UNITED STATES
SECURITIES 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, 2007

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

For
the transition period from:________________________to______________________



Commission file number:000-51294METAMORPHIX, INC.(Exact name of registrant as specified in its charter)

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

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

Check whether the registrant is a shell company (as defined in Exchange Act Rule 12b-2). Yeso 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 July 31, 2007
|----------------------------- |  | -------------------------------
|Common Stock, $.001 par value |  | 21,117,622 Shares              

Transitional Small Business Disclosure Format (Check one): Yeso Nox

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|                              |                                                                                     |    | Page No.
|----------------------------- | ----------------------------------------------------------------------------------- | -- | --------
|EXPLANATORY NOTE              |                                                                                     | 3 
|                              |                                                                                     |   
|PART I. FINANCIAL INFORMATION |                                                                                     |   
|                              |                                                                                     |    |         
|ITEM 1.                       | Consolidated Condensed Financial Statements (Unaudited)                             |    |         
|                              |                                                                                     |    |         
|                              | Consolidated
    Condensed Balance Sheets as of June 30, 2007 and December 31, 2006 |    | 6       
|                              |                                                                                     |    |         
|                              | Consolidated
    Condensed Statements of Operations for the Three and Six Months    |    |         
|                              | Ended June 30, 2007 and 2006 (restated)                                             |    | 7       
|                              |                                                                                     |    |         
|                              | Consolidated
    Condensed Statements of Cash Flows for the Six Months Ended        |    |         
|                              | June 30, 2007 and 2006 (restated)                                                   |    | 8       
|                              |                                                                                     |    |         
|                              | Notes to
    Consolidated Condensed Financial Statements                            |    | 9       
|                              |                                                                                     |    |         
|ITEM 2.                       | Management's Discussion and Analysis or Plan of Operation                           |    | 21      
|                              |                                                                                     |    |         
|ITEM 3                        | Controls and Procedures                                                             |    | 27      
|                              |                                                                                     |   
|PART II. OTHER INFORMATION    |                                                                                     |   
|                              |                                                                                     |    |         
|ITEM 1.                       | Legal Proceedings                                                                   |    | 28      
|                              |                                                                                     |    |         
|ITEM 2.                       | Unregistered Sales of Equity Securities and Use of Proceeds                         |    | 28      
|                              |                                                                                     |    |         
|ITEM 3.                       | Defaults Upon Senior Securities                                                     |    | 29      
|                              |                                                                                     |    |         
|ITEM 6.                       | Exhibits                                                                            |    | 29      
|                              |                                                                                     |   
|SIGNATURES                    |                                                                                     | 30

2

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EXPLANATORY NOTE

The consolidated condensed statements of operations and cash flows for the three and six months ended June 30, 2006 included in this Form 10-QSB have been restated. As discussed in Note 11,
subsequent to the issuance of the quarterly report on Form 10-QSB for the three and six months ended June 30, 2006 Metamorphix and its audit committee concluded to restate its consolidated condensed financial statements to correct the following
errors:

| | 1. | We used the Black-Scholes option valuation model for the valuation of warrants issued to non-employees from January 1, 1999 through March 31, 2007. The expected life assigned to these transferable warrants, which is an
input to the Black-Scholes option valuation model, was less than the contractual life of the warrant. We based the expected life of the warrants on the assumption that the warrants would be exercised prior to it expiration. Upon further reflection
and review of accepted valuation techniques and practices and the relevant accounting guidance, it was determined that the contractual life should have been used as an input.
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | 2. | In 2004, holders of our 8% Secured Convertible Promissory Notes and our 10.9% Secured Convertible Promissory Notes converted principal and interest into shares of our Series F Convertible Preferred Stock and warrants to
purchase shares of our common stock. This transaction was originally accounted for as an induced conversion. After further review of the relevant accounting guidance, it was determined that this conversion should have been accounted for as an
extinguishment of the notes. This transaction generated a loss on extinguishment.                                                                                                 
|
| | 3. | In 2004, holders of our various Series C, D, & E Bridge Notes converted their notes into our 12.5% Convertible Secured Promissory Notes. It was determined that this conversion should have been accounted for as an
extinguishment of the old notes and the establishment of new notes. This transaction generated a loss on extinguishment.                                                                                                                                                                                                                                                                                                                    
|
| | 4. | In 2005, we made a material modification to the terms of our 12.5% Convertible Secured Promissory Notes, in connection with a warrant exchange to eliminate a penalty warrant clause. This modification should have been
accounted for as an extinguishment of the old notes and the establishment of new notes. This transaction generated a loss on extinguishment.                                                                                                                                                                                                                                                                                            
|
| | 5. | In 2005, holders of our 8% Secured Convertible Promissory Notes and our 10.9% Secured Convertible Promissory Notes converted principal and interest into shares of our Series G Convertible Preferred Stock and warrants to
purchase our common stock. This transaction was originally accounted for as an induced conversion, but it was determined that it should have been accounted for as a debt extinguishment. This transaction generated a gain on
extinguishment.                                                                                                                                                                                       
|

3

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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/or 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 commercialize our beef and swine animal genomics technology, and expect to commercialize our chicken genomic technology.  We have exclusive agreements with 1)
Cargill Incorporated, or Cargill, the worlds second largest beef processor and feedlot operator, 2) Newsham, the second largest swine breeding company which recently acquired Monsanto Choice Genetics, a licensee of our genomic technology and
3) Hubbard S.A.S., or Hubbard, a world leading chicken breeder. We also have agreements to provide DNA testing services for the American Kennel Club, the worlds largest canine registry, United Kennel Club, American Angus Association, the
worlds largest beef cattle registry, Red Angus Association, American Limousin Association, and American Bucking Bull Association. These non-exclusive DNA testing service contracts are made in the ordinary course of business and contain
standard fee-per-test terms with contracts being renewable every three years by mutual consent of the parties. Additionally, these agreements detail DNA sample submission format, specifications for data analysis and delivery, and proper archiving of
samples after analysis.

In 2007, we launched our Canine Heritage Breed Test. This product uses DNA technology to genetically identify canine breed characteristics and can certify certain breeds. This test is being commercially sold to the public.

Our second technology platform is based on GDFs which 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, Tyson Poultry, Inc., or Tyson, and Pilgrims Pride Corporation, or Pilgrims Pride, 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 human therapeutic application of our GDF technology including Myostatin, under which Wyeth has completed
Phase II clinical trials to evaluate a Myostatin-based product as a therapeutic for Becker, Facioscapulohumeral, and Limb-Girdle forms of muscular dystrophy.

We have faced the numerous challenges and risks that many emerging growth, research-oriented companies face since our inception. We have had a consistent history of net losses. Our decision to
finance the Company through a combination of convertible notes and preferred stock has left us with a large debt obligation,

4

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the majority of which is long-term. The challenge is to generate sufficient revenue to repay this long term debt obligation or to have a liquidity event whereby this long term debt will be converted to equity. Now that we
are beginning to commercialize our various products, we face risks and challenges relating to liquidity.  We are dependent on future fund raising to become solvent until our operations reach profitability.

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. 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 Wyeth assigned 2.7 million shares of our Series A Preferred Stock and 900,000 shares of our Series B Preferred Stock
(95% of their total holdings) to us, as well as our receiving the right to future milestone and royalty payments. We accounted for the stock assignment as a repurchase and subsequently cancelled those shares. Between 2000 and 2002, we granted
options to license our Myostatin technology to the top two U.S. chicken producers, Tyson and Pilgrims Pride, and entered into a joint venture with a leading supplier of turkey poults, Willmar, to commercialize Myostatin in the North American
chicken and turkey markets.

Our business activities in the area of animal genomics commenced in February 2002, when we acquired some of the animal-related assets of the Celera Genomics Group of Applera Corporation, or Celera, and licensed
Celeras chicken, swine and cattle genome databases for agricultural use within specified fields. In May 2002, we entered into our Joint Development and Marketing Agreement with Cargill; in June 2004, we entered into our Swine Improvement
Agreement with Monsanto which has been transferred through an acquisition to Newsham in November 2007; and in January 2007, we entered into a Joint Research and Marker Development Agreement with Hubbard to develop improved breeds of chicken as
described under Licenses, Acquisitions, and Collaborative Agreements.

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 operate our GDF business from our Beltsville,
Maryland office. Our animal genomics business operates in Davis, California. We have a corporate internet website at http://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.  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.
You should not place undue reliance on our forward-looking statements.  You should also be aware that any of the events described under Risk factors in our Form 10-KSB/A filed June 8, 2007 and elsewhere in that annual report could harm
our business, prospects, operating results and financial condition.  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.

5

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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, |  
|------------------------------------------------------------------- |  | -------- | ------------ | - | ------------ | -
|                                                                    |  | 2007     |              |   | 2006         |  
|ASSETS                                                              |  |          |              |   |              |  
|CURRENT ASSETS:                                                     |  |          |              |   |              |  
|Cash and cash equivalents                                           |  | $        | 360,204      |   |              | $
|Accounts receivable                                                 |  |          | 325,249      |   |              |  
|Prepaid expenses and other current assets                           |  |          | 203,211      |   |              |  
|Total current assets                                                |  |          | 888,664      |   |              |  
|                                                                   
|PROPERTY AND EQUIPMENTNet                                          |  |          | 1,501,537    |   |              |  
|GOODWILL                                                            |  |          | 3,739,870    |   |              |  
|LEASE SECURITY DEPOSITS                                             |  |          | 204,494      |   |              |  
|DEFERRED DEBT ISSUE COSTS                                           |  |          | 4,538,990    |   |              |  
|                                                                    |  |          | 9,984,890    |   |              |  
|TOTAL ASSETS                                                        |  | $        | 10,873,555   |   |              | $
|                                                                   
|LIABILITIES AND STOCKHOLDERS EQUITY (DEFICIT)                      |  |          |              |   |              |  
|CURRENT LIABILITIES:                                                |  |          |              |   |              |  
|Accounts payable and accrued expenses                               |  | $        | 8,026,926    |   |              | $
|Accrued compensation                                                |  |          | 4,617,882    |   |              |  
|Accrued dividends                                                   |  |          | 3,963,858    |   |              |  
|Short-term notes payable                                            |  |          | 4,411,422    |   |              |  
|Notes payable to officers and directors                             |  |          | 2,184,498    |   |              |  
|Deferred revenue                                                    |  |          | 979,580      |   |              |  
|Celera purchase obligation                                          |  |          | 3,030,483    |   |              |  
|Derivative liability                                                |  |          | -            |   |              |  
|Accrued interest                                                    |  |          | 4,640,173    |   |              |  
|Total current liabilities                                           |  |          | 31,854,822   |   |              |  
|                                                                   
|LONG-TERM NOTES PAYABLE, net of discount of $945,483 and            |  |          |              |   |              |  
|$1,134,299 at June 30, 2007 and December 31, 2006, respectively     |  |          | 38,569,726   |   |              |  
|CELERA PURCHASE OBLIGATION                                          |  |          | 3,277,913    |   |              |  
|ACCRUED INTEREST                                                    |  |          | 1,804,647    |   |              |  
|OTHER LONG-TERM LIABILITIES                                         |  |          | 122,989      |   |              |  
|Total liabilities                                                   |  |          | 75,630,097   |   |              |  
|                                                                   
|COMMITMENTS AND CONTINGENCIES (Note 7)                              |  |          |              |   |              |  
|                                                                   
|STOCKHOLDERS EQUITY (DEFICIT):                                     |  |          |              |   |              |  
|Convertible Preferred stock, $0.001 par value22,000,000 shares     |  |          |              |   |              |  
|authorized as of June 30, 2007 and December 31, 2006, 7,333,819 and |  |          |              |   |              |  
|7,326,715 shares issued and outstanding as of June 30, 2007 and     |  |          |              |   |              |  
|December 31, 2006, respectively                                     |  |          | 58,146,983   |   |              |  
|Common stock, $0.001 par value75,000,000 shares authorized as of   |  |          |              |   |              |  
|June 30, 2007 and December 31, 2006, 21,117,622 and 21,075,141      |  |          |              |   |              |  
|shares issued and outstanding as of June 30, 2007 and December 31,  |  |          |              |   |              |  
|2006, respectively                                                  |  |          | 21,118       |   |              |  
|Additional paid-in capital                                          |  |          | 117,454,445  |   |              |  
|Accumulated other comprehensive loss                                |  |          | (205,629     | ) |              |  
|Accumulated deficit                                                 |  |          | (240,173,459 | ) |              |  
|Total stockholders equity (deficit)                                |  |          | (64,756,542  | ) |              |  
|TOTAL LIABILITIES AND STOCKHOLDERS EQUITY (DEFICIT)                |  | $        | 10,873,555   |   |              | $

See notes to consolidated condensed financial statements.

6

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METAMORPHIX, INC. AND SUBSIDIARIES 
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS

(Unaudited)

|                                       |  | Three Months Ended |            |   | Six Months Ended |              
|-------------------------------------- |  | ------------------ | ---------- | - | ---------------- | -------------
|                                      
|                                       |  | June 30, 2007      |            |   | June 30, 2006    |              
|                                       |  |                    |            |   |                  | (As Restated)
|REVENUE                                |  | $                  | 892,447    |   |                  | $            
|OPERATING COSTS AND                    |  |                    |            |   |                  |              
|EXPENSES:                              |  |                    |            |   |                  |              
|Cost of revenue                        |  |                    | 428,261    |   |                  |              
|Research and development               |  |                    | 759,569    |   |                  |              
|General and administrative             |  |                    | 1,998,330  |   |                  |              
|Depreciation and amortization          |  |                    | 80,045     |   |                  |              
|Total operating costs and expenses     |  |                    | 3,266,205  |   |                  |              
|OTHER INCOME (EXPENSE):                |  |                    |            |   |                  |              
|Interest expense and accretion of debt |  |                    |            |   |                  |              
|discount                               |  |                    | (1,660,738 | ) |                  |              
|Debt issue costs                       |  |                    | (791,178   | ) |                  |              
|Other (expense)                        |  |                    | -          |   |                  |              
|NET LOSS                               |  |                    | (4,825,674 | ) |                  |              
|Preferred stock dividends and          |  |                    |            |   |                  |              
|accretion of beneficial conversion     |  |                    |            |   |                  |              
|features                               |  |                    | (347,783   | ) |                  |              
|NET LOSS ATTRIBUTABLE TO               |  |                    |            |   |                  |              
|COMMON STOCKHOLDERS                    |  | $                  | (5,173,457 | ) |                  | $            
|Net loss per common share:             |  |                    |            |   |                  |              
|Basic and diluted                      |  | $                  | (0.25      | ) |                  | $            
|Weighted average number of shares      |  |                    |            |   |                  |              
|outstanding:                           |  |                    |            |   |                  |              
|Basic and diluted                      |  |                    | 21,089,707 |   |                  |              
|                                      

See notes to consolidated condensed financial statements.


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METAMORPHIX, INC. AND SUBSIDIARIES 
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS

(Unaudited)

|                                                        |               | Six Months Ended |              
|------------------------------------------------------- | ------------- | ---------------- | -------------
|                                                       
|                                                        | June 30, 2007 |                  | June 30, 2006
|                                                        |               |                  |              
|CASH FLOWS FROM OPERATING ACTIVITIES:                   |               |                  |              
|Net loss                                                | $             | (9,099,673       | )            
|Adjustments to reconcile net loss to net cash flows     |               |                  |              
|used in operating activities:                           |               |                  |              
|Depreciation and amortization                           |               | 224,601          |              
|Accretion of debt discount                              |               | 310,155          |              
|Amortization of deferred debt issue costs               |               | 1,570,211        |              
|Share-based payment expense                             |               | 930,521          |              
|Fair value changes in embedded derivative               |               | -                |              
|(Gain) loss on disposal of fixed assets                 |               | -                |              
|Changes in assets and liabilities:                      |               |                  |              
|Accounts receivable                                     |               | (48,397          | )            
|Prepaid expenses and other current assets               |               | (134,323         | )            
|Accounts payable and accrued expenses                   |               | 454,106          |              
|Accrued compensation                                    |               | (80,079          | )            
|Deferred purchase obligation                            |               | 111,748          |              
|Deferred revenue                                        |               | (92,055          | )            
|Accrued interest                                        |               | 2,435,667        |              
|Other, net                                              |               | -                |              
|Net cash flows used in operating activities             |               | (3,417,518       | )            
|CASH FLOWS FROM INVESTING ACTIVITIES:                   |               |                  |              
|Purchases of property and equipment                     |               | (97,740          | )            
|Net cash flows used in investing activities             |               | (97,740          | )            
|CASH FLOWS FROM FINANCING ACTIVITIES:                   |               |                  |              
|Proceeds from debt issuances                            |               | 3,925,000        |              
|Payment of debt issue costs                             |               | (262,080         | )            
|Principal payments on notes payable                     |               | (50,000          | )            
|Principal payments on lease obligations                 |               | (15,253          | )            
|Proceeds from stock issuances                           |               | 115              |              
|Net cash flows provided by financing activities         |               | 3,597,782        |              
|NET INCREASE (DECREASE) IN CASH AND CASH                |               |                  |              
|EQUIVALENTS                                             |               | 82,524           |              
|CASH AND CASH EQUIVALENTSBeginning of period           |               | 277,680          |              
|CASH AND CASH EQUIVALENTSEnd of period                 | $             | 360,204          |              
|SUPPLEMENTAL DISCLOSURES OF CASH FLOW                   |               |                  |              
|INFORMATION:                                            |               |                  |              
|Cash paid during the period for interest                | $             | 46,677           |              
|NON-CASH INVESTING AND FINANCING ACTIVITIES:            |               |                  |              
|Conversion of notes and accrued interest into new notes |               |                  |              
|payable                                                 | $             | 1,397,028        |              

See notes to consolidated condensed financial statements.


8

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METAMORPHIX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(Unaudited)



|1. | NATURE OF THE BUSINESS AND GOING CONCERN-MANAGEMENTS
    PLANS                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
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|   | 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) animal genomics and b) growth and differentiation factors.
          These technologies are commercially employed to both increase livestock
          meat quality and production efficiency and to potentially treat muscle-wasting
          diseases in humans, such as Muscular Dystrophy and Sarcopenia.
      These consolidated condensed
          financial statements include the accounts of MetaMorphix, Inc. and
          its wholly-owned subsidiaries: MMI Genomics, Inc., MMI Canada Inc.,
          MetaMorphix International, Inc., and MetaMorphix Holdings, Inc. All
          intercompany transactions and balances have been eliminated in consolidation.
      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, 2007, the Company had a working capital deficiency
          of $30,966,158 and an accumulated deficit of $240,173,459.
          The Company intends and is currently working to finance its operations
          primarily through future debt and equity financings and future revenues.
      The Company is working with
          two United Kingdom (U.K.)-based financial advisors to assist the Companys
          Board in evaluating a public listing of the Companys shares on
          AIM, a market operated by the London Stock Exchange plc (AIM).
          As part of this public listing, we intend to raise between U.S. $25
          million and $40 million through an offering of common stock (the Offering).
          The Offering would not be registered with the SEC because we will be
          relying on one or more exemptions from registration. Although there
          can be no assurance at this time that we will be able to successfully
          complete the Offering, we believe we have assembled a highly respected
          group of financial institutions to assist us in this process. As of
          February 26, 2008, we are in the process of finalizing the engagement
          of two investment firms in the U.K. to act as the nominated advisor
          (NOMAD), joint financial advisers and lead and co-broker
          for a U.K. fundraising and AIM listing. All companies whose shares
          are listed on AIM are required to appoint a NOMAD, who acts as both
          a financial advisor to a company and provides the regulatory oversight
          required by the London Stock Exchange plc. The two firms are well-regarded
          and highly selective investment firms that have played the role of
          financial advisor for a number of AIM-listed companies.
      In connection with the Offering,
          we are seeking the requisite consents so that all shares of our preferred
          stock (Series A through Series G), all of our 12.5% Convertible Notes,
          and a minimum of 85% of our 10% Convertible Notes convert into common
          stock upon completion of the Offering and AIM listing. In addition,
          we are seeking consent to waive the ratchet provisions contained in
          our Series E preferred stock and 12.5% Convertible Notes relative to
          the 30% discount of the 10% noteholders since they are so dilutive
          that they seriously jeopardize our ability to complete the Offering
          and AIM listing.
      In order to secure the automatic
          conversion and/or amendment of all of our outstanding preferred stock
          and convertible notes upon the closing of the Offering, we will need
          holders owning an aggregate of the following percentage of shares of
          preferred stock or principal amount of convertible notes to agree to
          conversion and/or amendment (i.e., so long as we obtain consent in
          the percentages listed below (other than for the 10% Convertible Notes)
          100% of the applicable series of preferred stock or convertible notes
          will be automatically converted into common stock upon the closing
    of the Offering):

9

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| | Series
          A - 85%Series B - 85%Series C - 85%Series D - 85%Series E - 75%Series F - 50%Series G - 50%
      12.5 % Convertible Notes  66.66%10% Convertible Notes  66.66%*
      *Since there is no existing
          percentage requirement for conversion of the 10% Convertible Notes,
          we have been advised that in order to successfully complete the Offering,
          we will need to obtain consent from holders of at least 66.66% of the
          outstanding principal amount of all 10% Notes to convert at the time
          of the Offering.
      The conversion and/or amendment
          of our preferred stock and convertible notes shall not occur unless
          we obtain the requisite consents (in the specified percentages) for
          each class of preferred stock or the convertible notes set forth above.
      Our current financial condition
          makes it imperative that we are able to complete the Offering as soon
          as possible. At present, we are insolvent, as our liabilities exceed
          our assets. In addition, the Report of Independent Registered Public
          Accounting Firm on our 2006 consolidated financial statements, as in
          earlier years (2004-2005), included an emphasis paragraph relating
          to the Companys ability to continue as a going concern.
      If we cannot complete the above
          described Offering, we will be forced to continue to attempt to raise
          capital on what we believe may be increasingly unfavorable terms, and
          we may not be able to raise additional funds at all. This will slow
          commercialization of some of our technology. If we cannot complete
          the Offering, we may be forced to seek bankruptcy protection.
      The securities to be offered
          in the Offering have not been registered under the Securities Act of
          1933, as amended, or any state securities laws, and unless so registered
          may not be offered or sold in the United States, except pursuant to
          an exemption from, or in a transaction subject to, the registration
          requirements of the Securities Act of 1933 and applicable state securities
          laws. This disclosure is being made pursuant to Rule 135c under the
          Securities Act and does not constitute an offer to sell, or the solicitation
          of an offer to buy, nor shall there be any sale of the securities in
          any jurisdiction in which such offer, solicitation or sale would be
          unlawful prior to registration or qualification under the securities
          laws of such jurisdiction.
      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
          2007. This uncertainty raises substantial doubt about the Companys
          ability to continue as a going concern. The accompanying consolidated
          condensed financial statements do not include any adjustments that
    might result from the outcome of this uncertainty.
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|2. | SIGNIFICANT ACCOUNTING
    POLICIES                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 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                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|   | Unaudited
              Interim Financial StatementsThe
              interim financial statements of the Company for the three and six
              months ended June 30, 2007 and June 30, 2006 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, 2007 and the results of
              its operations and its cash flows for the three and six months
              ended June 30, 2007 and June 30, 2006. The interim results of operations
              for the three and six months ended June 30, 2007 and June 30, 2006,
              respectively, are not necessarily indicative of the results that
              may be achieved for the full year.
      Earnings Per Share As
          of June 30, 2007 and 2006, there were 29,805,413 and 27,117,422 shares
          of common stock potentially issuable upon the exercise of stock options
          and warrants and the conversion of convertible securities, respectively.
          However, diluted per share amounts have not been presented in the accompanying
          consolidated statement of operations because the Company had a net
          loss in the three and six months ending June 30, 2007 and 2006 and
          the assumed effects of the exercise of all of the Companys outstanding
          stock options and warrants and the conversion of all of its convertible
          securities would have been anti-dilutive.
      Recent Accounting Pronouncements In
          December 2007, the FASB issued SFAS No. 160.
      Noncontrolling Interests
            in Consolidated Financial Statements, an Amendment to ARB No. 51.
            This statement applies to all entities that prepare consolidated
            financial statements, except not-for-profit organizations, but will
            affect only those entities that have an outstanding noncontrolling
            interest in one or more subsidiaries or that deconsolidate a subsidiary.
            This Statement is effective for fiscal years, and interim periods
            within those fiscal years, beginning on or after December 15, 2008
            (that is, January 1, 2009, for entities with calendar year-ends).
            Earlier adoption is prohibited. The effective date of this Statement
            is the same as that of the related Statement 141(R). The adoption
            of SFAS No. 160 is not expected to have a material impact on the
            Corporations financial position, results of operations or liquidity.
      In December 2007, the FASB issued
          SFAS No. 141(R)Business Combinations.This
          statement applies to all transactions or other events in which an entity
          (the acquirer) obtains control of one or more businesses (the acquiree),
          including those sometimes referred to as true mergers or mergers
          of equals and combinations achieved without the transfer of consideration,
          for example, by contract alone or through the lapse of minority veto
          rights. This Statement applies to all business entities, including
          mutual entities that previously used the pooling-of-interests method
          of accounting for some business combinations. It does not apply to;
          1) the formation of a joint venture; 2) the acquisition of an asset
          or a group of assets that does not constitute a business; 3) a combination
          between entities or businesses under common control; 4) a combination
          between not-for-profit organizations or the acquisition of a for-profit
          business by a not-for-profit organization. This Statement applies prospectively
          to business combinations for which the acquisition date is on or after
          the beginning of the first annual reporting period beginning on or
          after December 15, 2008. An entity may not apply it before that date.
          The effective date of this Statement is the same as that of the related
          FASB Statement No. 160,Noncontrolling
          Interests in Consolidated Financial Statements.
          The adoption of SFAS No. 141(R) is not expected to have a material
          impact on the Corporations financial position, results of operations
          or liquidity.
      In February 2007, the Financial
          Accounting Standards Board, or FASB, issued Statement of Financial
          Accounting Standards (SFAS) No. 159,The
          Fair Value Option for Financial Assets and Financial Liabilities Including
          an amendment of FASB Statement No. 115.
          SFAS No. 159 permits entities to choose to measure many financial instruments
          and certain other items at fair value. Unrealized gains and losses
          on items for which the fair value option has been elected will be recognized
          in earnings at each subsequent reporting date. SFAS No. 159 is effective
    for the Company on January 1, 2008. The Company

11

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| | is
          evaluating the impact that the adoption of SFAS No. 159 will have on
          its future results of operations and financial position.
      In September 2006, the FASB
          issued 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 results of operations
          and financial position.
      Contained in the registration
          rights section of the subscription agreement for the Companys
          10% Secured Convertible Promissory Notes was a liquidated damages clause
          which the Company had accounted for as an embedded derivative in accordance
          with FASB Statement No. 133,Accounting
          for Derivative Instruments and Hedging Activities.
          The liquidated damages clause stated that no later than 90 days following
          SEC clearance of the Companys current Form 10-SB, a Registration
          Statement on Form S-1 (or an equivalent form) relating to an offering
          of the Companys securities must be filed. If the registration
          statement has not been filed as set forth above, the Company shall
          pay liquidated damages to the noteholders in cash or Common Stock in
          an amount equal to 1.5% of the Purchase Price per 30 day period (or
          part thereof) until such filing is made.
      In December 2006, the FASB issued
          FASB Staff Position ("FSP") EITF 00-19-2,Accounting
          for Registration Payment Arrangements.
          EITF 00-19-2 addresses an issuer's accounting for registration payment
          arrangements. This FSP specifies that the contingent obligation to
          make future payments or otherwise transfer consideration under a registration
          payment arrangement, whether issued as a separate agreement or included
          as a provision of a financial instrument or other agreement, should
          be separately recognized and measured in accordance with FASB Statement
          No. 5,Accounting for Contingencies.
          The guidance in EITF 00-19-2 amends FASB Statements No. 133,Accounting
          for Derivative Instruments and Hedging Activities,
          and No. 150,Accounting for Certain
          Financial Instruments with Characteristics of both Liabilities and
          Equity, and FASB Interpretation
          No. 45,Guarantor's Accounting
          and Disclosure Requirements for Guarantees, Including Indirect Guarantees
          of Indebtedness of Others, to
          include scope exceptions for registration payment arrangements. EITF
          00-19-2 further clarifies that a financial instrument subject to a
          registration payment arrangement should be accounted for in accordance
          with other applicable generally accepted accounting principles (GAAP)
          without regard to the contingent obligation to transfer consideration
          pursuant to the registration payment arrangement. The Company adopted
          EITF 00-19-2 as of January 1, 2007. The Company determined that the
          obligation relating to the registration rights agreement is not considered
          probable and therefore is not recognized in the financial statements.
          As a result, the Company recorded a cumulative-effect adjustment of $100,475
    as a decrease to the January 1, 2007 accumulated deficit balance.
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| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 



12

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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, 2007 and 2006:

| |                | Three months ended |         | Six months ended
| | -------------- | ------------------ | ------- | ----------------
| |                | June 30,           |         | June 30,        
| |                | 2007               |         | 2006            
| | Research and   |                    |         |                 
| | development    | $                  | 71,360  |                 
| | General and    |                    |         |                 
| | administrative |                    | 372,513 |                 
| | Total          | $                  | 443,873 |                 

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

| |                    |  | June 30, |         | December 31,
| | ------------------ |  | -------- | ------- | ------------
| |                    |  | 2007     |         | 2006        
| | Prepaid expenses   |  |          | 84,911  |             
| | Supplies inventory |  |          | 118,300 |             
|
| | Total              |  | $        | 203,211 |             

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

| |                                |  | June 30, |            |   | December 31, |  
| | ------------------------------ |  | -------- | ---------- | - | ------------ | -
| |                                |  | 2007     |            |   | 2006         |  
| | Office equipment               |  | $        | 1,199,596  |   |              | $
| | Production equipment           |  |          | 1,933,222  |   |              |  
| | Office equipment under capital |  |          |            |   |              |  
| | lease                          |  |          | 213,224    |   |              |  
| | Leasehold improvements         |  |          | 129,062    |   |              |  
|
| |                                |  |          | 3,475,104  |   |              |  
| | Less: Accumulated depreciation |  |          | (1,973,567 | ) |              |  
|
| | Total                          |  | $        | 1,501,537  |   |              | $

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|   | The Company recorded
        depreciation expense of $111,642 and $117,525 for the three months
        ended June 30, 2007 and 2006, respectively, and $224,601 and $234,775
        for the six months ended June 30, 2007 and 2006, respectively. Accumulated
        depreciation for equipment under capital leases was $83,779 and $71,646
    as of June 30, 2007 and December 31, 2006, respectively.
|-- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   |                                                                                                                                                                                                                                                                                                                                                                                                              
|6. | LONG-TERM DEFERRED
    DEBT ISSUE COSTS                                                                                                                                                                                                                                                                                                                                                                      
|   |                                                                                                                                                                                                                                                                                                                                                                                                              
|   | The long-term deferred debt issue
    cost activity during the six months ended June 30, 2007 is as follows:                                                                                                                                                                                                                                                                                                 
|   |                                                                                                                                                                                                                                                                                                                                                                                                              

| | Balance at January 1, 2007       |  | $ | 5,814,349  |  
| | -------------------------------- |  | - | ---------- | -
| | Additional debt issue costs      |  |   | 294,852    |  
| | Amortization to debt issue costs |  |   | (1,570,211 | )
|
| | Balance at June 30, 2007         |  | $ | 4,538,990  |  

|7. | 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, 2007, are as
    follows:
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                          

| |                                     |  | Capital |         |   | Operating |   | Royalty   
| | ----------------------------------- |  | ------- | ------- | - | --------- | - | ----------
| |                                     |  | Leases  |         |   | Leases    |   | Agreements
| | July 1, 2007 through December       |  |         |         |   |           |   |           
| | 31, 2007                            |  | $       | 21,195  |   |           | $ | 531,495   
| | 2008                                |  |         | 42,390  |   |           |   | 1,052,282 
| | 2009                                |  |         | 29,155  |   |           |   | 1,131,950 
| | 2010                                |  |         | 17,480  |   |           |   | 1,176,630 
| | 2011                                |  |         | 17,480  |   |           |   | 1,222,862 
| | 2012                                |  |         | 7,283   |   |           |   | 345,424   
|
| | Thereafter                          |  |         |        |   |           |   |          
|
| | Total payments/(receipts)           |  |         | 134,983 |   |           |   | 5,460,643 
|
| | Less: Amounts representing interest |  |         | (6,556  | ) |           |   |          
|
| | Net payments/(receipts)             |  | $       | 128,427 |   |           | $ | 5,460,643 

| | The commitments
          for capital leases and operating leases set forth in the above table
          have not been reduced for anticipated amounts to be paid by the sublessee.
      Rent expense under operating
          leases was $222,554 and $222,275 for the three months ended
          June 30, 2007 and 2006, respectively, and $440,847 and $422,113
          for the six months ended June 30, 2007 and 2006, 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. Beginning in 2006, the sublessee no longer
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



14

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| | pays
          rent to the Company but instead pays directly to the lessor. These
          payments of $23,675 per month in 2007 by the sublessee fully offset
          amounts owed by the Company under the original lease agreement.
      LitigationFrom
          time to time, the Company and its subsidiaries face lawsuits and claims
          related to commercial, employment and patent-related matters. Although
          the possible loss or range of loss for these matters cannot be estimated,
          management of the Company, after reviewing developments to date with
          legal counsel, is of the opinion that the outcome of such matters will
          not have a material adverse effect on the Companys consolidated
          financial position or results of operations.
      Director and Officer IndemnificationThe
          Companys certificate of incorporation provides that it will indemnify
          and hold harmless its officers, directors and others serving the corporation
          in various capacities to the fullest extent permitted by the Delaware
          General Corporation Law (DGCL). Section 145 of the DGCL
          provides that a Delaware corporation has the power to indemnify officers
          and directors in specified circumstances.
      On June 20, 2005, the Company
          became aware of a lawsuit and claim against us from Regions Bank for $731,000.
          Mr. Samuel R. Dunlap, a former Company director, who recently exited
          bankruptcy, pledged a $731,000 Promissory Note made by us to Mr.
          Dunlap as security for a $5.0 million loan from Regions Bank. Regions
          Bank has sued us for payment of this Note. The amount that is owed
          is in dispute (due to offsets made at Mr. Dunlaps direction prior
          to the bankruptcy). We also contend that the conditions precedent to
          the maturity of the loan have not occurred. We note that our June 30,
          2007 consolidated financial statements reflect principal of $625,498
          being owed as of such date (reflecting the offsets). Regions Bank asserts
          that we (in the operation of our securities transfer function) and
          our legal counsel enabled Mr. Dunlap to pledge one of his several Warrants
          to another creditor in breach of an already existing Commercial Pledge
          Agreement between the Bank and Mr. Dunlap. The Company was notified
          that on October 2, 2007, Regions Bank dismissed its complaint with
          prejudice against the Company in this matter. A dismissal with prejudice
          indicates that a case is dismissed for good reason and the plaintiff
          is barred from bringing an action on the same claim. The plaintiff
          has subsequently stated they made this claim in error and petitioned
          the court to change the dismissal to without prejudice.
          The Company had requested the initial dismissal be upheld and the courts
          had agreed to review this matter on January 28, 2008. At this court
          hearing, additional information was requested relating to internal
          control documents from Regions Bank. A tentative date to review these
          documents has now been set for late March 2008.
      On March 15, 2007, we became
          aware of a claim against us from holders of two 10% convertible promissory
          notes, for breach of contract for non-repayment of principal and interest
          due on July 31, 2006. The original amount of the notes was $150,000
          and $50,000, and the principal amount currently past due is $115,000
          and $45,000, respectively. In April, 2007, we reached a settlement
          agreement in this matter whereby we have paid all accrued interest
          through April 13, 2007, totaling $34,157 ($17,078 was paid
          on April 13 and April 20, 2007). The amount of the claim, which includes
          principal and accrued interest through the date of the claim, less
          payments made, is recorded as a liability on the financial statements
          at June 30, 2007. We paid $10,000 of principal on June 29, 2007,
          and agreed to pay the remaining $160,000 of principal on July 31,
          2007. We were unable to make the payment on July 31, 2007, and have
          subsequently agreed with the noteholders on a repayment schedule. The
          Company as of February 26, 2008 is current in its repayment obligation
          under this settlement agreement.
      In addition, during 2006, we
          settled and dismissed eight collection lawsuits for a total cost of $257,503.
          At present, there are no such cases pending.
      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.
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                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               

15

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|8. | DEBT                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
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|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|   | The Company issued
          additional 10% Secured Convertible Promissory Notes, which totaled $3,925,000
          during the six months ended June 30, 2007. These notes have a three
          year maturity. The Company incurred financing costs of $294,852
          in connection with obtaining these investments.
      In connection with the issuance
          of the 10% Secured Convertible Promissory Notes in 2007, the Company
          granted warrants to purchase 98,125 shares of common stock. These warrants
          had an exercise price of $4.00 per share, expire in 2012, and had
          an allocated value of $121,341 in 2007. The value of these warrants
          was recorded as a debt discount to be amortized over the life of the
          debt.
      Amortization expense relating
          to the 10% Secured Convertible Promissory Note and 12.5% Convertible
          Secured Promissory Note debt discount was $172,202 and $118,056
          for the three months ended June 30, 2007 and 2006, respectively, and $310,155
          and $200,373 for the six months ended June 30, 2007 and 2006, respectively.
      The Company issued new 12.5%
          Convertible Secured Promissory Notes in the amounts of $1,397,028
          and $1,241,803 during the quarters ended March 31, 2007 and 2006,
          respectively, to existing holders of our 12.5% Convertible Secured
    Promissory Notes to satisfy accrued interest payable.                                                                                                                                                                                                  
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|9. | INCOME
    TAXES                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|   | The Company adopted
          the provisions of Financial Accounting Standards Board Interpretation
          No. 48,Accounting for Uncertainty
          in Income Taxes, or FIN 48, on
          January 1, 2007. FIN 48 prescribes a more-likely-than-not threshold
          for financial statement recognition and measurement of a tax position
          taken or expected to be taken in a tax return. This interpretation
          also provides guidance on derecognition of income tax assets and liabilities,
          classification of current and deferred income tax assets and liabilities,
          accounting for interest and penalties associated with tax positions,
          accounting for income taxes in interim periods and income tax disclosures.
          The total amount of unrecognized tax benefits as of the date of adoption
          was $0. As a result of the implementation of FIN 48, we recognized
          no adjustment to our unrecognized tax benefits.
      The Companys practice
          is to recognize interest and/or penalties related to income tax matters
          in income tax expense. We currently have no liabilities recorded for
          accrued interest or penalties related to uncertain tax positions.
      The tax years 1994-2006 remain
          open to examination by the major taxing jurisdictions to which we are
          subject, namely U.S. and Canadian federal taxes, and Maryland and California
          state taxes.
      A valuation allowance covering
          our net deferred tax assets has been provided due to the uncertainty
    of whether the future income tax benefits will be realized.
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               





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|10. | REPORTABLE
    SEGMENTS                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|    | The Company operates in two reportable
        segments: Growth and Differentiation Factors and Animal Genomics. All
        segments are dedicated to discovering and commercializing multiple technology
        platforms to improve the food supply and human health. The Growth and
        Differentiation Factors segment operates in Maryland with revenue generated
        in Maryland through the development and commercialization of companion
        animal health and livestock production for Growth and Differentiation
        Factor discoveries. The corporate headquarters is also located at the
        Maryland facility, and since no discrete financial information exists
        to separate the corporate activities from that of the Growth and Differentiation
        Factors segment, they are presented together in the table below. The
        Animal Genomics segment operates in California with revenue generated
        in California through the pioneering of the use of genome information
        companion animal health and livestock production. The Company previously
        had a segment called Immunopharmaceuticals, which was operated in Canada.
        In September 2005, the Company made the decision to consolidate the research
        efforts of the Immunopharmaceutical business unit into the Growth and
        Differentiation Factors business unit in order to maximize efficiency,
        and our facility in Canada was closed. In connection with this closure,
        we accrued approximately $267,000 at September 30, 2005 in severance
        benefits for the 11 employees who were involuntarily terminated. Of the
        original severance accrual, $217,957 remains accrued and unpaid at
        June 30, 2007. Because liabilities still exist in the Canadian company,
    the limited activity is still disclosed.



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| | MetaMorphix, Inc.s
        President is the chief operating decision maker. The segment structure
        corresponds to the Companys subsidiary structure. The two segments
        relate to the Companys technology platforms and its two distinct
        business opportunities: animal genomics in the Genomics segment, and
        human biopharmaceuticals and livestock biopharmaceuticals in the Growth
    and Differentiation Factors segment.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |                                                 | Segment Information |           
| | ----------------------------------------------- | ------------------- | ----------
|
| |                                                 | 2007                |           
| |                                                 | Corporate/Growth    |           
| |                                                 | and Differentiation |           
| |                                                 | Factors - Maryland  |           
| | Revenues from external customers for the        |                     |           
| | three months ended June 30, 2007                | $                   | -         
| | Total (loss) profit for reportable segments for |                     |           
| | the three months ended June 30, 2007            |                     | (4,219,641
|
| | Segment assets at June 30, 2007                 | $                   | 9,000,570 
|
| |                                                 | 2006                |           
| | Revenues from external customers for the        |                     |           
| | three months ended June 30, 2006                | $                   | -         
| | Total (loss) profit for reportable segments for |                     |           
| | the three months ended June 30, 2006            |                     | (4,123,130
| | Segment assets at December 31, 2006             |                     |           
| |                                                 | $                   | 10,190,762
|
| |                                                 | 2007                |           
| |                                                 | Corporate/Growth    |           
| |                                                 | and Differentiation |           
| |                                                 | Factors - Maryland  |           
| | Revenues from external customers for the        |                     |           
| | six months ended June 30, 2007                  | $                   | -         
| | Total (loss) profit for reportable segments for |                     |           
| | the six months ended June 30, 2007              |                     | (7,979,889
|
| | Segment assets at June 30, 2007                 | $                   | 9,000,570 
|
| |                                                 | 2006                |           
| | Revenues from external customers for the        |                     |           
| | six months ended June 30, 2006                  | $                   | -         
| | Total (loss) profit for reportable segments for |                     |           
| | the six months ended June 30, 2006              |                     | (7,280,939
| | Segment assets at December 31, 2006             |                     |           
| |                                                 | $                   | 10,190,762
| |                                                 |                     |           
| |                                                 |                     |           

(1) The Immunopharmaceuticals
    segment was operated in Canada and, in September 2005, the Company made the
    decision to consolidate the research efforts of the Immunopharmaceutical
    segment into the Growth and Differentiation Factors segment in order to maximize
    efficiency, and our facility in Canada was closed. The segment has remaining
    unpaid liabilities, which generate interest and fees, thus creating a current
period segment loss.




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|11. | RESTATEMENT                                                                                                                                                                                                                                                                    
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    |                                                                                                                                                                                                                                                                                
|    | Subsequent to the issuance of
        the Companys Form 10-QSB for the three and six months ended June
        30, 2006, the Company and its audit committee concluded to restate its
        condensed consolidated financial statements to correct the following
    errors:
|    |                                                                                                                                                                                                                                                                                

| | 1. | The Company used the Black-Scholes option valuation model for the valuation of warrants issued to non-employees from January 1, 1999 through March 31, 2007. The expected life assigned to these transferable warrants, which
is an input to the Black-Scholes option valuation model, was less than the contractual life of the warrant. The Company based the expected life of the warrants on the assumption that the warrants would be exercised prior to it expiration. Upon
further reflection and review of accepted valuation techniques and practices and the relevant accounting guidance, it was determined that the contractual life should have been used as an input.
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | 2. | In 2004, holders of the Companys 8% Secured Convertible Promissory Notes and 10.9% Secured Convertible Promissory Notes converted principal and interest into shares of Series F Convertible Preferred Stock and warrants
to purchase shares of our common stock. This transaction was originally accounted for as an induced conversion. After further review of the relevant accounting guidance, it was determined that this conversion should have been accounted for as an
extinguishment of the notes. This transaction generated a loss on extinguishment.                                                                                                                 
|
| | 3. | In 2004, holders of the Companys various Series C, D, & E Bridge Notes converted their notes into 12.5% Convertible Secured Promissory Notes. It was determined that this conversion should have been accounted for
as an extinguishment of the old notes and the establishment of new notes. This transaction generated a loss on extinguishment.                                                                                                                                                                                                                                                                                                                                
|
| | 4. | In 2005, the Company made a material modification to the terms of its 12.5% Convertible Secured Promissory Notes, in connection with a warrant exchange to eliminate a penalty warrant clause. This modification should have been accounted for as an extinguishment of the old notes and the establishment of new notes. This transaction generated a loss on extinguishment.                                                                                                                                                                                                                                                                                                     
|
| | 5. | In 2005, holders of the Companys 8% Secured Convertible Promissory Notes and 10.9% Secured Convertible Promissory Notes converted principal and interest into shares of Series G Convertible Preferred Stock and warrants
to purchase our common stock. This transaction was originally accounted for as an induced conversion, but it was determined that it should have been accounted for as a debt extinguishment. This transaction generated a gain on
extinguishment.                                                                                                                                                                                                       
|

The following tables
    summarize the effect of the restatement by major financial statement line
item:




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CONSOLIDATED STATEMENTS OF OPERATIONS

| |                            | Three months ended June 30, 2006 |            |   | Six months ended June 30, 2006 |  
| | -------------------------- | -------------------------------- | ---------- | - | ------------------------------ | -
| |                            | As Previously                    |            |   |                                |  
| |                            | Reported                         |            |   | As Restated                    |  
| | Interest expense and       |                                  |            |   |                                |  
| | accretion of debt discount | $                                | (1,633,705 | ) |                                | $
|
| | Debt issue costs           |                                  | (476,570   | ) |                                |  
|
| | NET LOSS                   |                                  | (4,871,941 | ) |                                |  
|
| | NET LOSS                   |                                  |            |   |                                |  
| | ATTRIBUTABLE TO            |                                  |            |   |                                |  
| | COMMON                     |                                  |            |   |                                |  
| | STOCKHOLDERS               | $                                | (5,219,724 | ) |                                | $
|
| | Net loss per common        |                                  |            |   |                                |  
| | share: Basic and diluted   | $                                | (0.25      | ) |                                | $

CONSOLIDATED STATEMENTS OF CASH FLOWS

| |                            |  | Six months ended June 30, 2006 |           
| | -------------------------- |  | ------------------------------ | ----------
| |                            |  | As Previously                  |           
| |                            |  | Reported                       |           
| | Net loss                   |  | $                              | (8,957,683
| | Accretion of debt discount |  |                                | (1,044,434
| | Amortization of deferred   |  |                                |           
| | debt issue costs           |  |                                | (957,061  

|12. | 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 $645,000 of
              promissory notes subsequent to June 30, 2007, each with a three
              year term. In connection with this offering, the Company issued
              warrants to purchase 16,125 shares of common stock. These warrants
              have an exercise price of
  $4.00 per share and expire in 2012. The Company paid a commission of $58,050
  in connection with these additional notes.
      11.5% Secured Convertible
              Promissory Note Offering The
              Company obtained new financing under the 11.5% Secured Convertible
              Promissory Note offering through the issuance of $375,000 of
              promissory notes subsequent to June 30, 2007, each with an eighteen
              month year term. In connection with this offering, the Company
              issued warrants to purchase 93,750 shares of common stock. These
              warrants have an exercise price of $4.00 per share and expire
    in 2012.



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

As discussed in Note 11, the Companys condensed consolidated financial statements for June 30, 2006 have been restated. The accompanying managements discussion and analysis gives effect to that restatement.

Material Changes in Results of Operations - Comparison of the Three Months Ended June 30, 2007 and 2006

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, 2007 |                    | June 30, 2006
| | Revenue                                         |               |                    |              
| | Cattle parentage and identification genotyping  |               |                    |              
| | service revenue                                 | $             | 232,196            |              
| | Canine parentage and identification genotyping  |               |                    |              
| | service revenue                                 |               | 317,249            |              
| | Cattle feedlot genotyping revenue               |               | -                  |              
| | Cattle Tru-Polled® genotyping revenue           |               | 57,373             |              
| | Canine Heritage                                 |               | 89,245             |              
| | Swine royalty revenue                           |               | 126,380            |              
| | License fee revenue                             |               | 52,501             |              
| | Other genomic service revenue                   |               | 17,503             |              
| | Total Revenue                                   | $             | 892,447            |              
| | Cost of revenue                                 |               | (428,261           | )            
| | Research and development expense                |               | (759,569           | )            
| | General and administrative expense              |               | (1,998,330         | )            
| | Depreciation and amortization expense           |               | (80,045            | )            
| | Interest expense and accretion of debt discount |               | (1,660,738         | )            
| | Debt issue costs                                |               | (791,178           | )            
| | Other income (loss)                             |               | -                  |              
| | Net loss                                        | $             | (4,825,674         | )            

Revenue.Our revenue for the three months ended June 30, 2007 was $892,447, which was an increase of $27,637, or 3.2%, from the $864,810 during the second quarter of
2006.  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 $174,492 during the second quarter of 2006 and
was completed in early 2007. The Company began earning royalty income form its swine agreement in late 2006, and earned $126,380 during the three months ended June 30, 2007. The Company also launched the Canine Heritage product in 2007, earning
$89,245 of revenue during the current quarter. This product uses DNA technology to

21

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genetically identify canine breed characteristics and can certify certain breeds. This test is being commercially sold to the public.

Cost of Revenue.Cost of revenue for the three months ended June 30, 2007 were $428,262, a $228,314, or 34.8% decrease from the $656,576 for the same period of 2006.  This
decrease was primarily related to shift in the product mix from lower margin products in the second quarter of 2006, to higher margin products in 2007.

Research and Development.Research and development costs were $759,569 for the three months ended June 30, 2007 compared to $583,918 for the same period in 2006. This
$175,651, or 30.1% increase was primarily due to additional employee costs incurred in our efforts to expand the Canine heritage test to identify additional breeds of dogs.

General and Administrative.General and administrative costs were $1,998,330 for the three months ended June 30, 2007 compared to $2,303,623 for the same period of 2006. This
$305,293, or 13.3% decrease was primarily due to the timing of professional fees associated with our SEC filings, including audit, legal and valuation fees. In 2006, most of these costs were incurred in the second quarter, while in 2007, they
were incurred in the first quarter. This timing difference amounted to approximately $316,000.

Depreciation and Amortization.Depreciation and amortization remained stable at $80,044 for the three months ended June 30, 2007 compared to $85,841 for the same period of
2006.

Interest Expense.Interest expense and accretion of debt discount increased $437,806 to $1,660,738 for the three months ended June 30, 2007 from $1,222,932 for the same
period in 2006. This 35.8% 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 Issue Costs.Debt issue costs increased $46,795 to $791,178 for the three months ended June 30, 2007 from $744,383 for the same period of 2006. This 6.3% 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 increased $96,693, or 2.0%, to $4,825,674 for the three months ended June 30, 2007 from the $4,728,981 for the three months ended June 30, 2006, due to
a combination of the factors described above.

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Material Changes in Results of Operations - Comparison of the Six Months Ended June 30, 2007 and 2006

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, 2007    |           
| | Revenue                                         |                  |           
| | Cattle parentage and identification genotyping  |                  |           
| | service revenue                                 | $                | 482,459   
| | Canine parentage and identification genotyping  |                  |           
| | service revenue                                 |                  | 657,131   
| | Cattle feedlot genotyping revenue               |                  | 37,053    
| | Cattle Tru-Polled® genotyping revenue           |                  | 145,021   
| | Canine Heritage                                 |                  | 89,245    
| | Swine royalty revenue                           |                  | 126,380   
| | License fee revenue                             |                  | 102,502   
| | Other genomic service revenue                   |                  | 46,977    
| | Total Revenue                                   | $                | 1,686,768 
| | Cost of revenue                                 |                  | (878,851  
| | Research and development expense                |                  | (1,308,411
| | General and administrative expense              |                  | (3,922,985
| | Depreciation and amortization expense           |                  | (163,856  
| | Interest expense and accretion of debt discount |                  | (2,942,127
| | Debt issue costs                                |                  | (1,570,211
| | Other income (loss)                             |                  | -         
| | Net loss                                        | $                | (9,099,673

Revenue.Our revenue for the six months ended June 30, 2007 was $1,686,768, which was a decrease of $24,060, or 1.4%, from the $1,710,828 during the same period of 2006.
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 second quarter of 2006 and was
completed in early 2007. The Company began earning royalty income form its swine agreement in late 2006, and earned $126,380 during the six months ended June 30, 2007. The Company also launched the Canine Heritage product in 2007, earning
$89,245 of revenue during the first six months. This product uses DNA technology to genetically identify canine breed characteristics and can certify certain breeds. This test is being commercially sold to the public

Cost of Revenue.Cost of revenue for the six months ended June 30, 2007 were $878,851, a $378,202, or 30.1% decrease from the $1,257,053 for the same period of 2006. This
decrease was primarily related to shift in the product mix from lower margin products in the second quarter of 2006, to higher margin products in 2007.

23

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Research and Development.Research and development costs were $1,308,411 for the six months ended June 30, 2007 compared to $1,163,617 for the same period in 2006. This
$144,794, or 12.4% increase was primarily due to additional employee costs incurred in our efforts to expand the Canine heritage test to identify additional breeds of dogs.

General and Administrative.General and administrative costs were $3,922,985 for the first six months of 2007 compared to $3,940,403 for the same period of 2006. This
$17,418, or 0.4% decrease reflected a stable expense level from year to year.

Depreciation and Amortization.Depreciation and amortization remained stable at $163,856 for the six months ended June 30, 2007 from the $162,962 for the same period of 2006.

Interest Expense.Interest expense and accretion of debt discount increased $618,591 to $2,942,127 for the six months ended June 30, 2007 from $2,323,536 for the same
period in 2006. This 26.6% 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 Issue Costs.Debt issue costs increased $85,665, or 5.8% to $1,570,211 for the six months ended June 30, 2007 from $1,484,546 for the same period of 2006.  This
decrease is due to higher expense associated with amortization of deferred debt costs for the period, which related to the 10% Secured Convertible Promissory Notes.

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. As a result of adopting EITF 00-19-2 as of January 1, 2007, The Company determined that the obligation
relating to the registration rights agreement is not considered probable and therefore the liability should not be recognized in the financial statements. As a result, the Company recorded a cumulative-effect adjustment of $100,475 as a decrease
to the January 1, 2007 accumulated deficit balance.

Net Loss.Net loss increased $451,364, or 5.2%, to $9,099,673 for the six months ended June 30, 2007 from the $8,648,309 for the six months ended June 30, 2006, due to a
combination of the factors described above.

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, 2007 the Company has cash and cash equivalents of $360,204 and a working capital deficiency of
$30,966,158.

In the first six months of 2007 cash used in operations was $3.4 million compared to $6.3 million in the comparable period last year. This decrease was primarily due to a $3.2 million increase in the change in
accounts payable and accrued compensation. Cash provided by financing activities was $3.6 million in the current period compared to $5.0 million in the prior year period. This decrease was due to lower proceeds from the sale of debt
securities of $1.6 million.

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

The Company is working with two U.K.-based financial advisors to assist the Companys Board in evaluating a public listing of the Companys shares on AIM, a market operated by the London Stock Exchange plc
(AIM). As part of this public listing, we intend to raise between U.S. $25 million and $40 million through an offering of common stock (the Offering). The Offering would not be registered with the SEC because we will
be relying on one or more exemptions from registration. Although there can be no assurance at this time that we will be able to successfully complete the Offering, we believe we have assembled a highly respected group of financial institutions to
assist us in this process.  As of February 26, 2008, we are in the process of finalizing the engagement of two investment firms in the U.K. to act as the nominated advisor (NOMAD), joint financial

24

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advisers and lead and co-broker for a U.K. fundraising and AIM listing. All companies whose shares are listed on AIM are required to appoint a NOMAD, who acts as both a financial advisor to a company and provides the
regulatory oversight required by the London Stock Exchange plc. The two firms are well-regarded and highly selective investment firms that have played the role of financial advisor for a number of AIM-listed companies.

In connection with the Offering, we are seeking the requisite consents so that all shares of our preferred stock (Series A through Series G), all of our 12.5% Convertible Notes, and a minimum of 85% of our 10% Convertible
Notes convert into common stock upon completion of the Offering and AIM listing. In addition, we are seeking consent to waive the ratchet provisions contained in our Series E preferred stock and 12.5% Convertible Notes relative to the 30% discount
of the 10% noteholders since they are so dilutive that they seriously jeopardize our ability to complete the Offering and AIM listing.

In order to secure the automatic conversion and/or amendment of all of our outstanding preferred stock and convertible notes upon the closing of the Offering, we will need holders owning an aggregate of the following
percentage of shares of preferred stock or principal amount of convertible notes to agree to conversion and/or amendment (i.e., so long as we obtain consent in the percentages listed below (other than for the 10% Convertible Notes) 100% of the
applicable series of preferred stock or convertible notes will be automatically converted into common stock upon the closing of the Offering):

Series A - 85%Series B - 85%Series C - 85%Series D - 85%Series E - 75%Series F - 50%Series G - 50%

12.5 % Convertible Notes  66.66%10% Convertible Notes  66.66%*

*Since there is no existing percentage requirement for conversion of the 10% Convertible Notes, we have been advised that in order to successfully complete the Offering, we will need to obtain consent from holders of at
least 66.66% of the outstanding principal amount of all 10% Notes to convert at the time of the Offering.

The conversion and/or amendment of our preferred stock and convertible notes shall not occur unless we obtain the requisite consents (in the specified percentages) for each class of preferred stock or the convertible notes
set forth above.

Our current financial condition makes it imperative that we are able to complete the Offering as soon as possible. At present, we are insolvent, as our liabilities exceed our assets.  In addition, the Report of Independent
Registered Public Accounting Firm on our 2006 consolidated financial statements, as in earlier years (2004-2005), included an emphasis paragraph relating to the Companys ability to continue as a going concern.

If we cannot complete the above described Offering, we will be forced to continue to attempt to raise capital on what we believe may be increasingly unfavorable terms, and we may not be able to raise additional funds at
all. This will slow commercialization of some of our technology. If we cannot complete the Offering, we may be forced to seek bankruptcy protection.

The securities to be offered in the Offering have not been registered under the Securities Act of 1933, as amended, or any state securities laws, and unless so registered may not be offered or sold in the United States,
except pursuant to an exemption from, or in a transaction subject to, the registration requirements of the Securities Act of 1933 and applicable state securities laws.  This disclosure is being made pursuant to Rule 135c under the Securities Act and
does not constitute an offer to sell, or the solicitation of an offer to buy, nor shall there be any

25

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sale of the securities in any jurisdiction in which such offer, solicitation or sale would be unlawful prior to registration or qualification under the securities laws of such jurisdiction.

We have faced the numerous challenges and risks that many emerging growth, research-oriented companies face since our inception.  We have had a consistent history of net losses.  Our decision to finance the Company through
a combination of convertible notes and preferred stock has left us with a large debt obligation, the majority of which is long-term. The challenge is to generate sufficient revenue to repay this long term debt obligation or to have a liquidity event
whereby this long term debt will be converted to equity. Now that we are beginning to commercialize our various products, we face risks and challenges relating to liquidity.  We are dependent on future fundraising to become solvent until our
operations reach profitability.

We are currently past-due on certain debt obligations. Our efforts have been to negotiate repayment plans in these matters with the best terms possible for both parties. To date, we do not have any outstanding lawsuits
related to this indebtedness. While the debt instruments have no material covenants other than the repayment of principal and accrued interest, we are making efforts to maintain shareholder and note holder satisfaction.

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 2007. 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.

26

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RISK FACTORS

INVESTING IN OUR COMMON STOCK INVOLVES A HIGH DEGREE OF RISK. YOU SHOULD CONSIDER THE RISK FACTORS DESCRIBED IN OUR FORM 10-KSB/A (Amendment No. 2) AS WELL AS THE OTHER INFORMATION AND RISK FACTOR IN THIS FORM 10-QSB
BEFORE DECIDING TO INVEST IN OUR SHARES OF COMMON STOCK. IF ANY OF THESE RISKS ACTUALLY OCCUR, OUR BUSINESS, FINANCIAL CONDITION AND RESULTS OF OPERATIONS WOULD SUFFER. IF THIS HAPPENS, YOU MIGHT LOSE ALL OR PART OF YOUR INVESTMENT.

Risks Related to Our Business

If we dont complete the AIM listing and Offering, we may be forced to seek bankruptcy protection.

If we cannot complete the above described Offering, we will be forced to continue to attempt to raise capital on what we believe may be increasingly unfavorable terms, and we may not be able to raise additional funds at
all. This will slow commercialization of some of our technology. If we cannot complete the Offering, we may be forced to seek bankruptcy protection.

The existence of a significant number of securities exercisable for, or convertible into, shares of our common stock may reduce your percentage ownership in us.

As of June 30, 2007, we had outstanding convertible debt, preferred stock, options and warrants which are exercisable for, or convertible into, an aggregate of approximately 45,719,282 shares
of common stock. In addition, certain of these securities contain provisions which would increase the number of shares of common stock issuable upon exercise or conversion thereof if we were to issue shares of common stock or other securities with
an effective purchase price of less than $4.00 per share.  Furthermore, certain of these securities contain conversion or exercise prices that are measured as a discount to our initial offering price, if one were to occur. We are currently
undertaking a consent effort from our note holders and our preferred stock holders which would eliminate the ratchet provisions of the conversion price of certain securities. If the consent effort is successful, our 10% Notes ($17,732,763
outstanding at June 30, 2007) will be the only security which will convert at a discount to an offering price. Their conversion price would be the lesser of $4.00 or 70% of an initial offering price.  If the consent is not successful, our 12.5%
Notes ($21,782,446 outstanding at June 30, 2007) and our Series E Preferred Shares (2,000,000 shares outstanding at June 30, 2007) would also convert at 70% of an initial offering price.  The issuance of additional shares of common stock upon
the exercise or conversion of these securities will reduce your percentage ownership in us.

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 our 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 performed at that time, the Chief Executive Officer
    and Chief Financial Officer originally concluded that, the Company's disclosure
controls and procedures were effective.

Prior to the Company filing our Quarterly
    Report on Form 10-QSB for the quarter and six-month period ended June 30,
    2007, we identified certain accounting errors that led us to conclude that
    our previously issued financial statements should be restated due to errors
    in our methodology for calculating and accounting for transferrable warrants
    and errors in our accounting for certain debt and equity exchange transactions
    as described further in the Explanatory Note to the consolidated condensed
    financial statements of the Company. These errors resulted in the filing
    of Amendment No. 2 to our 2006 Annual Report on Form 10-KSB/A and Amendment
    No. 1 to our March 31, 2007 Quarterly Report on Form 10-QSB. In connection
    with the filing of this Quarterly Report, our management, with the participation
    of our Chief Executive Officer and Chief Financial Officer, re-evaluated
    our disclosure controls and procedures. Based upon that evaluation, the CEO
    and CFO concluded that our disclosure controls and procedures were not effective
    as of June 30, 2007, as a result of a material weakness in our internal control
    over financial reporting. A material weakness is defined by Audit Standard
    No. 5 of the Public Company Accounting Oversight Board as, A deficiency,
    or combination of deficiencies, in internal control over financial reporting,
    such that there is a reasonable possibility that a material misstatement
    of the companys annual or interim financial statements will not be
    prevented or detected on a timely basis.

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Specifically, the material weakness identified relates to the Company lacking enough qualified financial personnel to account for the Company's complex debt and equity transactions in accordance with accounting principles accepted in the United States of America ("GAAP"). Notwithstanding this material weakness, management concluded that the consolidated condensed financial statements included in this report present fairly, in all material respects, the Company's financial position and results of operations and cash flows for the periods presented in conformity with GAAP.

The Company has plans to correct its
    material weakness through additional, qualified financial personnel and enhancements
    to the accounting system in 2008.

PART II - OTHER INFORMATIONITEM 1. Legal Proceedings

On June 20, 2005, the Company became aware of a lawsuit and claim against us from Regions Bank for $731,000.  Mr. Samuel R. Dunlap, a former Company director, who recently exited bankruptcy, pledged a $731,000
Promissory Note made by us to Mr. Dunlap as security for a $5.0 million loan from Regions Bank. Regions Bank has sued us for payment of this Note. The amount that is owed is in dispute (due to offsets made at Mr. Dunlaps direction prior to
the bankruptcy). We also contend that the conditions precedent to the maturity of the loan have not occurred. We note that our June 30, 2007 consolidated financial statements reflect principal of $625,498 being owed as of such date (reflecting
the offsets). Regions Bank asserts that we (in the operation of our securities transfer function) and our legal counsel enabled Mr. Dunlap to pledge one of his several Warrants to another creditor in breach of an already existing Commercial Pledge
Agreement between the Bank and Mr. Dunlap.  The Company was notified that on October 2, 2007, Regions Bank dismissed its complaint with prejudice against the Company in this matter. A dismissal with prejudice indicates that a case is dismissed for
good reason and the plaintiff is barred from bringing an action on the same claim. The plaintiff has subsequently stated they made this claim in error and petitioned the court to change the dismissal to without prejudice. The Company had
requested the initial dismissal be upheld and the courts had agreed to review this matter on January 28, 2008. At this court hearing, additional information was requested relating to internal control documents from Regions Bank. A tentative date to
review these documents has now been set for late March 2008.

On March 15, 2007, we became aware of a claim against us from holders of two 10% convertible promissory notes, for breach of contract for non-repayment of principal and interest due on July 31, 2006.  The original amount of
the notes was $150,000 and $50,000, and the principal amount currently past due is $115,000 and $45,000, respectively. In April, 2007, we reached a settlement agreement in this matter whereby we have paid all accrued interest through
April 13, 2007, totaling $34,157 ($17,078 was paid on April 13 and April 20, 2007). The amount of the claim, which includes principal and accrued interest through the date of the claim, less payments made, is recorded as a liability on the
financial statements at June 30, 2007. We paid $10,000 of principal on June 29, 2007, and agreed to pay the remaining $160,000 of principal on July 31, 2007.  The Company has subsequently agreed with the noteholders on a repayment schedule.
The Company as of February 26, 2008 is current in its repayment obligation under this settlement agreement.

Although the possible loss or range of loss for these matters cannot be estimated, management of the Company, after reviewing developments to date with legal counsel, is of the opinion that the outcome of such matters will
not have a material adverse effect on the Companys consolidated financial position, results of operations, or cash flows.

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

The Company issued additional 10% Secured Convertible Promissory Notes which totaled $3,925,000 during the six months ended June 30, 2007. These notes have a three year maturity. The Company incurred financings costs of
$294,852 in connection with obtaining these investments.

In connection with the issuance of the 10% Secured Convertible Promissory Notes in 2007, the Company granted warrants to purchase 98,125 shares of common stock. These warrants had an exercise price of $4.00 per
share,

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expire in 2012, and had an allocated value of $121,341 in 2007. The value of these warrants was recorded as a debt discount to be amortized over the life of the debt.

Amortization expense relating to the 10% Secured Convertible Promissory Note and 12.5% Convertible Secured Promissory Note debt discount was $172,202 and $118,056 for the three months ended June 30, 2007 and 2006,
respectively, and $310,155 and $200,373 for the six months ended June 30, 2007 and 2006, respectively.

ITEM 3. Defaults Upon Senior Securities

At June 30, 2007, $132,015 of outstanding principal under our 8% Secured Convertible Promissory Notes and $854,344 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.Registrant
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| | February 29, 2008 |                                
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| | February 29, 2008 |                                
| | Date              |                                
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