPENSES:                              |  |                    |            |   |                  |  
|Cost of revenue                        |  |                    | 656,576    |   |                  |  
|Research and development               |  |                    | 583,918    |   |                  |  
|General and administrative             |  |                    | 2,303,623  |   |                  |  
|Depreciation and amortization          |  |                    | 85,841     |   |                  |  
|Total operating costs and expenses     |  |                    | 3,629,958  |   |                  |  
|OTHER INCOME (EXPENSE):                |  |                    |            |   |                  |  
|Interest expense and accretion of debt |  |                    |            |   |                  |  
|discount                               |  |                    | (1,633,705 | ) |                  |  
|Debt issue costs                       |  |                    | (476,570   | ) |                  |  
|Debt conversion expense                |  |                    | -          |   |                  |  
|Other (expense)                        |  |                    | 3,482      |   |                  |  
|NET LOSS                               |  |                    | (4,871,941 | ) |                  |  
|Preferred stock dividends and          |  |                    |            |   |                  |  
|accretion of beneficial conversion     |  |                    |            |   |                  |  
|features                               |  |                    | (347,783   | ) |                  |  
|NET LOSS ATTRIBUTABLE TO               |  |                    |            |   |                  |  
|COMMON STOCKHOLDERS                    |  | $                  | (5,219,724 | ) |                  | $
|Net loss per common share:             |  |                    |            |   |                  |  
|Basic and diluted                      |  | $                  | (0.25      | ) |                  | $
|Weighted average number of shares      |  |                    |            |   |                  |  
|outstanding:                           |  |                    |            |   |                  |  
|Basic and diluted                      |  |                    | 20,875,183 |   |                  |  

See notes to consolidated condensed financial statements.

6

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METAMORPHIX, INC. AND SUBSIDIARIESCONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS

(Unaudited)

|                                                                     |  | Six Months Ended
|-------------------------------------------------------------------- |  | ----------------
|                                                                    
|                                                                    
|                                                                     |  | June 30, 2006   
|                                                                    
|CASH FLOWS FROM OPERATING ACTIVITIES:                                |  |                 
|Net loss                                                             |  | $               
|Adjustments to reconcile net loss to net cash flows                  |  |                 
|used in operating activities:                                        |  |                 
|Depreciation and amortization                                        |  |                 
|Accretion of debt discount                                           |  |                 
|Amortization of deferred debt issue costs                            |  |                 
|Share-based payment expense                                          |  |                 
|Induced conversion expense                                           |  |                 
|Fair value changes in embedded derivative                            |  |                 
|(Gain) loss on disposal of fixed assets                              |  |                 
|Changes in assets and liabilities:                                   |  |                 
|Accounts receivable                                                  |  |                 
|Prepaid expenses and other current assets                            |  |                 
|Lease security deposits                                              |  |                 
|Accounts payable and accrued expenses                                |  |                 
|Accrued compensation                                                 |  |                 
|Deferred purchase obligation                                         |  |                 
|Deferred revenue                                                     |  |                 
|Accrued interest                                                     |  |                 
|Other, net                                                           |  |                 
|Net cash flows used in operating activities                          |  |                 
|CASH FLOWS FROM INVESTING ACTIVITIES:                                |  |                 
|Purchases of property and equipment                                  |  |                 
|Net cash flows used in investing activities                          |  |                 
|CASH FLOWS FROM FINANCING ACTIVITIES:                                |  |                 
|Proceeds from debt issuances                                         |  |                 
|Principal payments on notes                                          |  |                 
|Proceeds from stock issuances                                        |  |                 
|Net cash flows provided by financing activities                      |  |                 
|Effect of exchange rate differences
      on cash & cash equivalents |  |                 
|NET (DECREASE) INCREASE IN CASH AND CASH                             |  |                 
|EQUIVALENTS                                                          |  |                 
|CASH AND CASH EQUIVALENTSBeginning of period                        |  |                 
|CASH AND CASH EQUIVALENTSEnd of period                              |  | $               
|SUPPLEMENTAL DISCLOSURES OF CASH FLOW                                |  |                 
|INFORMATION:                                                         |  |                 
|Cash paid during the period for interest                             |  | $               
|NON-CASH INVESTING AND FINANCING ACTIVITIES:                         |  |                 
|Debt converted into equity                                           |  |                 
|Conversion of notes and accrued interest into new notes              |  |                 

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 June 30, 2006 the Company had a working capital deficiency
          of $25,243,494 and an accumulated deficit of $185,084,066.
          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
          2006. This uncertainty raises substantial doubt about the Companys
          ability to continue as a going concern. The accompanying consolidated
          condensed financial statements do not include any adjustments that
    might result from the outcome of this uncertainty.

8

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|2. | SIGNIFICANT ACCOUNTING POLICIES                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|-- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|   | Unaudited Interim
              Financial StatementsThe
              interim financial statements of the Company for the three and six
              months ended June 30, 2006 and June 30, 2005 included herein have
              been prepared by the Company, without audit, pursuant to the rules
              and regulations of the Securities and Exchange Commission. Certain
              information and footnote disclosures normally included in the financial
              statements 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 June 30, 2006 and the results of
              its operations and its cash flows for the three and six months
              ended June 30, 2006 and June 30, 2005. The interim results of operations
              for the three and six months ended June 30, 2006 and June 30, 2005,
              respectively, are not necessarily indicative of the results that
              may be achieved for the full year.
      Recent Accounting PronouncementsIn
          September 2006, the Financial Accounting Standard Board 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 July 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, and amendment of FASB Statements
          No. 133 and 140. SFAS No. 155
          clarifies certain issues relating to embedded derivatives and beneficial
          interests in securitized financial assets. The provisions of SFAS No.
          155 are effective for all financial instruments acquired or issued
          after fiscal year beginning after September 15, 2006. The Company is
          currently assessing the impact that the adoption of SFAS No. 155 will
    have on its operations, financial position and cash flows.

9

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|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 six months ended
    June 30, 2006 and 2005:
|   |                                                                                                                                                                                                                                                     

|                 |  | Three months ended |         | Six months ended
|---------------- |  | ------------------ | ------- | ----------------
|                 |  | June 30,           |         | June 30,        
|                 |  | 2006               |         | 2005            
|Research and     |  |                    |         |                 
|development      |  | $                  | 72,663  |                 
|                 |  |                    |         |                 
|General and      |  |                    |         |                 
|administrative   |  |                    | 505,227 |                 
|                 |  |                    |         |                 
|Interest expense |  |                    |         |                 
|and accretion of |  |                    |         |                 
|debt discount    |  |                    | -       |                 
|                 |  |                    |         |                 
|Debt issue costs |  |                    | -       |                 
|                 |  |                    |         |                 
|Total            |  | $                  | 577,890 |                 

|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|-- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   | 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.
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|4. | PREPAID EXPENSES AND OTHER CURRENT ASSETS                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|   | Prepaid expenses and other current assets
    consist of the following:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          

|                   |  | June 30, |        | December 31,
|------------------ |  | -------- | ------ | ------------
|                   |  | 2006     |        | 2005        
|                  
|                  
|Prepaid expenses   |  |          | 57,312 |             
|Supplies inventory |  |          | 33,500 |             
|                  
|Total              |  | $        | 90,812 |             

10

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|5. | PROPERTY AND EQUIPMENTNET                       
|-- | -------------------------------------------------
|   |                                                  
|   | Property and equipment consists of the following:
|   |                                                  

|                               |  | June 30, |            | December 31,
|------------------------------ |  | -------- | ---------- | ------------
|                               |  | 2006     |            | 2005        
|                              
|Office equipment               |  | $        | 1,199,596  |             
|Production equipment           |  |          | 1,930,222  |             
|Office equipment under capital |  |          |            |             
|lease                          |  |          | 213,224    |             
|Leasehold improvements         |  |          | 129,062    |             
|                              
|                               |  |          | 3,472,104  |             
|Less: Accumulated depreciation |  |          | (1,513,684 | )           
|                              
|Total                          |  | $        | 1,958,420  |             

|   |                                                                                                                                                                                                                                                                                                                                                                                                                                
|-- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   | The Company recorded depreciation
          expense of $117,525
          and $115,305 for the three months ended June 30, 2006 and 2005, respectively,
          and $234,775 and $234,768 for the six months ended June 30, 2006
          and 2005, respectively. Accumulated depreciation for equipment under
          capital leases was $59,513 and $47,380 as of June 30, 2006
    and December 31, 2005, respectively.
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                
|6. | INTELLECTUAL PROPERTY RIGHTS                                                                                                                                                                                                                                                                                                                                                                                                   
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                
|   | Acquired intangible assets subject to amortization
    as of June 30, 2006 and December 31, 2005 are as follows:                                                                                                                                                                                                                                                                                                               
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                

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

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

11

---





|7. | LONG-TERM DEFERRED DEBT ISSUE COSTS                                                                         
|-- | ------------------------------------------------------------------------------------------------------------
|   |                                                                                                             
|   | The long-term deferred debt issue cost activity
    during the six months ended June 30, 2006 is as follows:
|   |                                                                                                             

| | Balance at January 1, 2006           |  | $ | 5,396,050 |  
| | ------------------------------------ |  | - | --------- | -
| | Calculated value of warrants granted |  |   | 21,215    |  
| | Other debt issue costs               |  |   | 119,184   |  
| | Amortization to debt issue costs     |  |   | (949,889  | )
|
| | Balance at June 30, 2006             |  | $ | 4,586,560 |  

|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|-- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|8. | COMMITMENTS AND CONTINGENCIES                                                                                                                                                                                                                                                                                                                                                                                                                                      
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|   | Leases and Royalty AgreementsThe
          Company has office facilities and equipment under capital and operating
          leases. In addition, the Company has certain agreements that provide
          for minimum future royalty payments and sublease income. Future minimum
          payments for capital leases, noncancelable operating leases, and royalty
          agreements with terms in excess of one year at June 30, 2006, are as
    follows:
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                    

|                                    |  | Capital |         | Operating |  | Royalty   
|----------------------------------- |  | ------- | ------- | --------- |  | ----------
|                                    |  | Leases  |         | Leases    |  | Agreements
|                                   
|July 1, 2006 through December       |  |         |         |           |  |           
|31, 2006                            |  | $       | 21,195  |           |  | $         
|2007                                |  |         | 42,390  |           |  |           
|2008                                |  |         | 42,390  |           |  |           
|2009                                |  |         | 29,155  |           |  |           
|2010                                |  |         | 17,480  |           |  |           
|2011                                |  |         | 17,480  |           |  |           
|                                   
|Thereafter                          |  |         | 7,283   |           |  |           
|                                   
|Total payments/(receipts)           |  |         | 177,373 |           |  |           
|                                   
|Less: Amounts representing interest |  |         | (22,878 | )         |  |           
|                                   
|Net payments/(receipts)             |  | $       | 154,495 |           |  | $         

| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 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 $222,275 and $281,398 for the three months ended
          June 30, 2006 and 2005, respectively, and $422,113 and $566,727
          for the six months ended June 30, 2006 and 2005, respectively. Sublease
          income was $0 and $54,770 for the three months ended June 30,
          2006 and 2005, respectively, and $0 and $109,559 for the six
          months ended June 30, 2006 and 2005, respectively.
      The Company is currently
          leasing space in Savage, Maryland which it no longer occupies. This
          lease commenced on January 1, 2002 and will terminate on December 31,
          2011. The Company currently subleases this space. This sublease commenced
          on December 1, 2004 and will terminate on December 31, 2011. The sublease
          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. In 2006, the sublessee no longer pays
          rent to the Company but instead pays directly to the lessor.
      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

12

---



|   | 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.
      As of June 30, 2006, there
          was one outstanding matter relating to director and officer indemnification.
          Regions Bank, a secured, $5 million lender of Samuel R. Dunlap,
          Jr., a former Director who is in bankruptcy, has sued us for payment
          of an August 1, 2001 $731,000 Promissory Note made by us to Mr.
          Dunlap. The amount that is owed is in dispute (due to offsets made
          prior to the bankruptcy at Mr. Dunlaps direction) and we contend
          that the conditions precedent to the maturity of the loan have not
          occurred. We also note that our June 30, 2006 consolidated condensed
          financial statements reflect principal and interest of $625,498
          being owed as of such date. Regions Bank has also claimed that we (in
          the operation of our securities transfer function) and our legal counsel
          enabled Mr. Dunlap to pledge one of his several Warrants to another
          creditor in breach of an already existing Commercial Pledge Agreement
          between the Bank and Mr. Dunlap. We will indemnify and hold harmless
          our legal counsel, who is also the Secretary of the Company, in this
          matter.
      Management Compensation The
          Company has entered into agreements with four employees, including
          three executives and one scientist, which require payments by the Company
          totaling approximately $1,009,000 annually based on their current
    salaries.
|-- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|9. | DEBT                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|   | The Company issued promissory
          bridge loans for a total of $950,000 to Mr. Peter Meyer, a member
          of our board of directors, during the first six months of 2006. The
          loans have a 10% interest rate and are payable in six months. The Company
          repaid $350,000 of these bridge loans during the first quarter
          of 2006, with the remaining $600,000 outstanding as of June 30,
          2006.
      In the first six months of
          2006, the Company issued additional identical 12.5% Convertible Secured
          Promissory Notes in the amount of $1,241,803 to satisfy accrued
          interest payable. Based on the terms of the 12.5% Notes, accrued interest
          is due and payable on the one year anniversary date of the notes. The
          interest is payable in cash or in the form of identical new notes,
          at the option of the Company.
      The Company issued additional
          10% Secured Convertible Promissory Notes which totaled $4,602,177
          during the six months ended June 30, 2006. These notes have a three
          year maturity.
      In connection with the issuance
          of the 10% Notes in 2006, the Company granted warrants to purchase
          1,016,321 shares of common stock. These warrants had an exercise price
          of $4.00 per share, expire in 2011, and had an allocated value
          of $581,201 in 2006. The value of these warrants was recorded as
          a debt discount to be amortized over the life of the debt.
      The Company also issued warrants
          to purchase 33,417 shares of common stock in the three months ended
          March 31, 2006 for advisory services in connection with obtaining the
          10% Note financing. The warrants had an exercise price of $4.00
          per share, expire in 2016, had a calculated value of $21,215 and
          were recorded as deferred financing costs in the six months ended June
          30, 2006, to be amortized over the life of the debt.
      The Company, with the assistance
          from a valuation specialist, recalculated the fair value of the embedded
          derivative associated with the 10% Notes for the first two quarters
    of 2006. The value was determined to                                                                                                            

13

---



|    | be $73,070 and $69,588 at March 31, 2006 and June 30, 2006, respectively. The change in value was recorded as other income or expense during the applicable quarter.                                                                                                                                                                                                                                                                                                                  
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|    | Amortization expense relating to the 10% Note and 12.5% Note debt discount was $532,430 and $450,268 for the three months ended June 30, 2006 and 2005, respectively, and $1,044,434 and
$900,536 for the six months ended June 30, 2006 and 2005, respectively.                                                                                                                                                                                                                      
|   
|10. | EQUITY                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|   
|    | In the six months ended June 30, 2006, the holders of warrants to purchase 976,834 shares common stock exchanged their warrants for 488,417 actual shares of common stock. There was no expense associated
with this exchange.                                                                                                                                                                                                                                                        
|   
|11. | SUBSEQUENT EVENTS                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|   
|    | 10% Secured Convertible Promissory Note Offering The Company obtained additional financing under the 10% Secured Convertible Promissory Note offering
through the issuance of $1,550,000 of promissory notes in July and August 2006. In connection with this offering, the Company issued warrants to purchase 38,750 shares of common stock. These warrants have an exercise price of $4.00 per share
and expire in 2011.                                                          
|   
|    | The Company obtained additional financing under the 10% Secured Convertible Promissory Note offering through the issuance of $1,857,000 of promissory notes in September 2006, each with a three year
term. In connection with this offering, the Company issued warrants to purchase 46,425 shares of common stock. These warrants have an exercise price of $4.00 per share and expire in 2011. In addition, the Company incurred expenses of $92,520
relating to these investments.
|   

14

---



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

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

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

|                              | Three months ended
|----------------------------- | ------------------
|                              | June 30,          
|Type of Revenue               |                   
|                             
|Parentage and identification  |                   
|genotyping service revenue    | $                 
|                             
|Feedlot sample testing        |                   
|                             
|License fee revenue           |                   
|                             
|Other genomic service revenue |                   
|                             
|Total revenue                 | $                 

Revenue.Our revenue for the three months ended June 30, 2006 was $864,810, which was an increase of $242,859, or 39.0%, from the $621,951 during the second quarter of
2005, primarily due to the introduction of various new product lines. The Company began its feedlot commercialization study in 2006 as the next step in commercializing the product developed in the Cargill collaborative research project.  That
testing generated $174,491 during the second quarter of 2006.  New products included in other genomic service revenue were canine data archiving, which generated $11,794 for the quarter, and Tru-Polled testing, which generated $43,025
during the quarter.

Cost of Revenues.Cost of revenues for the three months ended June 30, 2006 were $656,576, a $179,070, or 37.5% increase from the $477,506 for the same period of 2005.
This increase was primarily related to an increased level of revenue, as the gross margin percentage remained at a consistent level. The Company expects the gross margin from the new product lines to improve as volumes increase and labor costs
decrease.  The decrease in labor costs is expected to result from production efficiencies, as well as from personnel mix, as production moves from scientists to technicians.

Research and Development.Research and development costs were $583,918 for the three months ended June 30, 2006 compared to $1,214,410 for the same period in 2005. This
$630,492, or 51.9% decrease was primarily due to a reduction in employment related costs of approximately $613,000. This reflects the closure of our Canadian facility in the third quarter of 2005, as well as a reduction in our Beltsville
research team.

General and Administrative.General and administrative costs were $2,303,623 for the three months ended June 30, 2006 compared to $3,181,767 for the same period of 2005. This
$878,144, or 27.6% decrease was primarily due to the decrease in our employment related costs of approximately $839,000. This includes the reduction in salaries and related taxes due to changes in staff (including a consolidation of finance
and administration staff in Beltsville and Davis, CA), a reduction in the accrual relating to the bonus program, and a reduction in stock option expense due to fewer grants.

Depreciation and Amortization.Depreciation and amortization increased $9,680, or 12.7%, to $85,841 for the three months ended June 30, 2006 from $76,161 for the same
period of 2005 primarily due to the incremental expense related to asset purchases in late 2005.

15

---



Interest Expense.Interest expense and accretion of debt discount increased $402,930 to $1,630,104 for the three months ended June 30, 2006 from $1,227,174 for the same
period in 2005. This 32.8% increase was primarily due to the higher average debt balance and the higher accretion of debt discount relating to the 10% Secured Convertible Promissory Notes.

Debt Conversion Expense.In the second quarter of 2005, holders of our 10.9% Secured Convertible Promissory Notes converted $44,202 into our Series G convertible preferred stock,
with warrants attached. The $28,475 of expense represents the fair value of the securities and warrants issued in excess of the fair value of securities issuable pursuant to the original conversion terms. There were no debt conversions during
the second quarter of 2006.

Debt Issue Costs.Debt issue costs increased $42,556 to $476,570 for the three months ended June 30, 2006 from $434,014 for the same period of 2005. This 9.8% increase is
due to higher expense associated with amortization of deferred debt costs for the period, which related to the 10% Secured Convertible Promissory Notes.

Net Loss.Net loss decreased $1,146,858, or 19.1%, for the three months ended June 30, 2006 from the three months ended June 30, 2005, due to a combination of the factors
described above, primarily due to the decrease in our research and development and general and administrative operating costs.

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

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

|                              | Six months ended
|----------------------------- | ----------------
|                              | June 30,        
|Type of Revenue               |                 
|                             
|Parentage and identification  |                 
|genotyping service revenue    | $               
|                             
|Feedlot sample testing        |                 
|                             
|License fee revenue           |                 
|                             
|Other genomic service revenue |                 
|                             
|Total revenue                 | $               

Revenue.Our revenue for the six months ended June 30, 2006 was $1,710,828, which was an increase of $359,065, or 26.6%, from the $1,351,763 during the same period of
2005, primarily due to the introduction of various new product lines. The Company began its feedlot commercialization study in 2006 as the next step in commercializing the product developed in the Cargill collaborative research project.  That
testing generated $206,066 during the first six months of 2006. New products included in other genomic service revenue were canine data archiving, which generated $91,128 for the six months, and Tru-Polled testing, which generated
$116,195.

Cost of Revenues.Cost of revenues for the six months ended June 30, 2006 were $1,257,053, a $333,884, or 36.2% increase from the $923,169 for the same period of 2005.
This increase was primarily related to the increased level of revenue, as the gross margin percentage declined slightly due to lower volume within the new product lines. The Company expects the gross margin from the new product lines to improve as
volumes increase and labor costs decrease. The decrease in labor costs is expected to result from production efficiencies, as well as from personnel mix, as production moves from scientists to technicians.

16

---



Research and Development.Research and development costs were $1,163,617 for the six months ended June 30, 2006 compared to $2,427,503 for the same period in 2005. This
$1,263,886, or 52.1% decrease was primarily due to a reduction in employment related costs of approximately $1,134,000.  This reflects the closure of our Canadian facility in the third quarter of 2005, as well as a reduction in our
Beltsville research team.

General and Administrative.General and administrative costs were $3,940,403 for the first six months of 2006 compared to $6,441,949 for the same period of 2005. This
$2,501,546, or 38.8% decrease was primarily due to the decrease in our employee related costs of approximately $1,778,000. This includes the reduction in salaries and related taxes due to changes in staff (including a consolidation of
finance and administration staff in our Beltsville, MD and Davis, CA offices), a reduction in the accrual relating to the bonus program, and a reduction in stock option expense due to fewer grants.  Additionally, professional service fees decreased
approximately $456,000 due to the timing of our audit, valuation and legal work.

Depreciation and Amortization.Depreciation and amortization decreased $2,120,761, or 92.9%%, to $162,962 for the six months ended June 30, 2006 from $2,283,723 for the
same period of 2005 primarily due to the completion of the intangible asset amortization in February 2005. The intangible assets related to the intellectual property associated with the Celera genomics acquisition in February 2002 which was being
amortized at a rate of $3,189,000 per quarter.

Interest Expense.Interest expense and accretion of debt discount increased $477,546 to $3,160,395 for the six months ended June 30, 2006 from $2,682,849 for the same
period in 2005. This 17.8% increase was primarily due to the increase in the average outstanding debt balance, as well as the additional amortization relating to the debt discount associated with the 10% Secured Convertible Promissory Notes.

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

Debt Issue Costs.Debt issue costs decreased $163,760, or 14.7% to $949,859 for the six months ended June 30, 2006 from $1,113,619 for the same period of 2005. This
decrease is due to slightly lower expense associated with amortization of deferred debt costs for the period and the calculated value of warrants issued with short-term bridge loans in the second quarter of 2005.

Other Expense.Other expense of $27,020 for the six months ended June 30, 2006 primarily relates to the change in fair value of the embedded derivative associated with the
liquidated damages clause in the registration rights section of the subscription agreement for our 10% Secured Convertible Promissory Notes.

Net Loss.Net loss decreased $5,690,637, or 38.9%, for the six months ended June 30, 2006 from the six months ended June 30, 2005, due to a combination of the factors described
above, primarily the decrease in depreciation and amortization, and the decrease in our research and development and general and administrative operating costs.

Material Changes in Financial Position - Liquidity and Capital Resources

The Companys primary sources of liquidity are its revenues and the sale of debt and equity securities. At June 30, 2006 the Company has cash and cash equivalents of $123,733 and a working capital deficiency of
$25,173,906.

In the first six months of 2006 cash used in operations was $6.2 million compared to $3.1 million in the comparable period last year. This increase was primarily due to a $5.7 million decrease in net loss and a
$0.7 million increase in the change in accrued interest, partially offset by a $2.1 million decrease in depreciation and amortization expense, a $6.6 million decrease in the change in accounts payable and accrued compensation, and a
$0.9 million decrease in share-based payment expense. Cash provided by financing activities was $5.0 million in the current period compared to $2.7 million in the prior year period. This increase was due to higher proceeds

17

---



from the sale of debt and equity securities of $2.8 million, partially offset by the increase in principal payments of $0.4 million.

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

On June 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 2006. This uncertainty raises substantial doubt about the Companys ability to
continue as a going concern. The accompanying consolidated condensed financial statements do not include any adjustments that might result from the outcome of this uncertainty.

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.

18

---



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

Regions Bank, a secured, $5 million lender
    of Samuel R. Dunlap, Jr., a former Director who is in bankruptcy, has sued
    us for payment of an August 1, 2001 $731,000 Promissory Note made by
    us to Mr. Dunlap. The amount that is owed is in dispute (due to offsets made
    prior to the bankruptcy at Mr. Dunlaps direction) and we contend that
    the conditions precedent to the maturity of the loan have not occurred. We
    also note that our June 30, 2006 consolidated condensed financial statements
    reflect principal and interest being owed as of such date. Regions Bank has
    also claimed 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 dispute this claim.

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

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

The Company issued promissory bridge loans for
    a total of $950,000 to Mr. Peter Meyer, a member of our board of directors,
    during the first six months of 2006. The loans have a 10% interest rate and
    are payable in six months. The Company repaid $350,000 of these bridge
    loans during the first quarter of 2006, with the remaining $600,000 outstanding
    as of June 30, 2006.

In the first six months of 2006, the Company issued
    additional identical 12.5% Convertible Secured Promissory Notes in the amount
    of $1,241,803 to satisfy accrued interest payable. Based on the terms
    of the 12.5% Notes, accrued interest is due and payable on the one year anniversary
    date of the notes. The interest is payable in cash or in the form of identical
    new notes, at the option of the Company.

The Company issued additional 10% Secured Convertible
    Promissory Notes which totaled $4,602,177 during the six months ended
    June 30, 2006. These notes have a three year maturity.

In connection with the issuance of the 10% Notes
    in 2006, the Company granted warrants to purchase 1,016,321 shares of common
    stock. These warrants had an exercise price of $4.00 per share, expire
    in 2011, and had an allocated value of $581,201 in 2006. The value of
    these warrants was recorded as a debt discount to be amortized over the life
    of the debt.

The Company also issued warrants to purchase 33,417
    shares of common stock in the three months ended March 31, 2006 for advisory
    services in connection with obtaining the 10% Note financing. The warrants
    had an exercise price of $4.00 per share, expire in 2016, had a calculated
    value of $21,215 and were recorded as deferred financing costs in the
    six months ended June 30, 2006, to be amortized over the life of the debt.

The Company, with the assistance from a valuation
    specialist, recalculated the fair value of the embedded derivative associated
    with the 10% Notes for the first two quarters of 2006. The value was determined
    to be

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$73,070 and $69,588 at March 31, 2006 and June 30, 2006, respectively. The change in value was recorded as other income or expense during the applicable quarter.

ITEM 3.      Defaults Upon Senior Securities

At June 30, 2006, $142,166 of outstanding principal under our 8% Secured Convertible Promissory Notes and $884,343 of outstanding principal under our 10.9% Secured Convertible Promissory Notes were past due.

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.
| | --------------- | -----------------
| |                 |                  
|
|
| | October 3, 2006 | By:              
| | Date            |                  
| |                 |                  
| |                 |                  
| |                 |                  
|
|
| | October 3, 2006 | By:              
| | Date            |                  
| |                 |                  
| |                 |                  
| |                 |                  
| |                 |                  

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