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|                                  
|----------------------------------
|UNITED STATES                     
|SECURITIES AND EXCHANGE COMMISSION
|Washington,
  D.C. 20549          
|                                  
|                                  
|FORM 10-KSB                       

|  |                                                                                    
|- | -----------------------------------------------------------------------------------
|x | ANNUAL
  REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934   
|  |                                                                                    
|  | For
  the fiscal year ended December 31, 2005                                      
|  |                                                                                    
|o | TRANSITIONREPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
  EXCHANGE ACT OF 1934
|  |                                                                                    
|  | For
  the transition period from _____________ to ______________                   

Commission file number 000-51294

METAMORPHIX, INC.

(Name of small business issuer in its charter)

|                                                                 |  |                                       
|---------------------------------------------------------------- |  | --------------------------------------
|Delaware                                                         |  | 52-1923417                            
|                                                                 |  |                                       
|(State
  or Other Jurisdiction of Incorporation or Organization) |  | (I.R.S.
  Employer Identification No.)
|                                                                 |  |                                       
|8000
  Virginia Manor Road Suite 140 Beltsville, Maryland        |  | 20705                                 
|                                                                 |  |                                       
|(Address
  of Principal Executive Offices)                       |  | (Zip
  Code)                          
|                                                                 |  |                                       
|(301)
  617-9080                                                
|                                                                
|(Issuers
  Telephone Number)                                   

Securities to be registered
under Section 12 (b) of the Exchange Act:

|                                          |  |                                                                
|----------------------------------------- |  | ---------------------------------------------------------------
|Title
  of Each Class to be so Registered |  | Name
  of Each Exchange on Which Each Class is to be Registered
|                                          |  |                                                                
|None                                      |  | None                                                           

Securities to be registered
under Section 12 (g) of the Exchange Act:

|                                
|--------------------------------
|Common
  Stock, $0.001 par value
|                                
|(Title
  of Class)              

Check
whether the issuer (1) filed all reports required to be filed by Section 13 or
15(d) of the Exchange Act during the past 12 months (or for such shorter period
that the Registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes o  No x

Check
if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form, and no disclosure will be contained, to
the best of Registrants knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. x

Indicate
by check mark whether the Registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).Yes o  No x

The
Registrants revenues for the fiscal year ended December 31, 2005 were $2.5
million.

The
Registrants common equity is not publicly traded, therefore, an aggregate
market value of the voting and non-voting common equity held by non-affiliates
can not be determined at this time.

As
of August 31, 2006, the Registrant had 20,883,149 shares of its common stock
outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

None.

Transitional
Small Business Disclosure Format (check one): Yes o  No x

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TABLE OF CONTENTS

|           |                                                                                                                     |     
|---------- | ------------------------------------------------------------------------------------------------------------------- | ----
|           |                                                                                                                     | Page
|           |                                                                                                                     |     
|PART I     |                                                                                                                     |     
|           |                                                                                                                     |     
|Item 1.    | Description of Business                                                                                             | 1   
|Item 2.    | Description of Properties                                                                                           | 26  
|Item 3.    | Legal Proceedings                                                                                                   | 26  
|Item 4.    | Submission of Matters to a Vote of Security
  Holders                                                               | 27  
|           |                                                                                                                     |     
|PART II    |                                                                                                                     |     
|           |                                                                                                                     |     
|Item 5.    | Market for Common Equity, Related
  Stockholder Matters and Small Business
  Issuer Purchases of Equity Securities  | 27  
|Item 6.    | Managements Discussion and Analysis or
  Plan of Operation                                                         | 29  
|Item 7.    | Financial Statements                                                                                                | 42  
|Item 8.    | Changes and Disagreements with Accountants
  on Accounting
  And Financial Disclosure                               | 42  
|Item 8A.   | Controls and Procedures                                                                                             | 43  
|Item 8B.   | Other Information                                                                                                   | 43  
|           |                                                                                                                     |     
|PART III   |                                                                                                                     |     
|           |                                                                                                                     |     
|Item 9.    | Directors, Executive Officers, Promoters
  and Control Persons; Compliance
  With Section 16(a) of the Exchange Act | 44  
|Item 10.   | Executive Compensation                                                                                              | 47  
|Item 11.   | Security Ownership of Certain Beneficial
  Owners and Management and Related Stockholder Matters                    | 55  
|Item 12.   | Certain Relationships and Related
  Transactions                                                                    | 58  
|Item 13.   | Exhibits                                                                                                            | 60  
|Item 14.   | Principal Accountant Fees and Services                                                                              | 62  
|           |                                                                                                                     |     
|SIGNATURES |                                                                                                                     | 63  

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PART I

FORWARD-LOOKING STATEMENTS

Statements
in this Form 10-SB that are not descriptions of historical facts are
forward-looking statements within the meaning of the safe harbor provisions
of the Private Securities Litigation Reform Act of 1995. Reference is made in
particular to the description of our plans and objectives for future
operations, assumptions underlying such plans and objectives, and other forward
looking terminology such as may, expects, believes, anticipates,
intends, estimates, projects, or similar terms, variations of such terms
or the negative of such terms. Forward-looking statements are based on
managements current expectations. Actual results could differ materially from
those currently anticipated due to a number of factors, including those set
forth under Description of Business. The safe harbors for forward looking
statements provided by Section 21E of the Exchange Act do not apply to
statements made in this Form 10-KSB. 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 and elsewhere in
this registration statement 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.

ITEM 1. DESCRIPTION OF BUSINESS

Overview

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

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

We
have established several relationships through which we expect to commercialize
our animal genomics technology. We have exclusive development and marketing
agreements with Cargill Incorporated, or Cargill, the worlds second largest
beef processor and feedlot operator, and the Monsanto Company, or Monsanto, the
worlds second largest swine breeder. We describe these agreements in more
detail under Licenses, Acquisitions, and Collaborative Agreements. We also
have agreements to provide DNA testing services for the American Kennel Club,
the worlds largest canine registry, United

1

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Kennel Club, American Angus
Association, the worlds largest beef cattle registry, Red Angus Association,
American Limousin Association, and American Bucking Bull Association.

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

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

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

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

We
operate our GDF business in Beltsville, Maryland, where our corporate
headquarters are located. Our animal genomics business operates in Davis,
California.

The Livestock
Industry

According
to the Congressional Research Services 2006 Report on The U. S. Farm Economy
(February 2006), livestock receipts for the 2004 calendar year were $123.5
billion. In
addition, The

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United Nations 1999 report
on World Population Prospects states that the global demand for meat, milk and
eggs will increase threefold by the year 2020. The United Nations report
indicated that the two factors that will be primarily responsible for this
increase in demand are the expanding world population and changes in dietary
habits. The worlds population, which is approximately 6.5 billion, is
projected to reach 7.7 billion by 2020. According to the US Census Bureau, the
U.S. population alone is expanding at a rate of 1.1% per year and expected to
increase to 561 million people by 2050. As incomes rise in Asia, Europe,
Central America and the United States, the demand for meat products is also
expected to rise as diets shift from mainly carbohydrates to protein sources.
Global meat demand is expected to be 60% greater in 2020 than in 1999 with 88%
of this increase attributed to developing countries.

During
the last ten years, there has been significant consolidation and vertical
integration within the cattle, swine and poultry sectors of the global
livestock industry. Historically, the global livestock market has been
characterized by high volume and low margins. We believe that some of the
economic factors that caused this consolidation will create increasing demand
for technology such as ours.

Our Strategy

Our
business strategy is to generate near-term profitability from our animal
genomics product opportunities by producing a pipeline of innovative products
to address the needs of the global livestock industry while at the same time
building long-term value from our GDF technology in both human therapeutic and
agricultural sectors. To implement our strategy, we will seek to:

|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Develop and license products based on our animal genomics
  technology that will add value to major market participants in the livestock
  and animal health industries. Our commercialization strategy focuses on licensing our genomics
  technology to the consolidated and vertically integrated livestock industry,
  in particular, breeders, producers and processors. We will seek to structure
  our licensing agreements to provide us with license fees and milestone
  payments to fund the cost of product development and after commercialization,
  royalty payments based on various measures of the value created for the
  licensees through the use of our technologies.
|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| | License our GDF-8 technology
  to an animal health company for livestock and companion animal applications.
  Licensees are expected to undertake the additional research, development and
  regulatory activities required to commercialize the Myostatin technology at
  their own cost. We expect to receive development milestone payments and royalties
  on the sale of Myostatin-based products.                                                                                                                                                                                                                                                                                    
|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| | License our GDF technologies to pharmaceutical companies
  for human health applications. With our license to Wyeth, this objective has been completed. We are
  entitled to receive development milestone payments and royalties should Wyeth
  prove successful in developing and commercializing our GDF technology.                                                                                                                                                                                                                                                                                                                                                                    

Our Proprietary Technologies and Products

By
drawing on our two fundamental proprietary technologies  animal genomics and
GDFs we seek to develop products that will significantly increase quality and
production efficiency in all major livestock species, including cattle, swine
and poultry. We also use these technologies to develop products and services
that improve companion animal and livestock health and that can be used to
verify animal parentage and identification. We also intend to seek to discover and license to pharmaceutical
companies technologies that can be used to develop therapies for better
management of human metabolic and

3

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muscular degenerative
diseases. We describe these technologies and our current products below.
Several of our technologies involve commercial agreements which we have entered
with various parties. We describe some aspects of these agreements below, and they
are described in more detail under Licenses, Acquisitions and Collaborative
Agreements.

Animal
Genomics

Genomics,
the sequencing and analysis of the genetic make-up of organisms, and
proteomics, the identification and analysis of the proteins encoded by genes,
are two disciplines that enable the profiling of individual organisms to define
normal physiological variation and disease states. Discoveries in the areas of
genomics and proteomics have produced a new industry based on diagnostics and
drug development for disease prevention and treatment. We believe that
analogous opportunities exist with respect to animal health and agriculture.
Additionally, we believe genomics offers the opportunity to create superior
livestock breeds in terms of production efficiency, disease resistance, meat
quality and nutrition.

A
genome is the entire genetic information (DNA) possessed by an organism. DNA is
made up of sub-units called nucleotides, and a single nucleotide polymorphism,
or SNP, is a DNA sequence variation occurring when a single nucleotide in the
genome is altered. Genetic markers, based on SNPs, are abundant and
distributed throughout an animals DNA. SNPs can be used as a predictive,
diagnostic tool to determine the specific regions of DNA contributing to a
desired trait. Through our proprietary access to whole genome information, we
have validated dense SNP maps in cattle, swine and poultry. These SNP maps,
when used as part of our GENIUS-Whole Genome
SystemÔ, correlate SNP patterns with complex traits.
We expect that these predictive diagnostics will empower producer/processors
and breeders with precise, molecular-based tools with which to make informed
decisions that improve livestock growth potential, carcass quality, production
efficiency and nutritional value. These tools can also be used to improve
selection of genetically superior animals in breeding programs.

The
commercial opportunities for our genomic technology vary according to the
livestock sector. For cattle, the use of SNP-based, predictive diagnostics for
each animal entering the feedlot phase of production is a commercially viable
concept due to the high value of each individual animal. We believe, as a
result of discussions with our collaborative partner, Cargill, that the ability
to identify superior cattle at the beginning of production would result not
only in substantial cost savings, but would enable the processor to brand or
certify meat that contains traits desired by the consumer. The production
system and individual animal values are different in the swine and poultry
industries, and, accordingly, we intend to market our predictive diagnostic
tools in those species to create superior breeds.

In
order to support development and commercialization of our genomic technology we
have entered into contracts with livestock production and/or breeding
companies. Under our Joint Development and Marketing Agreement with Cargill, we
and Cargill agreed to jointly develop and commercialize products for the cattle
industry intended to be predictive of traits that improve production economics
or meet consumer demands for quality, consistency and tenderness. We received a
combined total of $10,200,000 in payments for the successful completion of all milestones
set forth in the work plan delineated in the Cargill agreement which was
completed in September 2004. These payments consisted of a $2,040,000 up-front
payment, a $2,260,000 milestone payment upon the completion of the SNP
validation phase, a $5,500,000 payment upon the completion of a two part
association study correlating a pattern of SNPs with the desirable traits and
the final $400,000 milestone payment after the successful initial validation of
the diagnostic traits. This collaboration has resulted in the development of
sets of genetic markers which can predict traits that would be of interest to
feedlot operators and cattle breeders. We expect to commercialize a feedlot
management and breeding selection tool with Cargill resulting from this collaboration.

4

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The
pre-commercial phase of the collaboration, which is essentially a beta test on
a commercial population of beef cattle, began in late 2005 and is expected to
be completed in the latter part of 2006. We expect that this study will
determine the level of economic benefit derived from the use of the feedlot
management tool. In the study, Cargill will divide its feedlot population into
outcome groups based on their genetic potential as determined by our feedlot
management tool. Production inputs are varied for each outcome group based on
their predicted performance. The test will be comprised of between 40,000 and
60,000 animals. The initial samples were collected exclusively from Cargills
own feedlots. It is expected that in the second half of the study, Cargills
alliance partners, leading feedlot operators that supply Cargills processing
facilities, will participate in the study. We have tested nearly half of this
test population for which Cargill has paid us $400,000 to date and Cargill will
pay additional fees for the balance of the samples. If this study is
successful, we, jointly with Cargill expect to commercialize the technology for
use in the cattle industry.

In
addition to the feedlot management tool, we and Cargill have also jointly
developed a breeding selection tool which provides beef cattle breeders and
cattle/calf producers often called cattle/calf operators, the ability to select
animals based on superior marbling, high average daily weight gain and
tenderness traits. We expect to begin marketing this product during the latter
part of 2006.

Our
technology also includes our GENIUS-Whole Genome
SystemÔ for swine,
which utilizes a map of approximately 600,000 SNPs, and associated
intellectual property. We have licensed this technology to Monsanto to enable
it to provide high-quality genetic information to pork producers, packers and
to consumers. We expect that by using our GENIUS-Whole Genome
SystemÔ, Monsanto will be able to develop new breeds
of pigs that are substantially more production efficient and meet increasing
demands by consumers for higher quality, more nutritious meat products.
Monsanto will be obligated to pay royalties to us if they commercialize new
breeds using our technology. We received $1,000,000 from Monsanto in June 2004
as a license fee for access to our database.

We
are exploring opportunities for our GENIUS-Whole Genome
SystemÔ with a leading chicken breeder. However, we
may be unable to enter into arrangements with any additional customers.

We
are also commercializing products based on our animal genomic technology in the
companion animal sector. Our initial product, a canine heritage diagnostic
tool, can differentiate between canine breeds. For purebred dogs, the diagnostic
tool can be used to certify the breed. For mixed breed dogs, the diagnostic
tool can be used to determine breed composition. The latter application can
potentially allow owners to better manage the health of their animals regarding
breed specific diseases. We expect to begin marketing the heritage diagnostic
tool during the latter part of 2006.

Current
Animal Genomic Products and Services

We
are currently providing genotyping services to the livestock and companion
animal industries using DNA-based systems developed for animal parentage and
identification. Our genotyping products were developed using internal research
and development resources. This development process produced DNA specific
markers that could be used for various applications that include the ability to
identify one individual animal from another, verify parentage, and determine
specific commercial traits. Once these markers were identified, we produced
assays to routinely screen animal samples.

We
have created novel uses for our parent verification services in the beef
industry. Our customers include cattle breed associations that are accustomed
to verifying the pedigrees for certain categories of animals. These DNA-based
tests are used by breed registries and commercial enterprises to maintain breed
integrity and provide information to breeders to be used in making breeding
decisions.

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We
currently market the following products to animal breeders: Tru-Parentage and
Identity, Tru-Coat Color and Tru-Polled®. Additionally, we have utilized our
DNA testing program for breeders, which enable them to identify the correct
sire for each calf. Our Homozygous Black test enables animal breeders to
determine the genetics of coat color of an animal. Our Tru-Polled product
includes the testing to determine the genetics of polled (hornless) cattle and
assess the probability that they will produce polled progeny during subsequent
matings. Polled cattle are more desirable due to decreased expense associated
with horn removal and increased value of the hide due to decreases in injury
rates during transportation and in feedlots.

We
provide DNA testing for several canine registries and have worked with both
large and small organizations to establish and build DNA testing programs to
fulfill each of their needs. This test allows canine genetic identity to be
certified.

We
are the principal provider of DNA-based parentage verification and identity
testing to the American Angus Association, the worlds largest beef cattle
breed association, and the American Kennel Club, the largest canine registry in
the world. For the year ended December 31, 2005 and the six months ended June
30, 2006, revenues from sales of these products and services were approximately
$2,225,000 and $1,134,000, respectively.

Growth and Differentiation Factor (GDF) Technology

Pursuant
to an Amended and Restated Collaboration Agreement between us, Genetics
Institute and Johns Hopkins, we have the exclusive right to develop and
commercialize eight of the fifteen GDFs discovered by Johns Hopkins and
Genetics Institute. We have retained the right to agricultural and veterinary
applications of the factors we selected under the terms of the agreement. We
have granted Wyeth the exclusive right to pursue human therapeutic applications
for our entire GDF portfolio in exchange for milestone payments, royalties and
access to research and development advances.

Myostatin

Our
initial focus in the GDF portfolio has been on Myostatin (GDF-8), a
naturally-occurring, patented protein that acts to limit skeletal muscle
development. Based on the data we have analyzed from published sources, we
believe that our Myostatin-based technology will benefit the global livestock
industry by improving production efficiencies, reducing production time,
improving quality and nutritional value and decreasing the production of animal
waste. Studies have demonstrated that the removal or inhibition of Myostatin
results in accelerated and increased development of skeletal muscle tissue, or
meat. The inactivation or inhibition of Myostatin in animals has been shown to
result in dramatic increases in skeletal muscle mass and reduction in fat
(McPherron and Lee, Nature 387:87-90). We have a research initiative
focused on the testing and identification of Myostatin inhibitors in poultry
and swine.

We
have entered into letters of intent and limited licenses with two of the top
U.S. leading chicken processors, pursuant to which the companies have agreed to
participate in commercial scale trials of Myostatin inhibitors to ascertain the
economic value of this technology to their operations. The letters of intent
and limited licenses provide that we and the companies will negotiate in good
faith to enter into long-term license agreements. We are also seeking partners
for the cattle and swine market segments for testing of Myostatin inhibitors.
We may be unable to enter definitive license agreements with any such entities.

Pursuant
to our cross-licensing arrangement with Wyeth, we have agreed to share the
results of our Myostatin research, as well as reagents and product candidates.

6

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Other GDFs in Development

In
addition to Myostatin, we have the opportunity to pursue the development of up
to seven other proprietary GDFs as novel agricultural products. GDF-9 has been
identified as playing a key role in the development of the fertilized embryo.
Based on work investigating the role of GDF-9 in ovarian function and
follicular development by Juengal et al. (published in Animal Reproductive
Science in 2004 and in Human Reproductive Update in 2005), we believe that a
potential agricultural use for this growth factor is in the regulation of
livestock fertility. We also believe that potential human uses include the
treatment of infertility and nonsteroidal contraception. We do not intend to
devote any significant resources to additional growth and differentiation
factors during the foreseeable future as we expect that any funds available to
pursue our GDF technology will be allocated to Myostatin.

Human Applications

We
have granted Wyeth an exclusive license for human applications of our GDF
portfolio. Wyeth has a significant development program for Myostatin based on
this license. Phase II clinical trials for Myostatin as a therapeutic for
treatment of Muscular Dystrophy have been completed. Myostatin is being
evaluated for treatment of other muscle degenerative diseases, including 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
the potential to collect up to $10,300,000 in developmental milestone payments
as well as royalties on product sales of between 4.5% and 6.5% in the event
Wyeth successfully commercializes any human applications for Myostatin.

Numerous
scientific studies support that Myostatin inhibitors may have significant
potential as treatments for muscular degenerative diseases such as Muscular
Dystrophy, muscle wasting (Cachexia), Sarcopenia (age-related loss of muscle)
as well as the metabolic diseases Type II Diabetes and obesity. For example,
McPherron and Lee, in a publication in the Journal of Clinical Investigation
(vol.109, 2002), show the effect of Myostatin inactivation on body fat and
glucose utilization. Other publications such as Zimmers et al. in Science (vol. 296,
2002) show the induction of Cachexia, or wasting syndrome, by over-expression
of Myostatin. These and other similar studies were carried out in animal models
for human physiology and disease. Such models have been widely accepted as a
basis for the investigation of new drug candidates for human medical
applications.

In
June 2004, Wyeth announced that it filed an Investigative New Drug, or IND,
application with the U.S. Food and Drug Administration, or FDA, for MYO-029, an
antibody against Myostatin for the treatment of Muscular Dystrophy and
Sarcopenia. Phase I trials for Muscular Dystrophy have been completed and as of
August 2006, we have learned that Wyeth has completed Phase II of the trials.
Because the regulatory approval process for human therapeutics is extremely
lengthy, costly and uncertain, we do not anticipate receiving any royalty
revenues from this license arrangement in the near term, if ever. We will
receive a substantial milestone payment if and when Wyeth enters Phase III for
MYO-029.

Licenses,
Acquisitions and Collaborative Agreements

General

We
obtained exclusive rights to our livestock genomic technology from the Celera
Genomics Group and our GDF technology from The Johns Hopkins University and
Wyeth. A discussion of the rights for each technology, as well as subsequent
development and commercialization agreements are described below.

7

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Animal Genomics

Celera
Acquisition

On
February 28, 2002, we acquired some of the animal-related assets of the Celera
Genomics Group of Applera Corporation. The assets acquired consisted of (1) a
canine and cattle genotyping business operating in Davis, California, and (2)
an exclusive, perpetual world-wide license to certain cattle, swine and poultry
database products; SNP maps; and software. In consideration for these assets
and licenses, we issued 2,000,000 shares of Series E Convertible Preferred
Stock to Celera and made deferred cash payment of $2,000,000. Under the Celera
License Agreement, Celera granted to us a non-exclusive, perpetual worldwide
license (with no right to sublicense) to access and to use certain of its
cattle, swine and poultry genomic database products, SNP maps and tools (e.g.
software) in connection with livestock and aquaculture production. Our license
was subsequently converted to an exclusive license in June 2004. Pursuant to
the Celera License Agreement, we also have a right of first offer for Celeras
services for genome and SNP map production for food producing animals other
than cattle, swine and poultry in connection with livestock and aquaculture
production. Collectively, we refer to this acquisition as Celera AgGen, which
we operate through MMI Genomics, Inc., our wholly owned subsidiary in Davis,
California.

The
Celera License Agreement contains revenue sharing and royalty provisions that
obligate us to pay Celera 3% of any economic consideration we receive from a
contract or business relationship in the cattle area for a period of 15 years
to the extent such royalty exceeds a cumulative amount of $500,000 annually,
and 20% of any consideration we receive from a collaboration entered into prior
to February 28, 2006 in the swine sector. Cattle-related payments will be
offset against a $500,000 annual payment we are required to make to Celera
under the agreement. We received $1,000,000 from a swine collaborative partner,
and were required to pay $1,000,000 to Celera for the right to grant a
sub-license to that partner. If and when we receive revenues from our swine
partner, $1,000,000 will be excluded from the calculation of economic
consideration due to Celera when calculating a revenue sharing payment.

Pursuant
to a separate agreement entered into with Celera, we are obligated to make
quarterly payments of $125,000 for subscription-based access to Celeras human
genome database and analysis software. The present value of the $500,000 annual
payments for fifteen years and the $125,000 quarterly payments for three years
was calculated to be $6,268,051 at the time of acquisition. When combined with
the $2,000,000 deferred cash payment, the $262,796 of acquisition costs, and
the value of the Series E Convertible Preferred Stock, the total purchase price
was $43,530,847. In the event of a breach of a representation or obligation by
a party under the Celera License Agreement, the non-defaulting party may
deliver notice to such defaulting party. If such default has not been cured by
the end of the applicable thirty-day cure period, the agreement will be
terminated. The agreement may also be terminated in the event of a bankruptcy
or insolvency event of one of the parties.

At
December 31, 2005, the total amount due to Celera was $5,960,209, of which
$2,026,442 is payable within 12 months and the remaining $3,933,767 is
classified as long term.

Cargill
Agreement

On
May 9, 2002, we entered into a Joint Development and Marketing Agreement, or
the Cargill Agreement, with Excel Corporation (a subsidiary of Cargill) and
Cargill, through its Caprock Business unit, or Cargill. Under the terms of the
agreement, the parties agreed to jointly develop and commercialize products for
the cattle industry intended to be predictive of traits that improve production
economics or meet consumer demands for quality, consistency and tenderness. To
date, we have received full payment, comprised of a $2,040,000 up-front
payment, a $2,260,000 milestone payment with the

8

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completion of
the SNP validation phase, $5,500,000 with the completion of a two part
association study correlating a pattern of SNPs with the desirable traits and
the final $400,000 milestone payment after the successful initial validation of
the diagnostic traits. The third stage of the collaboration is Cargills
implementation of the SNP-based predictive diagnostic tools in a beta-test
population of commercial cattle, known as the pre-commercial phase. This
validation phase consists of a test of between 40,000 and 60,000 animals, which
began in late 2005. It is expected to be completed in the latter part of 2006.
If the pre-commercial phase is successful, we and Cargill expect to jointly
commercialize the technology for use in the cattle industry.

All
information and data resulting from our efforts under the work plan will be the
joint intellectual property of the parties. After the term of the Cargill
Agreement, the parties may commercialize joint intellectual property subject to
certain royalty payments being made to the other party. In accordance with the
Cargill Agreement, upon the completion of the beta test, the parties have
agreed to negotiate in good faith to enter into a Joint Commercialization
Agreement. Among other provisions, we anticipate, based on preliminary
discussions with Cargill, that the Joint Commercialization Agreement will
provide for the equal division of all profits and losses between the parties and
that technologies and products developed thereunder will have a target price
equal to approximately 30% of the value added through the use of the predictive
diagnostic tools. We believe that we will enter into this Joint
Commercialization Agreement in the latter part of 2006, and the duration of
this agreement will be no less than five years. The final agreement we reach
with Cargill, however, may not be on these terms. For eighteen months beginning
in November 2004, Cargill had the exclusive right to use the joint intellectual
property on a commercial scale in its feedlots with all samples to be analyzed
at our genotyping facility on a fee-for-service basis.

Monsanto
Agreement

In
June 2004, we entered into a Swine Improvement Agreement with Monsanto. Under
the collaboration, we are providing Monsanto with an exclusive royalty-bearing
license to access our swine GENIUS-Whole Genome
SystemÔ which
utilizes a map of approximately 600,000 SNPs, and the associated
intellectual property. Monsanto will be obligated to pay royalties to us of up
to 17.5% of increased revenues from base year revenues calculated for the 12
month period immediately prior to product introduction if the research
performed using the database creates new breeds and/or product enhancements. If
revenues decrease as compared to the base year revenues, a credit will be
calculated to be applied against future royalties. We received $1,000,000 from
Monsanto in June 2004 as an exclusive license fee for access to our database.
If Monsanto has not created a commercial product using the database within 5
years, the right to access our database shall become non-exclusive.

Growth and Differentiation Factor Technology

Amended
and Restated Collaboration Agreement with Genetics Institute and The Johns
Hopkins University

On
January 26, 1999, we entered into an Amended and Restated Collaboration
Agreement, or the Collaboration Agreement, with The Johns Hopkins University
School of Medicine and Genetics Institute, Inc. (now a division of Wyeth)
whereby the parties amended, restated and replaced their 1994 Collaboration
Agreement, with respect to the discovery and characterization of GDFs in the
TGF- ß superfamily. The Collaboration Agreement provided for a sponsored research
plan to be conducted by Johns Hopkins and a collaborative research plan that
included requirements for mutual reporting of findings, to be conducted by us
and Wyeth. The Collaboration Agreement also continued and confirmed our
exclusive, worldwide, royalty bearing licenses to Myostatin (GDF-8) and certain
other GDFs (and Johns Hopkins and Wyeths patent rights in such factors) and
non-exclusive, perpetual royalty-free

9

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licenses to
Johns Hopkins and Wyeths know-how relating to such factor patent rights, in
each case, for commercialization within the agricultural and veterinary fields.
We have also granted an exclusive, worldwide, royalty bearing license to Wyeth
with respect to GDF-8 (Myostatin) and certain other GDFs (and Johns Hopkins
and our patent rights in such factor) and a non-exclusive, perpetual,
royalty-free license in our and Johns Hopkins know-how relating to such factor
patent rights, in each case, for commercialization in the field of human
therapeutics. Under this Collaboration Agreement, we have the potential for
$10,300,000 in developmental milestone payments as well as royalties on product
sales in the event Wyeth successfully commercializes any human applications for
Myostatin technology. The milestone payments are triggered as the technology
progresses through the regulatory review process and includes; a $500,000
payment which has been received for the filing of an IND, a second payment
which is due upon commencement of Phase III clinical trials, a third payment
upon acceptance of the NDA (New Drug Application) for regulatory review and
lastly a payment upon receipt of regulatory approval. Potential royalties from
sales of Myostatin and other human GDFs commercialized by Wyeth range from 0.5%
to 6.5%. The royalty rate depends upon certain variables such as the number of
GDFs commercialized, and whether the product is covered by a valid claim of
patents owned by us, Wyeth or jointly held.

The
Collaboration Agreement provides for the payment of nominal annual licensing and
maintenance fees by us to Johns Hopkins. In addition, Johns Hopkins will be
entitled to royalties of 3.5% on sales by us and our sublicenses of Johns
Hopkins licensed products.

Under
the Collaboration Agreement, we owe to Johns Hopkins reasonable efforts in
their scientific and business judgment to seek commercialization of each GDF.
Licenses granted under the Collaboration Agreement continue in effect until the
expiration of the last patent licensed. However, failure to achieve certain payment
and performance milestones may cause termination of the licenses granted to us
in the Agreement. The Collaboration Agreement had previously been amended twice
by the parties  first on January 22, 2002 and again on September 30, 2002  in
each case to extend the term of the sponsored research plan conducted by Johns
Hopkins. We have historically renewed the sponsored research agreement on an
annual basis and anticipate renewing such agreement again. We are currently in
arrears with respect to $755,000 of research funding we agreed to provide to
Johns Hopkins. Johns Hopkins does not have the right to terminate the
Collaboration Agreement for non-payment.

As
part of our original agreement with Genetics Institute (predecessor to Wyeth),
we received a $2,200,000 unsecured loan from Genetics Institute that was due
and payable on January 1, 2005 in cash or, at our option if our common stock is
then publicly traded, in Common Stock at a per share price equal to the average
closing price for the ten trading days ending on the fifth day prior to the
maturity date. Genetics Institute had the right, on or before December 31,
2004, to convert the loan into Common Stock at a per share price equal to (1)
if publicly traded, 125% of the initial public offering, or IPO, price or (2)
if not publicly traded, a price to be negotiated in good faith by Genetics
Institute and us. In January 2005, Wyeth and we agreed to extend the repayment
period to January 1, 2008, the current note expiration date. Interest will now accrue
on the original principal, $2,200,000 plus accrued interest of $988,601 at the
prime rate. At its option, Wyeth may offset any amounts due us against our
obligation. Wyeth also has the option to convert to equity or call the note
upon the closing of an IPO. Failure to repay the Wyeth loan will result in the
imposition of a penalty interest rate of two (2) percentage points above the
prime rate, and possible action for collection but will not constitute a
default under the Collaboration Agreement. Wyeth does not have the right to
terminate the Collaboration Agreement for non-repayment of this note.

The
Collaboration Agreement terminates upon the expiration of the last patent to be
filed, which currently is November 10, 2025.

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Cross-License
Agreement with Wyeth

On
October 14, 2002, we entered into a Cross License Agreement with Wyeth by and
through Genetics Institute, or the Cross License, in order to expand the
sharing of research information and reagents to include present and future
confidential information and reagents with regard to Myostatin and the parties
existing cross licenses under the Collaboration Agreement. Additionally, under
the Cross License, each party received from the other, to the extent not
granted under the Collaboration Agreement, an exclusive, worldwide,
royalty-bearing license under each respective partys Myostatin technology and
the right to commercialize Myostatin licensed products in the agricultural and
veterinary field, with respect to us, and the human therapeutic field, with
respect to Wyeth. Upon the expiration of any patent rights licensed under the
Cross License, each licensor shall retain a fully-paid, royalty-free,
perpetual, irrevocable, non-exclusive license to use the other partys related
know-how.

The
Cross License entitles us to receive a royalty of up to 4.5% of net sales, as
defined in the Collaboration Agreement, and an additional 2.0% of net sales
upon Wyeths use of our technology, as defined in the Cross License, in the
event Wyeth is successful in commercializing Myostatin for human therapeutic
application. We are obligated to pay Wyeth a maximum royalty of 2% of net sales
should we choose to utilize Wyeth technology, as defined in the Cross License,
in commercializing Myostatin within the agricultural or veterinary field. The
Cross License will terminate upon the expiration of the last exclusive license
granted thereunder or earlier in the event of a breach of the terms of the
Cross License.

Chicken
Commercial Licensing

In
2002, we entered into Letters of Intent, Limited License and Option Agreements
with two chicken producers for use of Myostatin technology within the United
States. Additionally, one of the chicken producers has rights to utilize the
Myostatin technology within Mexico. The agreements include an option to license
Myostatin technology in chicken on predefined terms upon the successful
completion of large-scale trials. For the option to the technology, both
chicken production companies have paid us $250,000. License fees to cover
development costs are to be paid once a product candidate has been agreed upon
by the parties. Additionally, we are to receive a portion of the value added by
the technology on a per treated bird basis.

Turkey
Myostatin Joint Venture

On
September 4, 2002, we entered into a joint venture with Willmar, a leading
supplier of day-old poults and vaccination equipment to the U.S. and Canadian
turkey production industry, and formed the Willmar/MetaMorphix Turkey Joint
Venture, LLC, or the Joint Venture, and entered into a related Limited
Liability Company Agreement, or the LLC Agreement. The Joint Venture was formed
for the purpose of developing and commercializing Myostatin related products in
the turkey market using the value added strategy described above. Pursuant to
the LLC Agreement, each of Willmar and we have granted to the Joint Venture an
exclusive license in its respective Myostatin technology (owned or subsequently
owned) for use in the turkey market in North America. The LLC Agreement
provides that all costs and profits will be shared 50-50 and targets a price
for potential customers in excess of 30% of the value added to their livestock.
To date there have been no transactions to account for under this Joint
Venture.

Research and Development

During
the six months ended June 30, 2005 and 2006, we spent $2,427,503 and
$1,163,617, respectively, on research and development. During the years ended
December 31, 2003, 2004 and 2005, we spent $3,674,157, $4,364,421, and
$4,311,880, respectively, on research and development. It is

11

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anticipated
that the majority of the costs associated with development of our genomic
predictive diagnostic tools will be funded by proceeds of contracts with our
collaborative partners and will be expensed as costs of goods sold.

Patents and Proprietary Rights

At
August 31, 2006, we either own or have licensed to us 35 issued U.S. patents,
and 61 issued foreign patents. The majority of these issued domestic and
foreign patents relate to our GDF technology. These patents have been
exclusively licensed from The Johns Hopkins University for exclusive use in the
non-human field. The exclusive use of these patents forms the basis of the
development of our GDF technology and is critical to our business. Many of the
remaining patents have been internally developed. These patents form the basis
for our ability to operate and commercialize the genomic technologies in the
livestock and companion animal sectors. Our patents expire at various dates,
during the period commencing on March 19, 2013 through November 10, 2025.There
are a large number of applications pending in both the U.S. and foreign patent
authorities. Patent prosecution and maintenance expense represents one of our
significant business expense elements. We are not involved in any patent
litigation anywhere in the world. We remain confident that we have adequate
patent protection for our key technologies. We also rely on trade secret
protection for our confidential and proprietary information. We require each of
our employees, consultants and advisors to execute a confidentiality agreement
upon the commencement of employment with us. The agreements generally provide
that all trade secrets and inventions conceived by the individual and all
confidential information developed or made known to the individual during the
term of his or her relationship with us shall be our exclusive property and
shall be kept confidential and not disclosed to third parties, except in
specified circumstances. We have fourteen registered trademarks and four
trademarks are currently being prosecuted.

Government Regulation

Animal
Health and Agriculture

Our
research, development, manufacturing, and marketing of our animal health and
agricultural product candidates, if any, are, with the exception of our
in-house canine and cattle genotyping services and SNP-based, predictive
diagnostics, subject to regulatory approval processes administered by the FDA,
the United States Department of Agriculture (USDA) and other regulatory
agencies in the United States and abroad. We are not currently seeking any
product approvals through the FDA, USDA or other applicable regulatory
agencies, foreign or domestic, nor are we expecting to do so within the next
year.

The
manufacture and sale of animal pharmaceuticals are regulated by the Center for
Veterinary Medicine, or CVM, of the FDA. A new animal drug may not be
commercially marketed in the U.S. unless it has been approved as safe and
effective by CVM. Approval may be requested by filing a New Animal Drug
Application, or NADA, with CVM containing substantial evidence as to the safety
and effectiveness of the drug. Data regarding manufacturing methods and controls
are also required to be submitted with the NADA. Manufacturers of animal drugs
must also comply with Good Manufacturing Practices and Good Laboratory
Practices. Sales of animal drugs in countries outside the United States require
compliance with the laws of those countries, which may be extensive.

Human
Therapeutics

The
FDA and comparable regulatory agencies in state and local jurisdictions and in
foreign countries impose substantial requirements upon the clinical
development, manufacture and marketing of pharmaceutical products. These
agencies and other federal, state and local entities regulate research and

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development
activities and the testing, manufacture, quality control, safety,
effectiveness, labeling, storage, record keeping, approval, advertising and
promotion of product candidates.

The
process required by the FDA before product candidates may be marketed in the
United States generally involves the following:

| |   |                                                                                                                                                
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------
| |  | Preclinical
  laboratory and animal tests;                                                                                                     
| |   |                                                                                                                                                
| |  | Submission
  to the FDA of an Investigational New Drug, or IND, application which must
  become effective before clinical trials may begin;    
| |   |                                                                                                                                                
| |  | Adequate and
  well-controlled human clinical trials to establish the safety and efficacy of
  the proposed pharmaceutical in intended use; and
| |   |                                                                                                                                                
| |  | Submission
  to the FDA of a New Drug Application that must be approved.                                                                       

The testing
and approval process requires substantial time, effort, and financial resources
and we cannot be certain that our collaborators will be granted any approval on
a timely basis, if at all.

Preclinical
studies include laboratory evaluation of the product candidate, its chemistry,
formulation and stability, as well as animal studies to assess its potential
safety and efficacy. The results of the preclinical studies are then submitted,
together with manufacturing information and analytical data, to the FDA as part
of an IND application, which must become effective before human clinical trials
may begin. The IND automatically becomes effective 30 days after the FDA
acknowledges that the filing is complete, unless the FDA, within the 30-day
time period, raises concerns or questions about the conduct of the preclinical
trials as outlined in the IND. In such a case, the IND sponsor and the FDA must
resolve any outstanding concerns before clinical trials can begin. Further, an
independent Institutional Review Board at each medical center proposing to
conduct the clinical trials must review and approve any clinical study.

Human
clinical trials are typically conducted in three sequential phases which may
overlap:

| |   |                                                                                                                                                                                                                                                                                                                                                
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Phase I: The
  drug is initially administered into healthy human subjects or subjects with
  the target condition and tested for safety, dosage tolerance, absorption, metabolism,
  distribution and excretion.                                                                                                                               
| |   |                                                                                                                                                                                                                                                                                                                                                
| |  | Phase II:
  The drug is administered to a limited subject population to identify possible
  adverse effects and safety risks, to determine the efficacy of the product
  for specific targeted diseases and to determine dosage tolerance and optimal
  dosage.                                                                                
| |   |                                                                                                                                                                                                                                                                                                                                                
| |  | Phase III:
  When Phase II evaluations demonstrate that a dosage range of the drug is
  effective and has an acceptable safety profile, Phase III clinical trials are
  undertaken to further evaluate dosage, clinical efficacy and to further test
  for safety in an expanded population at geographically dispersed clinical
  study sites.

In
the case of product candidates for severe or life-threatening diseases such as
Muscular Dystrophy, the initial human testing is often conducted in affected
subjects rather than in healthy volunteers. Since these subjects already have
the target condition, these clinical trials may provide initial evidence of
efficacy traditionally obtained in Phase II clinical trials and thus these
clinical trials are frequently referred to as Phase Ib clinical trials.

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We
cannot be certain that Wyeth will commence or successfully complete Phase III
testing of the product candidates within any specific time period, if at all.
Furthermore, the FDA or the Institutional Review Boards or the sponsor may
suspend clinical trials at any time on various grounds, including a finding
that the subjects are being exposed to an unacceptable health risk.

The
results of product development, preclinical studies and clinical trials are
submitted to the FDA as part of a new drug application for approval of the
marketing and commercial shipment of the product candidate. The FDA may deny a
new drug application if the applicable regulatory criteria are not satisfied or
may require additional clinical data. Even if such data is submitted, the FDA
may ultimately decide that the new drug application does not satisfy the
criteria for approval. Once issued, the FDA may withdraw product approval if compliance
with regulatory standards is not maintained or if problems occur after the
product reaches the market. In addition, the FDA may require testing and
surveillance programs to monitor the effect of approved products which have
been commercialized, and the agency has the power to prevent or limit further
marketing of a product based on the results of these post-marketing programs.

Satisfaction
of the above FDA requirements or similar requirements of state, local and
foreign regulatory agencies typically takes several years and the actual time
required may vary substantially, based upon the type, complexity and novelty of
the pharmaceutical product candidate. Government regulation may delay or
prevent marketing of potential products for a considerable period of time and
to impose costly procedures upon our activities. We cannot be certain that the
FDA or any other regulatory agency will grant approval for any of our
licensees product candidates on a timely basis, if at all. Success in
preclinical or early stage clinical trials does not assure success in later
stage clinical trials. Data obtained from preclinical and clinical activities
is not always conclusive and may be susceptible to varying interpretations
which could delay, limit or prevent regulatory approval. Even if a product
candidate receives regulatory approval, the approval may be significantly
limited to specific indications. Further, even after regulatory approval is
obtained, later discovery of previously unknown problems with a product may
result in restrictions on the product or even complete withdrawal of the
product from the market. Delays in obtaining, or failures to obtain regulatory
approvals would have a material adverse effect on our business, whereby we
would be unable to achieve product line revenues that are critical to our
business plan. Marketing product candidates abroad will require similar
regulatory approvals and is subject to similar risks. In addition, we cannot
predict what adverse governmental regulations may arise from future United
States or foreign governmental action.

Any
products manufactured or distributed through our license pursuant to FDA
clearances or approvals are subject to pervasive and continuing regulation by
the FDA, including record-keeping requirements and reporting of adverse
experiences with the drug. Drug manufacturers and their subcontractors are
required to register their establishments with the FDA and certain state
agencies, and are subject to periodic unannounced inspections by the FDA and
certain state agencies for compliance with current Good Manufacturing
Practices, which impose certain procedural and documentation requirements upon
us and our third-party manufacturers. We cannot be certain that our
collaborative partner or their present or future suppliers will be able to
comply with the current Good Manufacturing Practices and other FDA regulatory
requirements.

The
FDA regulates drug labeling and promotion activities. The FDA has actively
enforced regulations prohibiting the marketing of products for unapproved uses.
Under the Modernization Act of 1997, the FDA will permit the promotion of a
drug for an unapproved use in certain circumstances, but subject to very
stringent requirements.

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Companies
and their product candidates are also subject to a variety of state laws and
regulations in those states or localities where they are or will be marketed.
Any applicable state or local regulations may hinder the ability to market our
product candidates in those states or localities.

The
FDAs policies may change and additional government regulations may be enacted
which could prevent or delay regulatory approval of our collaborators potential
products. Moreover, increased attention to the containment of health care costs
in the United States and in foreign markets could result in new government
regulations which could severely limit our ability to achieve our goals. We
cannot predict the likelihood, nature or extent of adverse governmental
regulation which might arise from future legislative or administrative action,
either in the United States or abroad.

Foreign Regulation and Product
Approval

Outside
the United States, the ability to market a product candidate is contingent upon
receiving a marketing authorization from the appropriate regulatory
authorities. The requirements governing the conduct of clinical trials,
marketing authorization, pricing and reimbursement vary widely from country to
country. At present, foreign marketing authorizations are applied for at a
national level, although within the European Community, or EC, registration
procedures are available to companies wishing to market a product in more than
one EC member state. If the regulatory authority is satisfied that adequate
evidence of safety, quality and efficacy has been presented, a marketing
authorization will be granted. This foreign regulatory approval process
involves all of the risks associated with FDA clearance discussed above.
Currently, we are not seeking any product approvals in any foreign countries.

Other
Regulations

We
are also subject to numerous federal, state and local laws relating to such
matters as safe working conditions, manufacturing practices, environmental
protection, fire hazard control, and disposal of hazardous or potentially
hazardous substances. We may incur significant costs to comply with such laws
and regulations now or in the future.

Marketing and Sales

Our
principal customer base consists of breeders, producers and processors in the
cattle, swine and poultry industries and companion animal breeders and owners
principally throughout the United States. We believe that products for cattle
and companion animals represent the largest source of near-term future
revenues. Consequently, most of our marketing efforts are devoted to these
areas. We further seek to focus our marketing efforts or increase our
visibility to these groups in a number of ways:

| |   |                                                                                                                                                                                                                                                                                                  
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Direct Sales. We
  have a direct field sales force that actively solicits business from both
  cattle and companion animal breed registries, makes sales presentations on
  our products and capabilities and initiates contractual sales agreements.                                            
| |   |                                                                                                                                                                                                                                                                                                  
| |  | In-House Customer Service Center.
  We maintain a customer service center in our Davis, California facility to
  answer customer questions related to our cattle and canine products,
  facilitate the tracking of customer samples that we receive and expedite
  results back to our customers.
| |   |                                                                                                                                                                                                                                                                                                  
| |  | Trade Shows and Conferences.
  Many livestock associations conduct annual conventions, trade shows or
  conferences which typically include a series of speakers and/or workshops,                                                                                                               

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| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   | and an
  exhibition area where industry affiliates can promote their products. We
  attend a number of these shows per year and present as a speaker or panelist
  on topics related to animal genomic technology and/or promote our
  technologies.                                                                                                                                                                                                                       
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| |  | Trade Journals Advertising and Articles.
  There are numerous publications aimed at the livestock industry, several of
  which focus on the cattle livestock industry and in which we advertise. Our
  advertisements target specific customers who are most likely to use our
  predictive diagnostic products. In addition, we contribute to articles in
  trade and scientific journals on the use of genomics and predictive
  diagnostic tools in breeding strategies.

Competition

The
animal genomics industry has experienced consolidation in recent years. Besides
us, we believe that our competitors in the animal genomics industry include
Bovigen Solutions, LLC, Genus plc (formerly SyGen Intl plc), Illumina, Inc.,
Genetic Solutions pty LTD., Igenity, Inc. and Viagen, Inc. We believe we are
one of the industry leaders due to our exclusive access to whole genome
technology and key customer relationships with Cargill and Monsanto, which we
believe provide us with research and timing competitive advantages.

We
are aware that other companies have developed, are developing, or have licenses
to genomic technologies. Public tools that are broadly available to potential
competitors in most major livestock species include partial genome sequences,
the use of express sequence tags (ESTs), microsatellites (repeated sequence
polymorphisms), and quantitative trait loci (QTLs). Although useful, we believe
these tools permit examination of relatively small regions of the genome and
comparative gross mapping in contrast to our use of the entire genomic sequence
and high-density SNP maps. Public funding has invested significantly in large-scale
sequencing efforts and as a result, whole genome sequences and SNP maps for
chicken and cattle have recently become publicly available. We expect our field
to become more competitive with companies and academic institutions seeking to
develop competitive technologies and products as a result of access to these
genomic and SNP databases. We believe that even though these whole genome
sequences are now publicly available, a great deal of scientific and
bioinformatics expertise and infrastructure are still required to identify and
validate SNPs and create dense SNP maps that can be used for the identification
of predictive diagnostic tools in livestock populations. Although there can be
no assurance that other companies will not be successful in developing
predictive diagnostic tools, we believe we are well-positioned to make
significant progress in all major livestock species and to be the first company
to market SNP diagnostics derived from the whole genome that will create
significant and lasting value for the livestock industry.

While
we do not believe there is any direct competition to our Myostatin technology,
there is competition mainly from producers of performance enhancers such as
low-level antibiotics and hormone products that stimulate growth.

Customers

Three
customers comprised an aggregate of 50.7% of our total accounts receivable at
December 31, 2005, and two customers
comprised an aggregate of 56.8% of our total accounts receivable at December
31, 2004. Our customers are primarily associations which purchase our parentage
and identification genotyping services. We have not experienced any significant
credit losses and do not require collateral on receivables.

Revenue
from one collaborative partner, Cargill, represented 0.0%, 55.2%, and 76.8% of
our total revenues for the years ended December 31, 2005, 2004 and 2003,
respectively.

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Employees

As
of June 30, 2006, we had a total of 37 employees: 26 in Davis, California and
11 in Beltsville, Maryland. No employees are represented by labor organizations
and there are no collective bargaining agreements. We consider relations with
our employees to be good.

Corporate Information

We
were incorporated in Delaware in 1994. Our principal executive office is
located at 8000 Virginia Manor Road, Suite 140, Beltsville, Maryland 20705, and
our telephone number is (301) 617-9080. Our website address is www.metamorphixinc.com. Information
contained on our website does not constitute part of the document.

RISK FACTORS

INVESTING IN OUR
COMMON STOCK INVOLVES A HIGH DEGREE OF RISK. YOU SHOULD CONSIDER THE FOLLOWING
RISK FACTORS AS WILL AS THE OTHER INFORMATION IN THIS FORM 10-SB BEFORE
DECIDING TO INVEST IN OUR SHARES OF COMMON STOCK. IF ANY OF THE FOLLOWING RISKS
ACTUALLY OCCURS, 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

Our
recurring losses, negative cash flows from operations, working capital
deficiency and significant accumulated deficit raise substantial doubt about
our ability to continue as a going concern

Our history
of negative operating results and the fact that our current assets are
significantly less than our current liabilities indicate that we may not be
able to continue as a going concern, as discussed in Note 1 to the financial
statements on page F-8. Our independent registered public accounting firm has
included in their report on our consolidated financial statements for 2005 an
explanatory paragraph that states our recurring losses and negative cash flows
from operations, working capital deficiency and significant accumulated deficit
raise substantial doubt about our ability to continue as a going concern.

In the
course of our operations, we have sustained operating losses and negative cash
flows from operations and expect such losses to continue in the foreseeable
future. We intend to finance our operations primarily through future debt and
equity financings and future revenues, although we may not be successful.

We have a history of operating losses and may never achieve
profitable operations.

We
were formed in 1994 and to date have been engaged primarily in research and
development activities. We generated material revenues from operations for the
first time in 2002. We have incurred losses from operations since our inception
and we anticipate incurring operating losses at least through 2006 and possibly
thereafter. These losses, among other things, have had and will continue to
have an adverse effect on our stockholders equity and working capital. We may
not be able to generate sufficient revenues from operations to achieve or
sustain positive cash flow or profitability.

17

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We require additional funding and may be unable to obtain
funding on acceptable terms.

We
have incurred negative cash flows since inception and have expended, and expect
to continue to expend, substantial funds for working capital to continue our
research and development programs and operate our business. At September 26,
2006, we had approximately $1.5 million of cash and cash equivalents. If, in
the future, we begin to generate positive cash flow from our operations, we
will still need to seek additional financing to continue our research and
development activities and fund our business operations. If we are unable to
generate adequate revenues, enter into a corporate collaboration, complete a
debt or equity offering, or otherwise obtain sufficient financing when and if
needed, we may be required to reduce, defer or discontinue one or more of our
research and development programs. We may not be able to:

|  |                                                                                                                                                                                                                                                                                                                                                                                                           
|- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|§ | find financing on terms acceptable to us, if at all;                                                                                                                                                                                                                                                                                                                                                      
|  |                                                                                                                                                                                                                                                                                                                                                                                                           
|§ | receive payments due to us in a timely manner, if at all, pursuant to
  any collaboration arrangements into which we have entered;                                                                                                                                                                                                                                                                        
|  |                                                                                                                                                                                                                                                                                                                                                                                                           
|§ | generate revenues that will reach projected levels;                                                                                                                                                                                                                                                                                                                                                       
|  |                                                                                                                                                                                                                                                                                                                                                                                                           
|§ | keep a substantial portion of the proceeds from any financing from
  being used to repay existing debt or other obligations;                                                                                                                                                                                                                                                                              
|  |                                                                                                                                                                                                                                                                                                                                                                                                           
|§ | keep expenditures from exceeding current expectations; or                                                                                                                                                                                                                                                                                                                                                 
|  |                                                                                                                                                                                                                                                                                                                                                                                                           
|§ | incur expenditures for research and development activities, progress
  of research collaborations, additions to our technologies, changes in or
  terminations of relationships with strategic partners, changes in the focus,
  direction or costs of our research and development programs, competitive and
  technological advances, or other factors below the amount than is presently
  anticipated.

Accordingly,
we may require additional funds to implement our business plan even if we
obtain additional financing to implement our business plan. If adequate funds
are not available to us through additional financings, we may be required to:

|  |                                                                                                                                                                                                                                                   
|- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|§ | delay, reduce the scope of, or eliminate, one or more of our research
  and development programs or forfeit our rights to future technologies;                                                                                                    
|  |                                                                                                                                                                                                                                                   
|§ | obtain funds through arrangements with collaborative partners or
  others that may require us to relinquish rights to certain technologies,
  product candidates or products that we would otherwise seek to develop or
  commercialize ourselves;
|  |                                                                                                                                                                                                                                                   
|§ | license the rights to products on terms that are unfavorable to us;
  or                                                                                                                                                                          
|  |                                                                                                                                                                                                                                                   
|§ | enter into a corporate restructuring, bankruptcy or liquidation
  proceeding.                                                                                                                                                                     

18

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We have substantial outstanding indebtedness, including
amounts owed to members of current and former management that we may be unable
to repay or convert to equity.

At
June 30, 2006, we had approximately $35,671,000 of outstanding indebtedness in
the form of short-term and long-term promissory notes. Of such amount,
$4,431,000 principal amount is past due and an additional $20,000 is considered
short-term debt. We will need to raise additional funds through financings or
future revenue to repay our outstanding indebtedness. Any funds that we raise
that are applied to repay our outstanding indebtedness will not be available to
fund our business. We may be unable to raise the funds necessary to repay our
debt and the holders of past due amounts may seek to enforce their rights
against us.

At
June 30, 2006, we had $264,000 principal amount of outstanding indebtedness to
Edwin C. Quattlebaum, our Chief Executive Officer, President and Co-Chairman of
the Board, representing working capital advances he made to us, which
indebtedness is evidenced by demand notes bearing interest at the prime rate
plus 1% and which provide for repayment at such time as we have sufficient
resources. An additional $625,500 principal amount of debt that is evidenced by
a substantially similar note is owed to a former director of ours who is
currently in bankruptcy (see Legal Proceedings). We also have an accrued
liability of $1,130,300 for deferred bonus payments (declared and estimated) to
our executive officers, which were earned from 1999 through June 30, 2006.

Our failure to file tax returns in a timely manner may
subject us to penalties and interest which would impair our financial
condition.

Currently
we are delinquent in filing certain federal and state tax returns due to timing
and financial constraints. We are working to have those returns filed as soon
as possible. While we believe that we will have no income tax liability, we may
be subject to penalties and interest which could adversely affect our financial
condition.

Our genomic technologies are being developed and products
and services from this emergent technology may never be successfully
commercialized.

Our
genomic technologies are based on the use of SNPs for the identification of
desirable traits in livestock. We may never be able to develop commercially
viable services from this technology. Other than current regular revenues
derived from our commercial genotyping operations, any products or services
which we may develop may prove to be uneconomical or otherwise commercially
unfeasible, such outcomes would severely limit our near-term prospects. The
successful development of this technology is subject to the risks of failure
generally inherent in the development of any innovative technologies and
products derived therefrom. These risks include the possibilities that:

|  |                                                                                                                 
|- | ----------------------------------------------------------------------------------------------------------------
| | third parties hold proprietary rights that preclude us from marketing
  one or more of its proposed products; or
|  |                                                                                                                 
| | third parties have superior technologies and/or market superior or
  equivalent products.                       

If we do not meet objectives under our license agreement
with Celera, we will not maintain exclusive rights to the genomic technology.

Under
our license agreement with Celera, we are obligated to make certain payments in
order to maintain our exclusive rights under the license agreement to Celeras
cattle, swine and poultry genomic sequencing tools and technology. At June 30,
2006, we were in arrears with respect to $100,000 of quarterly payments to
Celera and a royalty obligation of $1,938,800. We may not be able to satisfy
the

19

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prescribed
conditions for maintaining the license. The failure to maintain an exclusive
license to the genomic sequencing technology would negatively impact our
ability to commercialize any products or services based on this platform
technology.

Our Myostatin technology for use in agriculture is being
developed and may never be successfully commercialized.

Our
proposed Myostatin technology for agricultural uses is in the early
developmental stage and will require time-consuming and costly research and
development, testing, and regulatory clearances prior to commercialization.
Accordingly, we do not expect to develop any proposed product candidates from
these technologies for commercial sale for three to five years, if ever. The
successful development of any of these technologies and any subsequent product
candidates is subject to the risks of failure generally inherent in the
development of any innovative technologies and products derived therefrom.
These risks include the possibilities that:

|  |                                                                                                                                                                                             
|- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|§ | to the extent regulatory clearance is mandated, the proposed products
  may be found or believed to be ineffective or toxic, or otherwise fail to
  receive necessary regulatory clearances;
|  |                                                                                                                                                                                             
|§ | the technologies or any proposed products derived from the
  technologies are uneconomical to manufacture or market or do not achieve
  broad market acceptance;                            
|  |                                                                                                                                                                                             
|§ | third parties hold proprietary rights that preclude us from marketing
  one or more of our proposed product candidates; or                                                                  
|  |                                                                                                                                                                                             
|§ | third parties have superior technologies and/or market superior or
  equivalent products.                                                                                                   

The
failure of our research and development activities to result in any
commercially viable Myostatin technology or products, or any significant delay
in completion of such commercialization, would limit our Growth and
Differentiation Factors Technology.

Our success in developing our product candidates depends
upon the performance of our licensees and collaborative partners, without which
our product lines may never be successfully commercialized.

Our
strategy involves entering into multiple, concurrent strategic alliances with
corporate partners to pursue development and commercialization of our two
primary technologies. With respect to the genomics technology, our success is
dependent upon our ability to enter into an agreement with an additional
breeding company for poultry, and commercialization partners for canine and
companion animals whereby such partners are obligated to finance the
development costs and develop joint commercialization strategies with us. While
we are in active negotiations with potential partners in these industries, we
may be unable to finalize and enter into these agreements. Our development and
commercialization of our Myostatin products in the non-vertically integrated
cattle, aquaculture and companion animal industries will depend in part on our
ability to enter into a collaborative agreement with one or more animal
healthcare companies with the resources to develop, obtain regulatory approvals
for and market any of such products. We are dependent upon the expertise and
dedication of our outside collaborators to develop and market products.
Similarly, we are completely dependent upon Wyeth with respect to the
development and commercialization of any human applications of our growth and
differentiation factors. Any failure of any one or more of our collaborative
partners to develop commercially viable products could cause us to curtail or
cease operations.

Any
failure on the part of our licensees or collaborators to perform or satisfy
their obligations to us could lead to delays in the development or
commercialization of our product candidates and affect our

20

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ability
to realize product revenues. Disagreements with our licensees or collaborators
could require or result in litigation or arbitration, which could be
time-consuming and expensive. If we fail to maintain our existing agreements or
establish new agreements as necessary, we could be required to undertake
development, manufacturing and commercialization activities solely at our own
expense. This would significantly increase our capital requirements and may
also delay the commercialization of our technologies and services.

Our Myostatin business is subject to government regulation
and the costs and uncertainty of the regulatory approval and compliance
process.

Our
research, development, manufacturing, and marketing of our animal health and
agricultural product candidates are, with the exception of genomic diagnostics
and related services, subject to regulatory approval processes administered by
the FDA, USDA, and other regulatory agencies in the United States and abroad.
The process of obtaining FDA, USDA and other required regulatory approvals for
drug and biologic products, including required regulatory trials for animal and
human safety, is lengthy, expensive and uncertain. Even after expenditure of
significant time and financial and other resources, we may not be able to
obtain necessary regulatory approvals for clinical testing or for the manufacturing
or marketing of any products requiring such approval. If regulatory approvals
are not obtained, we will not be able to generate revenues from these types of
products. In addition, we or our collaborators may encounter significant delays
or excessive costs in our and/or their efforts to secure necessary approvals or
licenses. Even if regulatory clearance is obtained, a marketed product is
subject to ongoing review, and later discovery of previously unknown defects or
failure to comply with the applicable regulatory requirements may result in
restrictions on the marketing of a product or withdrawal of the product from
the market, as well as possible civil or criminal sanctions.

The
research, development, manufacture and marketing of human therapeutic products
are subject to an extensive regulatory approval process by the FDA and other
regulatory agencies in the United States and other countries. The process of
obtaining required regulatory approvals for human drugs is lengthy, expensive
and uncertain. In order to obtain the regulatory approvals needed to
commercialize any human therapeutic product, it must be demonstrated that the
product candidate is safe and effective for use in humans for each target
indication. Clinical trials conducted for such purpose are subject to
substantial oversight by institutional review boards and the FDA and may be
curtailed or terminated at any time for any of the following reasons:

|  |                                                                                                                                                                       
|- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------
|§ | unanticipated, adverse or ambiguous results;                                                                                                                          
|  |                                                                                                                                                                       
|§ | undesirable side effects which delay or extend the trials;                                                                                                            
|  |                                                                                                                                                                       
|§ | the inability to locate, recruit and qualify a sufficient number of
  patients for the trials;                                                                        
|  |                                                                                                                                                                       
|§ | regulatory delays or other regulatory actions; or                                                                                                                     
|  |                                                                                                                                                                       
|§ | difficulties in manufacturing sufficient quantities of the particular
  product candidate or any other components needed for preclinical testing or
  clinical trials.

We
may not be able to obtain regulatory approval for any human therapeutic product
based on our technology. Even if regulatory clearance is obtained, post-market
evaluation of a product, if required, could result in restrictions on a
products marketing or withdrawal of the product from the market as well as
possible civil and criminal sanctions.

21

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We
and our collaborative partners may be subject to additional regulation under
state and federal laws, including requirements regarding occupational safety,
laboratory practices, environmental protection and hazardous substance control,
and may be subject to other local, state, federal and foreign regulation. We
cannot predict the impact of such regulation on us, although it could seriously
impact our business.

Finally,
while our genomic technology is not currently subject to government regulation,
regulatory requirements may be imposed in the future, compliance with which
could have a negative impact on the commercial or economic viability of these
products and services.

Our technologies may not meet with consumer acceptance,
which would reduce our future revenues

Currently,
although Myostatin inhibitor technology does not affect DNA and therefore will
not modify the genetics of these animals, adverse publicity may nevertheless
arise in connection with the use of the technology that we are developing.
While there are a number of drug delivery systems available, we have not
determined the appropriate system to employ. Our technology or any products
derived therefrom may cause controversy comparable to that which arose with the
use of hormones and other additives in the milk production industry. Our
technology may be viewed with the same distrust. A lack of consumer or industry
acceptance would have an adverse impact on our business, financial condition
and future prospects.

We face substantial competition and the risk of
technological obsolescence.

The
animal health and agricultural industries, and related biotechnology,
pharmaceutical, and biopharmaceutical industries are intensely competitive.
Competition from other companies and other research and academic institutions
may increase. Many of these companies have substantially greater financial and
other resources and research and development capabilities than us and have
substantially greater experience in undertaking preclinical and clinical
testing of products, obtaining regulatory approvals and manufacturing and
marketing products. Moreover, the biotechnology, pharmaceutical and
biopharmaceutical industries, in the animal health and agricultural areas, are
rapidly evolving fields in which developments are expected to continue at a
rapid pace. We may not be able to develop products that are more effective or
achieve greater market acceptance than competitive products, or that our
competitors will not succeed in developing products and technologies that are more
effective than those being developed by us or that would render our
agricultural products and technologies less competitive or obsolete.

With
respect to potential human therapeutic products, our collaborative partner will
face competition from companies that are developing products for the treatment
of the diseases and disorders we have targeted. Our collaborative partner may
also compete with universities and other research institutions in the
development of products, technologies and processes, as well as the recruitment
of highly qualified personnel. These competitors may succeed in developing
technologies or products that are more effective than the ones under
development by Wyeth or that render its proposed products noncompetitive or obsolete.

22

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We are dependent on a small number of key personnel and
consultants the loss of whom could threaten our ability to operate our business
successfully.

As
a small company with 37 full-time employees, our success depends on the
continuing contributions of our management team and scientific personnel. We
are highly dependent on the services of Dr. Edwin C. Quattlebaum, our
Co-Chairman, President and Chief Executive Officer, as well as the other
principal members of our management and scientific staff. Our success depends
in large part upon our ability to attract and retain highly qualified
personnel. We face intense competition in our hiring efforts with other
pharmaceutical and biotechnology companies, as well as universities and
nonprofit research organizations, and we may have to pay higher salaries to
attract and retain qualified personnel. The loss of one or more of such
individuals, or our inability to attract additional qualified personnel, could
substantially impair our ability to implement our business plan.

We have limited manufacturing and marketing capability.

We
do not generally expect to engage directly in commercial scale manufacturing or
marketing of Myostatin products in the near term, but may elect to do so in
certain cases. Apart from the high volume commercial genotyping business
acquired from Celera and the near term commercial potential arising for
manufacturing in relation to cattle genomic diagnostics, we do not, generally,
have the capacity or experience to manufacture products in large quantities or
market such products. If we elect to perform these functions, we will be
required either to develop these capacities or contract with others to perform
some or all of these tasks. We may be dependent to a significant extent on
corporate partners, licensees or other entities for manufacturing and marketing
of products. If we engage directly in wider manufacturing or marketing, we will
require substantial additional funds and personnel and we will also be required
to comply with extensive regulations applicable to companies engaged in the
production of biotech products. We may not be able to obtain necessary funding
or develop or contract for these capacities in a timely manner, on acceptable
terms or at all.

If we cannot protect our intellectual property rights, our
ability to develop and commercialize our products will be severely limited.

Our
success will depend in part on our and our licensors ability to obtain,
maintain and enforce patent protection for each partys technologies, compounds
and products, if any, resulting from these technologies. Without protection for
the intellectual property we use, other companies could offer substantially
identical products for sale without incurring the sizable discovery,
development and licensing costs that we have incurred. Our ability to recover
these expenditures and realize profits upon the sale of products could be
diminished.

We
have patent applications filed and pending in the United States and abroad for
our own technologies, and for technologies that we have developed from our
in-licensed technologies. The process of obtaining patents can be time
consuming and expensive with no certainty of success. Even if we spend the
necessary time and money, a patent may not issue or it may insufficiently
protect the technology it was intended to protect. We can never be certain that
we were the first to develop the technology or that we were the first to file a
patent application for the particular technology because many U.S. patent
applications are confidential until a patent issues, and publications in the
scientific or patent literature lag behind actual discoveries. The degree of
future protection for our proprietary rights will remain uncertain if our pending
patent applications are not approved for any reason or if we are unable to
develop additional proprietary technologies that are patentable. Furthermore,
third parties may independently develop similar or alternative technologies,
duplicate some or all of our technologies, design around our patented
technologies or challenge our issued patents or the patents of our licensors.

23

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In
any litigation where our patents or our licensors patents are asserted, a
court may determine that the patents are invalid or unenforceable. Even if the
validity or enforceability of these patents is upheld by a court, a court may
not prevent alleged infringement on the grounds that such activity is not
covered by the patent claims. Any litigation, whether to enforce our rights to
use these patents or to defend against allegations that we infringe third party
rights, will be costly, time consuming, and may distract management from other
important tasks.

As
is commonplace in the biotechnology and pharmaceutical industry, we employ
individuals who were previously employed at other biotechnology or
pharmaceutical companies, including our competitors or potential competitors.
To the extent our employees are involved in research areas which are similar to
those areas in which they were involved at their former employers, we may be
subject to claims that such employees and/or we have inadvertently or otherwise
used or disclosed the alleged trade secrets or other proprietary information of
the former employers. Litigation may be necessary to defend against such
claims, which could result in substantial costs and be a distraction to
management, even if we are successful in defending such claims.

We
also rely in our business on trade secrets, know-how and other proprietary
information. We seek to protect this information, in part, through the use of
confidentiality agreements with employees, consultants, advisors and others.
Nonetheless, these agreements may not provide adequate protection for our trade
secrets, know-how or other proprietary information and prevent their
unauthorized use or disclosure. To the extent that consultants, key employees
or other third parties apply technological information independently developed
by them or by others to our proposed products, disputes may arise as to the
proprietary rights to such information which may not be resolved in our favor.
The risk that other parties may breach confidentiality agreements or that our
trade secrets become known or independently discovered by competitors, could
adversely affect us by enabling our competitors, who may have greater
experience and financial resources to copy or use our trade secrets and other
proprietary information in the advancement of their products, methods or
technologies.

Our success also depends on our ability to operate and
commercialize products without infringing on the patents or proprietary rights
of others.

Third
parties may claim that we or our licensors or suppliers are infringing their
patents or are misappropriating their proprietary information. In the event of
a successful claim against us or our licensors or suppliers for infringement of
the patents or proprietary rights of others, we may be required to:

|  |                                                
|- | -----------------------------------------------
|§ | pay substantial damages;                       
|§ | stop using our technologies;                   
|§ | stop certain research and development efforts; 
|§ | develop non-infringing products or methods; or 
|§ | obtain one or more licenses from third parties.

A
license required under any such patents or proprietary rights may not be
available to us, or may not be available on acceptable terms. If we or our
licensors or suppliers are sued for infringement we could encounter substantial
delays in, or be prohibited from developing, manufacturing and commercializing
our product candidates.

24

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Risks Related to the Ownership
of Our Securities

Our failure to comply with the reporting requirements of the
Exchange Act could lead to an enforcement action against us by the Commission
or materially delay or prevent us from affecting an initial public offering of
our securities or merging with a public company.

Since
December 31, 2004, we have met both the security holder and total asset levels
that obligated us to become a publicly reporting company during 2005. This obligation
is imposed by the federal securities laws despite the fact that our
securities are not publicly traded. In May 2005, we filed a registration
statement on Form 10-SB with the SEC. As a public reporting company under
Section 12(g) of the Exchange Act, we are required to file annual and quarterly
reports with respect to our business and financial condition and current
reports with respect to material events. To date, we have been delinquent in
our compliance with these requirements. We received a comment letter from the
SEC dated June 2, 2005, for which a response was provided in a letter by us
dated October 3, 2006. Changes to our original filing as a result of that
comment letter are reflected in this Amendment No. 1. The SEC may seek an
enforcement action against us which could subject us to civil penalties.
Furthermore, our non-compliance to date and any difficulties we experience with
becoming compliant may significantly delay, or possibly limit, our ability to
affect an initial public offering of our common stock or merge with a
publicly-traded company.

There will not be a public market for our common stock which
may prevent future investment on which we are dependent.

It
is unlikely that a public market for our common stock will be created until
such time, if ever, as we undertake an initial public offering of our
securities. Accordingly, investors will not be able to sell their common stock
should they desire to do so, or may be able to do so only at lower than desired
prices, which may prevent future investment in our common stock.

Our preferred stockholders have control over our actions.

For
so long as our Preferred Stock remains outstanding, the holders of each class
of our Preferred Stock have the right to approve the creation of any new class
of capital stock (or the modification of the terms of any existing class of
capital stock) having rights or preferences that would adversely effect or be
detrimental to the holders of each such existing class of Preferred stock. In addition,
pursuant to our Shareholders Agreement, dated February 28, 2002, we may not
sell or dispose of all or substantially all of our assets or consummate certain
mergers or take certain other material actions without the approval of New
Frontiers Capital, LLC, our largest holder of Series E Convertible Preferred
Stock. In addition, certain holders of our Series E Convertible Preferred Stock
and holders of our 10% Secured Convertible Promissory Notes have pre-emptive
rights, which entitle such holders to acquire up to their pro rata share of new
equity securities offered by the Company. These approval rights and pre-emptive
rights could inhibit our ability to raise additional capital or undertake
transactions that our board of directors may deem to be in the best interests
of our stockholders. In addition to the foregoing, the holders of our Series E
Convertible Preferred Stock currently have 26.3% voting control.

25

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The requirements of
complying with the Sarbanes-Oxley Act may strain our resources and distract
management

We
are subject to the reporting requirements of the Exchange Act and the
Sarbanes-Oxley Act. These requirements may place a strain on our systems and
resources. The Exchange Act requires that we file annual, quarterly and current
reports with respect to our business and financial condition. The
Sarbanes-Oxley Act requires that we maintain effective disclosure controls and
procedures and internal controls over financial reporting. Historically, as a
private company, we maintained a small accounting staff, but in order to
maintain and improve the effectiveness of our disclosure controls and
procedures and internal control over financial reporting, significant
additional resources and management oversight will be required. This effort may
divert managements attention from other business concerns, which could have a
negative effect on our business, financial condition, results of operations and
cash flows. In addition, we may need to hire additional accounting and
financial persons with appropriate public company experience and technical
accounting knowledge, and we may be unable to do so in a timely fashion.

ITEM 2. DESCRIPTION OF PROPERTY

We
conduct our principal operations at leased facilities described below. We
believe that our existing facilities are suitable for their use and will be
adequate to meet our needs for the foreseeable future. We also believe that any
additional space needed in the future will be available at commercially
reasonable rates.

|                                                                                  |  |                                                                                  |  |                        |  |                                   |  |                               
|--------------------------------------------------------------------------------- |  | -------------------------------------------------------------------------------- |  | ---------------------- |  | --------------------------------- |  | ------------------------------
|Entity Name; Location                                                             |  | Use                                                                              |  | Square
  Feet
  Leased |  | 2005 Annual
  Base Rent
  Amounts |  | Term of Lease                 
|                                                                                  |  |                                                                                  |  |                        |  |                                   |  |                               
|MetaMorphix,
  Inc.
  8000 Virginia Manor Road
  Suite 140
  Beltsville, MD 20705 |  | Corp.
  Headquarters,
  Growth Differentiation Factors,
  Research & Development |  | 30,380                 |  | $333,486                          |  | Lease
  expires April30, 2012.
|                                                                                  |  |                                                                                  |  |                        |  |                                   |  |                               
|MMI
  Genomics, Inc.
  1756 Picasso Avenue
  Davis, CA 95616                      |  | Genomics
  Research
  and Operations                                             |  | 12,104                 |  | $265,878                          |  | Lease
  expires May31, 2007.  

ITEM 3. LEGAL PROCEEDINGS

Regions
Bank, a secured, $5 million lender of Samuel R. Dunlap, Jr., a former Director
who is in bankruptcy, has sued us for payment of an August 1, 2001 $731,000
Promissory Note made by us to Mr. Dunlap. The amount that is owed is in dispute
(due to offsets made prior to the bankruptcy at Mr. Dunlaps direction) and we
contend that the conditions precedent to the maturity of the loan have not
occurred. We also note that our December 31, 2005 financial statements reflect
principal and interest of

26

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$625,498 being owed as of
such date. Regions Bank has also claimed that we (in the operation of our
securities transfer function) and our legal counsel enabled Mr. Dunlap to
pledge one of his several Warrants to another creditor in breach of an already
existing Commercial Pledge Agreement between the Bank and Mr. Dunlap. We
dispute this claim.

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

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

No
matters were submitted to a vote of our stockholders during the fiscal quarter
ended December 31, 2005.

PART II

ITEM 5. MARKET FOR COMMON EQUITY, RELATED
STOCKHOLDER MATTERS
AND SMALL BUSINESS ISSUER PURCHASES OF EQUITY SECURITIES

Listing.

Our
shares of common stock are not listed on any stock market or exchange.

Market Information.

As
of June 30, 2006, we have warrants outstanding to purchase 9,980,173 shares of
our common stock, options outstanding to purchase 9,272,500 shares of our
common stock, and convertible notes which may be converted into 7,864,749
shares of our common stock.

Any
person who may be deemed an affiliate of ours (as the term affiliate is
defined in the Exchange Act of 1934) may be eligible to sell their shares
pursuant to the provisions of Rule 144 promulgated under the Securities Act of
1933. Generally, Rule 144 provides that a person or persons who acquired stock
in a non-public transaction and has owned the stock for more than one year
prior to the proposed sale may sell within a three month period no more than
one per cent of the then issued and outstanding shares of common stock or the
average weekly reported trading volume on all national securities exchange and
through NASDAQ during the four calendar weeks preceding the proposed sale. At
August 31, 2006, 20,365,540 out of 20,883,149 shares of our common stock were
held by investors who have owned the shares for more than one year. Any shares
sold pursuant to Rule 144 may adversely affect the market price of our common
stock. Sales under Rule 144 may adversely affect the market price for our
shares in any market that may exist.

Holders of Record.

As of June 30, 2006, 20,883,149
shares of common stock were
issued and outstanding and held by approximately 550 holders of record.

27

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Dividends.

We
have not declared any dividends on our common stock to date, and we do not
intend to declare dividends on our common stock in the foreseeable future. We
currently intend to retain any future earnings to fund the development and
growth of our business.

The
terms of our 12.5% Convertible Secured Promissory Notes restrict us from
declaring or paying dividends, except as set forth in the respective
certificate of designation. No other current debt agreement has a restriction
on dividends.

Equity Compensation Plan
Information.

The
following table provides information as of December 31, 2005 with respect to
the shares of our common stock that may be issued under our existing equity
compensation plans:

|                                                                    |  |                                                                                         |  |                                                                       |  |                                                                                                        |      |  | 
|------------------------------------------------------------------- |  | --------------------------------------------------------------------------------------- |  | --------------------------------------------------------------------- |  | ------------------------------------------------------------------------------------------------------ | ---- |  | 
|Plan
  category                                                     |  | Number of
  securities to be
  issued upon exercise
  of outstanding
  options/warrants |  | Weighted-average
  exercise price of
  outstanding
  options/warrants |  | Number of
  securities
  remaining available
  for future issuance
  under equity
  compensation plans
|                                                                    |  |                                                                                         |  |                                                                       |  |                                                                                                       
|Equity
  compensation plans approved by security holders (1)        |  | 6,379,862                                                                               |  |                                                                       |  | $                                                                                                      | 3.72 |  | 
|Equity
  compensation plans not approved by security holders (1)(2) |  | 2,968,573                                                                               |  |                                                                       |  |                                                                                                        | 3.60 |  | 
|                                                                    |  |                                                                                         |  |                                                                       |  |                                                                                                        |      |  | 
|                                                                   
|Total                                                               |  | 9,348,435                                                                               |  |                                                                       |  | $                                                                                                      | 3.68 |  | 
|                                                                    |  |                                                                                         |  |                                                                       |  |                                                                                                        |      |  | 

|    |                                                                                                                                               
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------
|   
|   
|(1) | Please see
  Item 6 Executive Compensation  Employees Stock Option Plans for a
  description of the material features of each of our plans.
|    |                                                                                                                                               
|(2) | This
  represents the Non-Qualified Plan, which is not required to be approved by
  security holders.                                         

Our
common stock is not currently traded on a public market.

The
following sets forth information regarding sales of our unregistered securities
during the last fiscal quarter:

In
December 2005 through June 2006, we issued an aggregate of $9,531,763 principal
amount of 10.0% Secured Convertible Promissory Notes and warrants to purchase
1,825,700 shares of common stock to a group of accredited investors in a
private placement for aggregate consideration of $9,436,384. We incurred issue
costs of $83,777 relating to warrants to purchase 149,458 shares of our common
stock which were issued in connection with this offering.

28

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ITEM 6. MANAGEMENTS DISCUSSION AND ANALYSIS
OR PLAN OF OPERATION

The
following discussion and analysis of our consolidated financial condition and
results of operations should be read in conjunction with our audited
consolidated financial statements and related notes included in this Form
10-KSB. This discussion and analysis contains forward-looking statements that
are subject to risks, uncertainties and other factors, including, but not
limited to, those discussed under Risk Factors and elsewhere in this Form
10-KSB, that could cause our actual results, performance, prospects or
opportunities to differ materially from those expressed in, or implied by,
these forward-looking statements. See Forward-Looking Statements.

Overview

We
are a life science Company. We use our two fundamental proprietary
technologiesanimal genomics and GDFs to discover, develop and commercialize
products we believe will increase livestock quality and production efficiency,
improve companion animal health and potentially treat human muscle degenerative
diseases and metabolic disorders.

We
commenced operations on September 2, 1994. Our corporate headquarters in
Beltsville, Maryland (administrative segment) is also the primary location for
our GDF research and development effort. MMI Genomics Inc., in Davis,
California, our wholly owned subsidiary, which we acquired from Celera in
February 2002, is the primary location responsible for our ongoing genotyping
business and genomic research activities.

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

We
have established several relationships through which we expect to commercialize
our animal genomics technology. We have exclusive development and marketing
agreements with Cargill Incorporated, or Cargill, the worlds second largest
beef processor and feedlot operator, and the Monsanto Company, or Monsanto, the
worlds second largest swine breeder. We describe these agreements in more
detail under Licenses, Acquisitions, and Collaborative Agreements. We also
have agreements to provide DNA testing services for the American Kennel Club,
the worlds largest canine registry, United Kennel Club, American Angus
Association, the worlds largest beef cattle registry, Red Angus Association,
American Limousin Association, and American Bucking Bull Association. We
generate operating revenues from various genotyping services for the clients
noted above.

Our
strategy is to develop revenue from the genomics near term opportunities,
particularly the livestock, trait identification tool, breeding identification
tool and canine breed specific tool. In the medium term we expect to generate
additional revenue from our swine breeding tools and in the long-term from our
GDF technology. With regard to our GDF technology, the Companys strategy has

29

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remained to
license out our technology to large pharmaceuticals, which have both the
financial resources and research experience to develop these products in a
timely and cost effective manner.

The
Company believes that to be financially sound and successful, in addition to
having short, medium and long revenue objectives, we must be able to generate
revenues from various activities for purposes of risk diversification.

We
have also derived revenues from upfront and milestone payments from our
corporate partners, including Cargill, Wyeth and Monsanto.

We
analyze our business and operations in terms of three business segmentsGDFs
(Beltsville, MD), Livestock Genomics (Davis, CA.) and Immunopharmaceuticals.
All segments are dedicated to discovering and commercializing multiple
technology platforms to improve the food supply and human health. In September
2005, we made the decision to consolidate the research efforts of our
Immunopharmaceutical segment into the GDF segment 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. This amount
remains unpaid at June 30, 2006.

Critical Accounting Policies

The
preparation of consolidated financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the consolidated financial statements and the reported amounts of revenues and
expenses during the reporting period. These estimates are based on historical
experience and on various other assumptions that we believe are reasonable
under the circumstances. Actual results could differ from those estimates.
While our significant accounting policies are described in more detail in the
notes to our consolidated financial statements, we believe the following
accounting policies to be critical to the judgments and estimates used in the
preparation of our consolidated financial statements.

Revenue Recognition

Our
revenue recognition policies are in accordance with the Securities and Exchange
Commissions (SEC) Staff Accounting Bulletin No. 101, Revenue Recognition in Financial Statements,
as amended by SEC Staff Accounting Bulletin No. 104, Revenue Recognition. We have license and development
agreements with several pharmaceutical, biotechnology, and food production
companies. The agreements typically include nonrefundable license fees paid to
us, funding of research and development by the counterparty, payments to us
based upon achievement of certain milestones and royalties on net product
sales. Revenues, including nonrefundable license fees, are recognized when we
have a contractual right to receive such payments, provided a contractual
arrangement exists, the contract price is fixed and determinable, the
collection of the resulting receivable is reasonably assured, and we have no
further performance obligations under the arrangement.

When
we have performance obligations under an arrangement, revenue recognition is
deferred until the obligations are fulfilled. Where our level-of-effort is relatively
constant over the performance period, the revenue is recognized on a
straight-line basis. The straight-line basis is used when performance
corresponds to the passage of time, such as exclusivity rights. Where our
level-of-effort is not relatively constant over the performance period, we
recognize revenue on a systematic basis based on when effort is expended. The
systematic basis includes cost based estimates to establish level-of-effort
progress.

30

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Research
and development revenues and other revenues from milestone payments are
deferred until achievement of the related milestone; provided we have no
continuing performance obligations and the milestone payment is reasonable in
relation to the effort expended or the risk associated with its achievement.
Typical terms of these agreements with collaborative partners include work
plans to jointly develop and commercialize products. Achievement of steps
within the work plan triggers milestone payments. If any of these conditions
are not met, the milestone payments are deferred and recognized as revenue over
the term of the arrangement as we complete our performance obligations.

We
defer upfront payments received until such a time as they are earned as the
products and/or services are delivered and/or performed over the term of the
arrangement. The revenue is then recognized systematically over the periods
that the fees are earned. In June 2004, we entered into a Swine Improvement
Agreement with Monsanto Company, which gives Monsanto an exclusive
royalty-based license to use our porcine genetic database, which consists of
over 600,000 SNPs, and the associated intellectual property. We will provide
consulting and support in the use of its database resource. Monsanto will be
obligated to pay royalties to us if the research performed using the database
creates product enhancements which generate increased revenues. We received
$1,000,000 from Monsanto in June 2004 as an access fee for the database. We
recorded deferred revenue upon receipt of the payment, and are amortizing the
fee on a straight-line basis over the license exclusivity period of 5 years. We
recognized revenue of $200,004 and $116,669 for the years ended December 31,
2005 and 2004, respectively, and the remainder as recorded as deferred revenue
at December 31, 2005.

In
2002, we entered into Letters of Intent and Limited License and Option
Agreements with two chicken producers for use of Myostatin technology within
the United States. Additionally, one of the chicken producers has rights to
utilize the Myostatin technology within Mexico. The Agreements include an
option to license Myostatin technology in chicken on predefined terms upon the
successful completion of large-scale trials. For the option to the technology,
both chicken production companies have paid us $250,000. License fees to cover
development costs are to be paid once a product candidate has been developed
and tested by the parties. Additionally, we are to receive a portion of the
value added by the technology on a per treated bird basis. The $500,000 in
up-front fees was deferred upon receipt, and to date, has not been earned by us
since the product has yet to be delivered. The fees were recorded as deferred
revenue at December 31, 2005 and June 30, 2006.

We
currently provide parentage and genotyping services. These services are
provided to the livestock and companion animal industries and are performed by
using a DNA-based test on samples provided. We recognize revenue for genotyping
services at the time the services are provided on a test by test basis and no
additional performance is required by us. The revenue is then considered
realized and earned. Amounts received prior to being earned are recorded as
deferred revenue until earned.

Impairment of
Long-Lived Assets

We
evaluate our long-lived assets for impairment whenever events or changes in
circumstances indicate that the carrying amount of such assets may not be
recoverable. Recoverability of an asset to be held and used is measured by a
comparison of the carrying amount of the asset to future net cash flows
expected to be generated by the asset. The calculation of future net cash flows
involves estimates and assumptions which could be impacted by changes in the
economic climate, product acceptance, or changes in costs. Any impairment to be
recognized is measured by the amount by which the carrying amount of the asset
exceeds its fair value. Assets to be disposed of are reported at the lower of
the carrying amount or fair value less estimated costs to sell.

31

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Stock-Based
Compensation

In
2003, we elected to adopt the fair value based method of accounting for
employee stock options as set forth in Statement of Financial Accounting
Standard, or SFAS, No. 123,Accounting for
Stock-Based Compensation, using the retroactive restatement method
described in SFAS No. 148, Accounting for
Stock-Based Compensation  Transition and Disclosure. Under the fair
value based method of accounting, compensation cost is measured at the grant
date based on the value of the award and is recognized as expense over the
vesting period.

Effective
January 1, 2004, we adopted SFAS No. 123(R), Share-Based
Payment. SFAS No. 123(R) which, among other things, requires
nonpublic entities to use a calculated value, similar to the fair value based
method of accounting set forth in SFAS No. 123. The adoption of SFAS No. 123(R)
did not have a material impact on our results of operations or financial
position.

We
also follow guidance as prescribed in Emerging Issues Task Force Abstract, or
EITF, No. 96-18, Accounting for equity
Instruments That Are Issued to Other Than Employees for Acquiring, or in
Conjunction with Selling, Goods and Services.

The
fair value of each option award is estimated on the date of grant using the
Black-Scholes option valuation model that uses the weighted average assumptions
in accordance with SFAS No. 123(R). Expected volatility is based on the average
historical volatilities on the stock of similar companies in the agricultural
and biotech industries that are publicly traded. The average historical
volatilities were calculated using the time period corresponding to the vesting
period. The Company uses historical data to estimate a weighted-average percentage
of forfeitures within the valuation model. The expected term of options granted
represents the period of time the options granted are expected to be
outstanding. The risk free rate for periods within the contractual life of the
option is based on the U.S. Treasury constant maturities in effect at the time
of the grant and for instruments with a life equal to the vesting period of the
grant.

Management,
with the assistance from a valuation specialist, determined the fair value of
our common stock for each quarter during the period January 1, 2005 through
March 31, 2006. The analyses were performed retrospectively and not
contemporaneously, because during this period, our efforts were focused on
product development and filing our initial 10-SB filing. As a result, our
financial and managerial resources were limited. The valuation analyses
considered the guidance set forth in the AICPA Audit and Accounting Practice
Aid Series, Valuation of
Privately-Held-Company Equity Securities Issued as Compensation (the
Guide). Accordingly, the valuation allocates the value of the business
enterprise among our classes of stock with consideration given to the
methodologies prescribed in the Guide.

Determining
the fair value of our stock requires making complex and subjective judgments.
The valuation of the business enterprise is based on a discounted future cash
flow approach that uses managements estimates of revenue, anticipated growth
rates, and estimated costs. The estimates are consistent with the plans and
estimates being used to manage the business. There is inherent uncertainty in
making these estimates. The risks associated with achieving the forecasts were
assessed in the selection of the appropriate discount rates, as well as
probability weighting certain revenue based on the likelihood of achieving
specific milestones. If different discount rates and probabilities had been
used, the valuations would have been different.

The
enterprise value was then allocated to preferred and common shares. The
allocation of value to the preferred stock was based on treating the preferred
shares as if they were converted to common stock. Therefore, the value of the
preferred stock was estimated as the fully diluted per share value of

32

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equity as if
all preferred shares were converted to common shares. A discount for lack of
marketability was applied to the portion of business enterprise allocated to
the common stock. The discount was based on specific characteristics of the
underlying stock. Had a different methodology used to allocate the business
enterprise value or a different discount for lack of marketability been used,
the allocations between preferred and common shares and the resulting value of
common stock would have been different.

The
results of the analyses indicated a fair value of $3.15 at March 31, 2005,
$3.00 at June 30, 2005, $2.95 at September 30, 2005, $3.20 at December 31,
2005, and $3.15 at March 31, 2006. These fair value amounts were used in our
Black-Scholes option pricing calculations in order to determine the proper
stock option and warrant accounting.

Summary of Contractual Obligations

The
following table summarizes our contractual obligations as of December 31, 2005:

|                                                                                                |  |                          |            |                      |   |            |  |           |           |                     |   |            |  |   |           | 
|----------------------------------------------------------------------------------------------- |  | ------------------------ | ---------- | -------------------- | - | ---------- |  | --------- | --------- | ------------------- | - | ---------- |  | - | --------- | 
|                                                                                                |  |                          |           
|                                                                                                |  |                          |           
|                                                                                                |  | Payments
  due by period |           
|                                                                                                |  |                          |           
|                                                                                                |  |                          |            |                      |   |            |  |           |           |                     |  
|                                                                                                |  | Total                    |            | Less than
  1
  year |   | 1-3 years  |  | 3-5 years |           | More than
  5 years |  
|Debt obligations  includes short-term and long-term promissory
notes,
  gross of debt discount |  | $                        | 29,450,022 |                      | $ | 4,073,502  |  | $         |          |                     | $ | 25,376,520 |  | $ |          | 
|Employment related obligations (1)                                                              |  |                          | 198,569    |                      |   | 42,390     |  |           | 84,780    |                     |   | 46,635     |  |   | 24,764    | 
|Interest obligations  on promissory notes                                                      |  |                          | 5,221,743  |                      |   | 5,221,743  |  |           |          |                     |   |           |  |   |          | 
|Capital lease obligations  for equipment                                                       |  |                          | 2,284,145  |                      |   | 1,095,813  |  |           |          |                     |   | 1,188,332  |  |   |          | 
|Operating lease obligations  property and other
leases                                         |  |                          | 3,670,332  |                      |   | 964,261    |  |           | 1,017,053 |                     |   | 993,017    |  |   | 696,001   | 
|Celera purchase obligations  minimum royalties due                                             |  |                          | 5,960,209  |                      |   | 2,026,442  |  |           | 547,772   |                     |   | 614,361    |  |   | 2,771,634 | 
|                                                                                                |  |                          |            |                      |   |            |  |           |           |                     |   |            |  |   |           | 
|                                                                                                |  |                          |            |                      |   |            |  |           |           |                     |   |            |  |   |           | 
|                                                                                                |  |                          |            |                      |   |            |  |           |           |                     |   |            |  |   |           | 
|Total                                                                                           |  | $                        | 46,785,020 |                      | $ | 13,424,151 |  | $         | 1,649,605 |                     | $ | 28,218,865 |  | $ | 3,492,399 | 
|                                                                                                |  |                          |            |                      |   |            |  |           |           |                     |   |            |  |   |           | 
|                                                                                                |  |                          |            |                      |   |            |  |           |           |                     |   |            |  |   |           | 

(1) Employment
related obligations consist of employment contracts of $1,009,000 (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), accrued bonuses of $3,526,183, and accrued
severance of $686,560.

33

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Results of Operations

The
following is a summary of our operating results for the three years ended
December 31:

|                                                            |  |      |             |      |   |             |   |   |             |  
|----------------------------------------------------------- |  | ---- | ----------- | ---- | - | ----------- | - | - | ----------- | -
|                                                            |  | 2005 |             | 2004 |   | 2003        |  
|                                                            |  |      |             |      |   |             |  
|Revenue                                                     |  |      |             |      |   |             |   |   |             |  
|Parentage
  and identification genotyping service revenue   |  | $    | 2,225,040   |      | $ | 1,860,835   |   | $ | 1,580,640   |  
|Genomic
  research project milestone revenue                |  |      |            |      |   | 3,150,000   |   |   | 5,690,000   |  
|Growth
  differentiation research project milestone revenue |  |      |            |      |   | 500,000     |   |   |            |  
|License fee
  revenue                                       |  |      | 200,004     |      |   | 116,669     |   |   |            |  
|Other
  genomic service revenue                             |  |      | 91,020      |      |   | 77,292      |   |   | 136,103     |  
|                                                            |  |      |             |      |   |             |   |   |             |  
|Total Revenue                                               |  | $    | 2,516,064   |      | $ | 5,704,796   |   | $ | 7,406,743   |  
|Cost of
  revenue                                           |  |      | (1,552,312  | )    |   | (5,306,663  | ) |   | (4,334,625  | )
|Research and
  development expense                          |  |      | (4,311,880  | )    |   | (4,364,421  | ) |   | (3,674,157  | )
|General and
  administrative expense                        |  |      | (10,041,448 | )    |   | (10,698,706 | ) |   | (8,431,135  | )
|Depreciation
  and amortization expense                     |  |      | (2,432,992  | )    |   | (12,991,210 | ) |   | (12,954,432 | )
|Interest
  expense and accretion of debt discount           |  |      | (5,384,033  | )    |   | (18,984,610 | ) |   | (5,182,107  | )
|Debt
  conversion expense                                   |  |      | (93,696     | )    |   | (3,281,462  | ) |   | (1,276,038  | )
|Debt issue
  costs                                          |  |      | (2,119,070  | )    |   | (2,297,702  | ) |   | (5,808,701  | )
|Other income
  (loss)                                       |  |      | (192,457    | )    |   | 36,516      |   |   | 19,302      |  
|                                                            |  |      |             |      |   |             |   |   |             |  
|Net loss                                                    |  | $    | (23,611,824 | )    | $ | (52,183,462 | ) | $ | (34,235,150 | )
|                                                            |  |      |             |      |   |             |   |   |             |  

Comparison of the Years Ended December 31, 2005 and
2004

Revenue. Our revenue
for the year ended December 31, 2005 was $2,516,064, which was a decrease of
$3,188,732, or 55.9%, from the $5,704,796 during the same period of 2004,
primarily due to the difference in genomic research project milestone revenue.
In 2004, we earned $3,150,000 in milestone revenue relating to the Cargill
collaborative research project. Revenue from our parentage and identification
genotyping services increased $364,205, or 19.6%, in 2005 from 2004 due to the
increased volume of tests services performed.

We
expect revenue from the livestock genomics business to increase during the next
two years as a result of the commercialization of the technologies currently
under collaborative research projects. However, there is no guarantee such
increase will ever take place and investors are cautioned against placing undue
certainty on our projections.

34

---



Cost of Revenues. Cost
of revenues for the year ended December 31, 2005 were $1,552,312, a
$3,754,351, or 70.7% decrease from the $5,306,663 for 2004. This decrease was
primarily related to level of personnel costs and consumables used in 2004 to
support the Cargill collaborative research project, which ended in 2004. The
personnel costs and consumables in 2004 were used to complete the project
steps, which triggered milestone revenue recognition throughout the year.

Research and Development. Research
 and development costs were $4,311,880 for the year ended December 31,
2005 compared to $4,364,421 for 2004. This $52,541, or 1.2%, increase was
primarily due to additional personnel costs (representing those employees who
had previously worked on the Cargill project and were classified as cost of
revenue) and severance accruals for MetaMorphix and MetaMorphix Canada R&D
employees, partially offset by lower stock compensation expenses for employees,
lower contractual analytic services, and lower patent legal fees.

General and Administrative. General and administrative costs were $10,041,448 for the year ended December
31, 2005 compared to $10,698,706 for 2004. This $657,258, or 6.1%, decrease was
primarily due to a decrease in employee related expenses of approximately
$78,000, a decrease in professional and consulting fees of approximately
$751,000, partially offset by an increase of allocated expenses (e.g. rents,
utilities, and insurance) attributable to general and administrative expenses of
approximately $555,000.

Depreciation and Amortization. Depreciation and amortization decreased $10,558,218, or 81.3%, to $2,432,992
for the year ended December 31, 2005 from $12,991,210 for 2004 primarily due to
the completion of the intangible asset amortization in February 2005. The
intangible assets were related to the intellectual property associated with the
Celera genomics acquisition in February 2002. The amortization expense relating
to this intangible asset was approximately $3.2 million per quarter.

Interest Expense. Interest expense and accretion of debt discount decreased $13,600,577 to
$5,384,033 for the year ended December 31, 2005 from $18,984,610 for 2004. This
71.6% decrease was primarily due to the decrease in the number and value of
penalty warrants issued as well as the value of contingently adjustable terms
on warrants related to the 12.5% Convertible Secured Promissory Notes. The
penalty warrants issued in the second quarter of 2004 primarily related to the
Series C, D, and E bridge loans.

Debt Conversion Expense. Debt conversion expense was $93,696 for the year ended December 31, 2005
compared to $3,281,462 for 2004. This $3,187,766, or 97.1%, decrease relates to
the volume of conversion that took place during the periods. In the first
quarter of 2005, holders of our 8% Secured Convertible Promissory Notes and our
10.9% Secured Convertible Promissory Notes converted $143,992 of principal and
interest into shares of our Series G Convertible Preferred Stock and warrants
to purchase shares of our common stock. In the same period of 2004, holders of
our 8% Secured Convertible Promissory Notes and our 10.9% Secured Convertible
Promissory Notes converted $3,805,539 of principal and interest into shares of
our Series F Convertible Preferred Stock and warrants to purchase shares of our
common stock. The expense represents the fair value of the securities and
warrants issued in excess of the fair value of securities issuable pursuant to
the original conversion terms of those notes.

Debt Issue Costs. Debt issue costs decreased $178,632, or 7.8%, to $2,119,070 for the year ended
December 31, 2005 from $2,297,702 for the same period of 2004. This decrease is
due to debt issue costs relating to short term debt in 2004, which consisted of
bridge conversions and a rights offering, offset by a full years worth of
deferred debt issue cost amortization in 2005.

35

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Other Expense. Other expense was $192,457
for the year
ended December 31, 2005 as compared to other income of $36,516 for 2004. This
change was primarily due to the loss recorded on the disposal of assets from
MetaMorphix Canada, Inc.

Net Loss. Net loss
decreased $28,571,638, or 54.8%, for the year ended December 31, 2005 from the
year ended December 31, 2004, due to a combination of the factors described
above.

Comparison of the Years Ended December 31, 2004 and
2003

Revenue. Our revenue
for the year ended December 31, 2004 decreased $1,701,947, or 23.0%, from 2003
primarily due to the difference in milestone payments under genomic research
collaborative projects. In 2003, we earned $1,580,640 in parentage and
identification genotyping services revenue, $5,690,000 in research project
milestones and $136,103 in other genomic related revenue. In 2004, we earned
$1,860,835 in parentage and identification genotyping services revenue,
$3,150,000 in genomic research project milestones, $193,961 in other genomic
related and license fee revenue, and $500,000 in human biopharmaceutical growth
differentiation factors research project milestones. The increase in parentage
and identification genotyping services revenue in 2004 was primarily due to a
continuing increase in sample volume from our cattle breed association customers.
The genomics research revenue in 2004 was almost entirely from the successful
completion of milestones in the Cargill project. In comparison to those of
2003, the decrease of $2.5 million reflected the less intensive work
requirements required to meet the milestones as the Cargill Project neared
completion. The revenue from human biopharmaceutical growth differentiation
factors was entirely from Wyeth reaching a certain milestone as outlined in our
licensing agreement.

We
expect revenue from the livestock genomics business to increase during the next
two years as a result of the commercialization of the technologies currently
under collaborative research projects. However, there is no guarantee such
increase will ever take place and investors are cautioned against placing undue
certainty on our projections.

Cost of Revenues. Cost of revenues increased approximately $972,000 from 2003 to 2004 due to the
$1,000,000 payment we were obligated to make to Celera after we secured an
agreement involving porcine elements of the license rights we acquired from
Celera in 2002. This payment was triggered when we executed a swine improvement
agreement with Monsanto in June 2004. This agreement gives Monsanto an
exclusive license to use our porcine genetic database in exchange for future
royalty payments.

Research and Development. Research and development costs increased $690,264, or 18.8%, for the year ended
December 31, 2004 as compared to the same period in 2003. The increase is primarily
related to increased patent costs for new patent filings and maintenance of
pending and existing patents of approximately $300,000. Also contributing to
the higher cost was the value of stock options given to employees in our
research departments; which resulted in an increase of approximately $163,000.
Fees and consumables also increased relating to the timing and nature of the
different stages of research and development efforts.

General and Administrative. General and administrative costs increased $2,267,571, or 26.9%, in 2004
compared to 2003. This increase was primarily due to the increase in our
administrative infrastructure, with employment-related expenses increasing
approximately $982,000. Employment related expenses include salaries, benefits,
training, recruiting and stock option grants. General and administrative costs
also increased due to our strategic growth plans that included consulting
services and professional fees of approximately $873,000. With the increased
cost of compliance and the build out of our accounting staff, we expect our
costs to increase over time.

36

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Interest Expense. Interest expense and accretion of debt discount increased $13,802,503 in 2004
compared to 2003 due to an increase in our interest expense of approximately
$881,000 associated with outstanding debt, the increase in the amortization of
our debt discount of $1,597,000, the increase in the calculated value of
penalty warrants issued of $4,939,000 (penalty warrants were granted under the terms
of some of our agreements when we failed to meet certain specified criteria),
and the increase in the value of contractual adjustments to warrants of
$7,685,000, offset by the lack of warrants issued with short-term debt, valued
at $1,230,000 in 2003. The debt discount arose because a portion of the debt
proceeds were allocated to the warrants which were granted with the 12.5%
Convertible Secured Promissory Notes.

Debt Conversion Expense. Debt conversion expense was recorded in 2004 in the amount of $3,281,462,
relating to short-term notes which were converted to Series F Convertible
Preferred Stock with warrants attached. The expense represents the fair value
of the securities and warrants issued in excess of the fair value of securities
issuable pursuant to the original conversion terms.

Debt Issue Costs. Debt issue costs decreased $3,510,999 in 2004 from 2003, which was primarily
related to a decrease in commissions paid of $2,625,000, a decrease in the
value of warrants granted for advisory services of $2,020,000, offset by an
increase in the amortization of deferred debt issue costs of approximately
$1,134,000.

Net Loss. Net loss
increased $17,948,312, or 52.4%, for the year ended December 31, 2004 from the
year ended December 31, 2003, due to a combination of the factors described
above.

Description of Our Revenues, Costs and
Expenses

Revenues

Revenues
consist of fees for our parentage and identification genotyping services and
upfront and milestone payments from our collaborative partners and licensees.
We have deferred revenue recognition for upfront and milestone payments where
we have future performance obligations.

Research and Development Expenses

Research
and development expenses consist primarily of salaries and related expenses for
personnel, fees paid to professional service providers in conjunction with
independently monitoring our clinical trials and acquiring and evaluating data
in conjunction with our clinical trials, costs of contract manufacturing
services, costs of materials used in clinical trials and research and
development, depreciation of capital resources used to develop our products,
costs of facilities and the legal costs of pursuing patent protection of our
intellectual property. Research and development costs also include stock-based
compensation expense and collaborative agreements requiring us to pay periodic
license fees, research payments, additional payments, royalty fees, and
milestone payments. We expense research and development costs as incurred. We
expect our research and development expenses to increase as we continue to
develop our product candidates. From inception through June 30, 2006, we
expensed an aggregate of $32.6 million, including stock-based compensation
expenses of $3.2 million, on research and development.

37

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General and Administrative Expenses

General
and administrative expenses consist primarily of salaries and other related
costs for personnel serving executive, finance, sales and marketing, business
development, information technology and human resource functions. Other costs
include facility costs not otherwise included in research and development
expense and professional fees for legal and accounting services. We expect that
our general and administrative expenses will increase as we add personnel and
become subject to the reporting obligations applicable to public companies.
From inception through June 30, 2006, we expensed an aggregate of $53.2 million,
including stock-based compensation expenses of $16.2 million, on general and
administrative expenses.

Share-Based Payments

In
2003, we elected to adopt the fair value based method of accounting for
employee stock options as set forth in Statement of Financial Accounting
Standard, or SFAS, No. 123, Accounting for
Stock-Based Compensation, using the retroactive restatement method
described in SFAS No. 148, Accounting for
Stock-Based Compensation  Transition and Disclosure. Under the fair
value based method of accounting, compensation cost is measured at the grant
date based on the value of the award and is recognized as expense over the
vesting period.

Effective
January 1, 2004, we adopted SFAS No. 123(R), Share-Based
Payment. SFAS No. 123(R) which, among other things, requires
nonpublic entities to use a calculated value, similar to the fair value based
method of accounting set forth in SFAS No. 123. The adoption of SFAS No. 123(R)
did not have a material impact on our results of operations or financial
position.

We
utilize the Black-Scholes option pricing valuation model to calculate the value
of share-based payments in accordance with SFAS No. 123(R), or calculated
value.

Compensation
expense for options granted to employees amounted to $906,276 and $1,299,415
for the six months ended June 30, 2006 and 2005, respectively, and $2,435,631,
$2,241,091, and $1,269,684 for the years ended December 31, 2005, 2004, and
2003, respectively. Compensation expense for options granted to employees are
classified between research and development and general and administrative
expense based on employee job function.

Compensation
expense for options granted to non-employees amounted to $341,233 and $583,368
for the six months ended June 30, 2006 and 2005, respectively, and $951,734,
$1,119,224 and $1,750,457 for the years ended December 31, 2005, 2004, and
2003, respectively.

Beneficial Conversion Feature

The
12.5% Convertible Secured Promissory Notes issued in 2004 and 2003, the shares
of Series F Convertible Preferred Stock issued in 2004 from the rights
offering, and the shares of Series G Convertible Preferred Stock issued in 2004
all contained embedded beneficial conversion features as defined in No. 98-5, Accounting for Convertible Securities with Beneficial
Conversion Features or Contingently Adjustable Conversion Ratios. The calculated value associated with the beneficial conversion feature was
$71,932 for the Series F Convertible Preferred Stock and $1,042,198 for the
Series G Convertible Preferred Stock. We immediately recognized the beneficial
conversion feature of the preferred shares as a deemed dividend in 2004.

38

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For
the 12.5% Convertible Secured Promissory Notes, the value of this beneficial
conversion feature was calculated to be $2,136,848 and $1,830,143 relating to
the notes issued in 2004 and 2003, respectively. Allocating debt issuance
proceeds to the beneficial conversion feature resulted in the debt being recorded
at a discount which will be amortized to interest expense over the life of the
debt.

The
10.0% Secured Convertible Promissory Notes and the shares of Series G
Convertible Preferred Stock issued in 2005 did not contain embedded beneficial
conversion features.

Liquidity and Capital Resources

Since
inception, we have financed cash flow requirements through the issuance of
common and preferred stock for cash and services and the issuance of long- and
short-term notes. Often, we issue warrants together with such securities. We
are currently experiencing substantial cash flow difficulties and we anticipate
that we will continue to experience cash flow difficulties for an indefinite
period. As a result, we have no plans to make any material capital
expenditures. At June 30, 2006 and December 31, 2005, we had a working capital
deficit of $25,243,494 and $24,767,525, respectively, which deficit has since
increased. At September 26, 2006, we had approximately $1.5 million of cash and
cash equivalents on hand. With this level of cash, we are unable to satisfy our
current and expected cash requirements, including vendor charges, fixed
operating costs, and payroll related obligations for the remainder of 2006.

In
order to meet our cash requirements, we will have to raise additional
financing. The sale of additional debt, if we are successful in raising funds,
would, among other things, continue to adversely impact our balance sheet,
increase our expenses and increase our cash flow requirements. The sale of
equity securities would, among other things, result in additional dilution to
our stockholders. Due to the risks involved to investors, we have historically
been forced to offer return rates higher than market rates to attract financing.

Discussion of Cash Flows

The
following table summarizes our primary sources and uses of cash for the years
ended December 31:

|                                                                   |  |      |            |      |   |             |   |   |            |  
|------------------------------------------------------------------ |  | ---- | ---------- | ---- | - | ----------- | - | - | ---------- | -
|                                                                   |  | 2005 |            | 2004 |   | 2003        |  
|                                                                   |  |      |            |      |   |             |  
|Net cash
  provided by (used in):                                  |  |      |            |      |   |             |   |   |            |  
|                                                                  
|Operating activities                                               |  | $    | (5,280,884 | )    | $ | (12,404,945 | ) | $ | (9,304,489 | )
|                                                                  
|Investing activities                                               |  |      | (49,050    | )    |   | (276,039    | ) |   | (7,692     | )
|                                                                  
|Financing activities                                               |  |      | 6,225,395  |      |   | 13,122,750  |   |   | 9,386,097  |  
|                                                                  
|Effect of exchange rate differences on cash
  and cash equivalents |  |      | (21,209    | )    |   | (17,025     | ) |   | 345        |  
|                                                                   |  |      |            |      |   |             |   |   |            |  
|                                                                  
|Net increase
  in cash and cash equivalents                        |  | $    | 874,252    |      | $ | 424,741     |   | $ | 74,261     |  
|                                                                   |  |      |            |      |   |             |   |   |            |  

Operating Activities. Net cash used in operating activities was $5.3 million in 2005 compared to
$12.4 million in 2004. This decrease was primarily due to a $28.6 million
decrease in net loss and a $5.3 million increase in accounts payable and
accrued expenses, partially offset by a $10.5 million decrease in depreciation
and amortization, and a $14.4 million decrease in share-based payment expense.

39

---



Net cash used
in operating activities was $12.4 million in 2004 compared to $9.3 million in
2003. This increase was primarily due to a $17.9 million increase in net loss,
partially offset by higher share-based payment expense of $9.7 million, higher
accretion of debt discount and amortization of deferred debt issue costs of
$2.3 million, and higher debt conversion expense of $2.0 million.

Investing Activities. Net cash used in investing activities was $49,050 in 2005, $276,039 in 2004,
and $7,692 in 2003. The changes in net cash used in investing activities
primarily relate to the timing and level of our purchases of property and
equipment.

Financing Activities. Net cash provided by financing activities totaled $6.2 million in 2005 compared
to $13.1 million in 2004. This decrease was primarily due to lower proceeds
from stock offerings of $10.7 million, partially offset by a decrease in note
repayments of $3.1 million and lower debt issue costs of $1.0 million.

Net cash
provided by financing activities totaled $13.1 million in 2004 compared to $9.4
million in 2003. This increase was primarily due to higher proceeds from stock
issuances of $11.2 million and a decrease in principal payments on notes of
$2.3 million, partially offset by a decrease in proceeds from debt issuance of
$9.8 million. Through the course of our financing activities, we have incurred
debt issuance costs in the form of commissions and warrants issued to financial
advisors. At December 31, 2005, we have a total of $5,396,050 of deferred debt
issue costs which are to be amortized as expense over the life of the related
debt.

40

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Penalty Warrants

We
have issued warrants to purchase common stock to note holders at times when we
were unable to repay the notes at their contractual maturity, and when certain
corporate goals have not been met (e.g., completing an initial public offering
of our stock within a certain timeframe). While issuing warrants does not
require a cash commitment, it has resulted in dilution to our stockholders.

During
the year ended December 31, 2004, the Company also issued penalty warrants to
purchase 3,325,000 shares of common stock with an initial exercise price of
$6.00. Penalty warrants were granted because the Series C, D, and E Bridge Loans
were not repaid in full by the due date. These warrants had a calculated value
of $2,262,531 which was recorded as interest expense in 2004. The exercise
price of the penalty warrants was adjusted to $4.00 in 2004 due to the
triggering of a contingently adjustable exercise price clause in the warrant
document. The calculated value of this adjustment was $1,777,950, which was
recorded as interest expense in 2004.

In
the year ended December 31, 2004, the Company issued penalty warrants to
purchase 296,000 shares of common stock with an initial exercise price of $4.00
and $6.00. The penalty warrants had a calculated value of $264,193 which was
recorded as interest expense in 2004. The exercise price of the $6.00 warrants
was subsequently adjusted down to $4.00 due to a contingently adjustable
exercise price clause in the warrant document. The calculated value of the
exercise price adjustment was $88,764, which was recorded as interest expense
in 2003. In 2005, the Company issued penalty warrants to purchase 40,000 shares
of common stock with an exercise price of $4.00. The penalty warrants had a
calculated value of $18,032 which was recorded as interest expense in 2005.
These penalty warrants were issued due to the past-due balances on the loans and
expire in 2014.

The
Company issued penalty warrants, each with an exercise price of $8.00 per
share, to purchase 1,614,582 shares of common stock as of December 31, 2004.
These warrants expire in 2014, were valued at $655,443 and were expensed as
interest expense in 2004. In 2005, the Company issued additional penalty
warrants, each with an exercise price of $8.00 per share, to purchase 1,461,346
shares of common stock. These warrants were valued at $205,692 and were
expensed as interest expense in 2005. Based on the warrant exchange discussed
in Note 14 to the consolidated financial statements, the warrant exchange
completed by the Company in 2005 served to amend the terms of the original note
agreement. The amendment was to eliminate the obligation to issue penalty
warrants into the future.

Off-Balance Sheet Arrangements

We
have no off-balance sheet arrangements.

41

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ITEM 7. FINANCIAL STATEMENTS

Our
consolidated financial statements, including the notes thereto, together with
the report of Deloitte & Touche LLP, independent registered public
accounting firm, thereon are presented as a separate section of this Form
10-KSB, and the following are attached hereto beginning on Page F-1, which
follows page 59:

CONSOLIDATED FINANCIAL STATEMENTS AND NOTES

|                                                                                                                  |  |     
|----------------------------------------------------------------------------------------------------------------- |  | ----
|TABLE OF CONTENTS                                                                                                 |  |     
|                                                                                                                  |  |     
|                                                                                                                  |  |     
|                                                                                                                  |  | Page
|                                                                                                                  |  |     
|REPORT OF
  INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM                                                         |  | F-2 
|                                                                                                                  |  |     
|FINANCIAL
  STATEMENTS:                                                                                           |  |     
|                                                                                                                  |  |     
|Consolidated Balance Sheets at December 31,
  2005 and 2004                                                       |  | F-3 
|                                                                                                                  |  |     
|Consolidated Statements of Operations for
  the Years Ended December 31, 2005, 2004, and 2003                     |  | F-4 
|                                                                                                                  |  |     
|Consolidated Statements of Cash Flows for
  the Years Ended December 31, 2005, 2004, and 2003                     |  | F-5 
|                                                                                                                  |  |     
|Consolidated Statements of Stockholders
  Equity (Deficit) for the Years Ended December 31, 2005, 2004, and 2003 |  | F-6 
|                                                                                                                  |  |     
|Notes to Consolidated Financial
Statements                                                                        |  | F-8 

ITEM 8. CHANGES IN AND DISAGREEMENTS WITH
ACCOUNTANTS

We
have had no disagreements with our independent registered public accounting
firm, nor any change in our independent registered public accounting firm
during the last three years.

42

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ITEM 8A. CONTROLS AND PROCEDURES

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

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

ITEM 8B. OTHER INFORMATION

None.

43

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PART III

ITEM 9. DIRECTORS, EXECUTIVE OFFICERS PROMOTERS AND CONTROL PERSONS;
  COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT

The
following table sets forth information as of June 30, 2006 with respect to our
directors and executive officers. Our Bylaws provide that our board of
directors shall consist of at least one director, with the number of directors
being determined by resolution of our board of directors or by stockholders at
an annual or special meeting of the stockholders. We currently have eight
directors, each serving for a one-year term or until his or her successor is
duly elected and qualified. In accordance with our Bylaws, executive officers
are elected annually by our board of directors to serve for one-year terms or
until their respective successors are duly elected and qualified.

|                                          |  |     |  |                                                                               
|----------------------------------------- |  | --- |  | ------------------------------------------------------------------------------
|Name of Individual                        |  | Age |  | Position with Our Company                                                     
|                                          |  |     |  |                                                                               
|Edwin C.
  Quattlebaum, Ph.D. (1) (4) (9) |  | 55  |  | Chief
  Executive Officer, President and Co-Chairman of the Board of Directors
|                                          |  |     |  |                                                                               
|Thomas P.
  Russo                         |  | 56  |  | Executive
  Vice President, Treasurer and Chief Financial Officer             
|                                          |  |     |  |                                                                               
|Dennis
  Fantin, Ph.D., M.B.A.            |  | 51  |  | Executive
  Vice President, Chief of Operations                               
|                                          |  |     |  |                                                                               
|Clifton
  Baile, Ph.D. (1)                |  | 66  |  | Director                                                                      
|                                          |  |     |  |                                                                               
|John R.
  Block (2) (3) (8)               |  | 71  |  | Director                                                                      
|                                          |  |     |  |                                                                               
|William
  Buckner (2)                     |  | 52  |  | Director                                                                      
|                                          |  |     |  |                                                                               
|Victor M.
  Casini, Esquire (3)           |  | 44  |  | Director                                                                      
|                                          |  |     |  |                                                                               
|Peter Drake,
  Ph.D. (2) (4) (5)          |  | 52  |  | Director                                                                      
|                                          |  |     |  |                                                                               
|Peter A.
  Meyer (1) (2) (3) (4) (5) (6)  |  | 61  |  | Director and
  Co-Chairman of the Board of Directors                          
|                                          |  |     |  |                                                                               
|Howard L.
  Minigh (3) (4) (5) (7)        |  | 57  |  | Director                                                                      

---

|    |                                
|--- | -------------------------------
|(1) | Executive
  Committee member   
|(2) | Compensation
  Committee member
|(3) | Nominating
  Committee member  
|(4) | Finance
  Committee member     
|(5) | Audit
  Committee member       
|(6) | Audit
  Committee Chair        
|(7) | Finance Committee
  Chair      
|(8) | Nominating
  Committee Chair   
|(9) | Executive
  Committee Chair    
|    |                                

* The Compensation Committee Chair position is currently vacant.

The business
experience of each of our directors and executive officers is set forth below.

44

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Edwin C. Quattlebaum, Ph.D. joined us in January
1998 as Executive Vice President-Agriculture. In
February 1998, he became the President and in October 1998, he became a
director and our Chief Executive Officer. From May 2000 until December 2004,
Dr. Quattlebaum served as the Chairman of the Board. Since January 2005, he has
served as Co-Chairman of the Board. Dr. Quattlebaum has over 25 years of
agricultural industry experience, much of it within the biotechnology sector.
Prior executive experience includes positions with biosys, Inc. (President and
Chief Executive Officer), at the time the second largest producer of biological
pesticides in the United States, subsequently acquired by Thermo Trilogy Corp.;
Rhone-Poulenc S.A. (Global Business Manager of Foliar Insecticide Business);
and Union Carbide Agricultural Products Company (Global Director of
Development). He received a B.A. in Biology from Catawba College, Salisbury,
N.C. and M.S. and Ph.D. degrees in Entomology, with a specialization in Insect
Pathology, from Clemson University. Dr. Quattlebaum serves as a director of
InsectiGen; an Athens, Georgia based agricultural biotechnology company
developing crop protection products. Dr. Quattlebaum serves on the
Biotechnology Industry Organization Food and Agricultural Governing Board, the
Clemson University Research Foundation Board of Directors, the Maryland
Governors Workforce Investment Board, Bioscience Steering Committee, and the
South Carolina BIO Advisory Board.

Thomas P. Russo, M.B.A. has served as our Executive
Vice President, Treasurer and Chief
Financial Officer since June 2004. Mr. Russo has over 26 years of financial
executive experience. From February 2004 until joining the Company, Mr. Russo
was Chief Financial Officer of Chesapeake PERL, or C-PERL, a biotech company.
From March 2003 to January 2004 he was the Chief Financial Officer for Stem
Cell Preservation Technologies. From January 2002 to March 2003, Mr.
Russo was with AAI where he sourced funding for biotech and other emerging
growth companies. From November 2000 to January 2002, Mr. Russo served as the Chief
Financial Officer for EntreMed, Inc. From 1995 to 2000, he was a Principal with
Ernst & Young where he served as the Director, Infrastructure and Project Finance,
for E&Ys Capital Market Group, assisting CEOs and CFOs in securing
capital. Concurrent with his tenure at E&Y, Mr. Russo was the Chief
Financial Officer of Global Plasma Systems, Inc. (now Solena Group), which has
technology for alternative waste treatment. Prior to E&Y, Mr. Russo was
with Bechtel Enterprises raising capital for infrastructure projects. Prior
thereto, Mr. Russo spent 17 years with the World Bank and its private sector
affiliate, The International Finance Corporation, providing debt and equity
funding for projects worldwide. Mr. Russo holds a B.A. from Georgetown
University and an M.B.A. from George Washington University. Currently, he sits
on the steering committees for both the Maryland Tech Council Financial
Executive Forum and the Washington/Baltimore chapter of the Association of
Biotech Financial Officers, or ABFO.

Dennis Fantin, Ph.D., M.B.A. has served as our
Executive Vice President, Chief of Operations for MMI
Genomics since November 2005. He manages all aspects of our production
genotyping and diagnostic efforts. Prior to joining MMI, he was Director of
Business Development and World-Wide Sales and Marketing for the Celera AgGen
business group of the Applera Corporation from October 1998 to March 2002. Dr.
Fantin has more than 18 years of experience in the biotechnology industry, much
of it within the agricultural sector. From 1984-1998 Dr. Fantin held various
managerial positions of increasing responsibility within Applied Biosystems, a
leader in the development and marketing of automated, state-of-the-art systems
for life science research. In 1995, he was part of the Applied Biosystems team
that led to the creation of the agricultural subsidiary, PE AgGen. Dr. Fantin
led the development of molecular-based programs in the areas of animal
parentage and identity, animal diagnostics and health, plant breeding, crop
protection, and food processing and in 1997 he started AgGens Genomic
Programs. He successfully established a number of genomic programs for
agricultural gene discovery with leading international agricultural companies.
He received his Ph.D. in Biochemistry from the University of Western Ontario
and his M.B.A. from Wilfrid Laurier University.

45

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Clifton Baile, Ph.D. has served as
a director since November 1998. Dr. Baile has served as an Eminent Scholar in
Agricultural Biology at the University of Georgia. Dr. Baile has served on the
faculties of Harvard University and the University of Pennsylvania. In 2003 Dr.
Baile founded InsectiGen and is currently chairman and CEO of this agricultural
biotechnology company that develops crop protection products.

John R. Block has served as
a director since July 2000. Mr. Block served as Secretary of Agriculture under
President Reagan from 1981 to 1986. Prior to that, he was Secretary of
Agriculture for the State of Illinois. Mr. Block served as President of Food
Distributors International from 1986 through January 2003 (then known as the
National-American Wholesaler Grocers Association), a trade association
representing food distributors that supply independent grocers and food service
operations in the U.S., Canada and abroad. When the association became the Food
Marketing Institute in 2003, Mr. Block became Executive Vice President and
President of its Wholesale division until 2005. Currently, Mr. Block is a
Senior Policy Advisor in the firm of Olsson, Frank and Weeda, P.C. where he
specializes in agriculture, food and drug, and health care. Mr. Block serves on
the boards of several other corporations, including Hormel Foods Corp. and
Deere & Co., as well as nonprofit organizations.

William Bucknerhas served as
a director since September 2003. Mr. Buckner has been employed since 1987 by
Cargill, Inc., and in April 1998 was appointed President of Excel Corporation,
a leading processor of beef and pork in North America. Mr. Buckner was elected
Corporate Vice President of Cargill, Inc. in January 2000.

Victor M. Casini, Esquire has served as
a director since September 2005. Mr. Casini has served as Vice President and
General Counsel of Flynn Enterprises, a venture capital, hedging and consulting
firm, and since 1998 as Vice President and General Counsel of LKQ Corporation,
a public automotive replacements parts company. Mr. Casini is a graduate of the
University of Illinois with a B.S. in Finance and received his Juris Doctor in
1987 from Northwestern University.

Peter Drake, Ph.D. has served as
a director since October 2005. Dr. Drake has served as the Managing General
Partner of Mayflower Partners, a healthcare investment fund since June 2002,
and Vice President of Vector Securities International, Inc. since January 1997.
Prior roles include serving as Managing Director in the Equity Research
Department of Prudential Securities, co-founder of Vector Fund Management and
Deerfield Management and a partner and biotechnology analyst with Kidder,
Peabody.

Peter A. Meyerhas served as
a director since November 1998 and became the Companys Co-Chairman of the
Board in January 2005. Mr. Meyer is the President of PMI Consultants, a firm he
founded in 1982 to develop ventures, acquisition and divestiture opportunities,
and investment strategies for companies involved in the domestic and
international food, feed and fermentation industries.

Howard L. Minigh, Ph.D. has served as
a director since April 2004. Dr. Minigh has been a partner in Trishul Capital
Group, a private equity firm, since August 2003. From September 2000 through
June 2003, he was employed by DuPont, where he served as Group Vice President
of Agriculture and Nutrition.

AUDIT COMMITTEE FINANCIAL
EXPERT

The
Companys board of directors does not have an audit committee financial
expert, within the meaning of such phrase under applicable regulations of the
Securities and Exchange Commission, serving on its audit committee. The board
of directors believes that all members of its audit committee are financially
literate and experienced in business matters, and that one or more members of
the audit

46

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committee
are capable of (i) understanding generally accepted accounting principles
(GAAP) and financial statements, (ii) assessing the general application of
GAAP in connection with our accounting for estimates, accruals, reserves and
all other areas, (iii) analyzing and evaluating our financial statements, (iv)
understanding our internal controls and procedures for financial reporting; and
(v) understanding audit committee functions, all of which are attributes of an
audit committee financial expert. However, the board of directors believes that
there is not any audit committee member who has obtained these attributes
through the experience specified in the SECs definition of audit committee
financial expert. Further, like many small companies, it is difficult for the
Company to attract and retain board members who qualify as audit committee
financial experts, and competition for these individuals is significant. The
board believes that its current audit committee is able to fulfill its role under
SEC regulations despite not having a designated audit committee financial
expert.

ITEM 10. EXECUTIVE
COMPENSATION

The
following summary compensation table sets forth, for each of the last three
fiscal years, the aggregate compensation awarded to, earned by, or paid to the
Chief Executive Officer and to the three other executive officers at December
31, 2005 whose annual compensation exceeded $100,000 for the fiscal year ended
December 31, 2005 (collectively, the named executive officers):

Summary Compensation Table (1)

|                                          |  |               |      |            |                     |               |        |                                            |         |  |  |           | 
|----------------------------------------- |  | ------------- | ---- | ---------- | ------------------- | ------------- | ------ | ------------------------------------------ | ------- |  |  | --------- | 
|                                          |  |               |      |            | Annual Compensation |               | Awards |                                           
|                                          |  |               |      |            |                     |               |        |                                           
|Name and
  Principal Position             |  | Fiscal
  Year |      | Salary ($) |                     | Bonus ($) (2) |        | Securities
  Underlying
  Options/SARS (#) |        
|                                          |  |               |      |            |                     |               |        |                                            |        
|Edwin C.
  Quattlebaum, Ph.D.             |  |               | 2005 |            | $                   | 407,349       |        | $                                          |        |  |  | 575,000   | 
|Co-Chairman,
  President and              |  |               | 2004 |            | $                   | 421,912       |        | $                                          | 152,000 |  |  | 1,101,444 | 
|Chief
  Executive Officer (3)             |  |               | 2003 |            | $                   | 392,957       |        | $                                          | 107,250 |  |  |          | 
|                                          |  |               |      |            |                     |               |        |                                            |         |  |  |           | 
|Thomas P.
  Russo (4)                     |  |               | 2005 |            | $                   | 252,451       |        | $                                          |        |  |  |          | 
|Executive
  Vice President, Treasurer and |  |               | 2004 |            | $                   | 133,670       |        | $                                          |        |  |  | 401,250   | 
|Chief
  Financial Officer                 |  |               | 2003 |            | $                   |              |        | $                                          |        |  |  |          | 
|                                          |  |               |      |            |                     |               |        |                                            |         |  |  |           | 
|Dennis
  Fantin, Ph.D., M.B.A.            |  |               | 2005 |            | $                   | 189,323       |        | $                                          |        |  |  |          | 
|Executive
  Vice President, Chief of      |  |               | 2004 |            | $                   | 165,640       |        | $                                          | 29,456  |  |  | 63,500    | 
|Operations
  (5)                          |  |               | 2003 |            | $                   | 147,555       |        | $                                          | 36,336  |  |  | 7,000     | 

|    |                                                                                                                                                                                                                                                                           
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | There is no
  non-cash compensation in lieu of salary or bonus or other long-term
  compensation awards or payouts or any other compensation payable to the
  individuals on the table. There is no applicable defined benefit plan under
  which benefits are determined.
|    |                                                                                                                                                                                                                                                                           
|(2) | To date, all
  bonus amounts for the named executive officers have been granted in the
  period listed, but remain accrued and unpaid as of June 30, 2006.                                                                                                                

47

---



|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(3) | Dr.
  Quattlebaums bonus is determined based on his achieving and exceeding
  corporate goals including those related to corporate funding, financial,
  research and development, business development, government relations, and
  human resources. He declined a bonus awarded to him of $180,703 by the board
  of directors in 2005 for the achievement of goals in 2004. His 2005 salary
  includes $70,431 which is unpaid and accrued at December 31, 2005.
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|(4) | Mr. Russo
  joined us at his current position on June 1, 2004. His 2005 salary includes
  $33,654 which is unpaid and accrued at December 31, 2005.                                                                                                                                                                                                                                                                                                                 
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|(5) | Mr. Fantins
  2005 salary includes $24,904 which is unpaid and accrued at December 31,
  2005.                                                                                                                                                                                                                                                                                                                                                                     

Option Grants in Last Fiscal Year

The
following table contains information concerning the stock option grants made to
the named executive officers during the fiscal year ended December 31, 2005. No
stock appreciation rights were granted to these individuals during such year.

|                       |  |                                                       |  |                                                              |  |                                                                 |  |                   |  |  |  |  | 
|---------------------- |  | ----------------------------------------------------- |  | ------------------------------------------------------------ |  | --------------------------------------------------------------- |  | ----------------- |  |  |  |  | 
|Name                   |  | Number of
  Securities
  Underlying
  Options Granted |  | % of Total
  Options Granted
  to Employees
  In Fiscal Year |  | Exercise
  or Base Price
  ($ per share) (1)
  Individual Grant |  | Expiration
  Date | 
|                       |  |                                                       |  |                                                              |  |                                                                 |  |                   | 
|                      
|Edwin C.
  Quattlebaum |  | 575,000                                               |  | 48.97%                                                       |  | $ 4.00                                                          |  | 01/01/15          | 

|    |                                                                                                                                                                                                                        
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(1) | The exercise
  price may be paid in cash, in shares of common stock valued at the fair
  market value on the exercise date or through a cashless exercise procedure
  involving a same-day sale of the purchase shares.

Aggregate Option Exercises in Last Fiscal
Year and Fiscal Year-End Option Values

The
following table sets forth information concerning option exercises and option
holdings for the fiscal year ended December 31, 2005 with respect to the named
executive officers. No stock appreciation rights were exercised during such
year or were outstanding at the end of that year.

|                       |  |             |   |          |  |                                                                                |  |                                                                             |           |             |  |               |  |   |           |  |   |   | 
|---------------------- |  | ----------- | - | -------- |  | ------------------------------------------------------------------------------ |  | --------------------------------------------------------------------------- | --------- | ----------- |  | ------------- |  | - | --------- |  | - | - | 
|                       |  | Shares      |   |          |  | Number of Securities Underlying 
  Unexercised Options at 
  December 31, 2005 |  | Value of Unexercised 
  in-the-Money 
  Options at 
  December 31, 2005 (1) |          
|                       |  | Acquired on |   | Value    |  |                                                                                |  |                                                                             |          
|Name                   |  | Exercise    |   | Realized |  | Exercisable                                                                    |  | Unexercisable                                                               |           | Exercisable |  | Unexercisable | 
|                       |  |             |   |          |  |                                                                                |  |                                                                             |           |             |  |               | 
|Edwin C.
  Quattlebaum |  |             |  |          |  |                                                                               |  |                                                                             | 1,717,238 |             |  | 1,209,206     |  | $ | 2,174,150 |  | $ |  | 
|Thomas P.
  Russo      |  |             |  |          |  |                                                                               |  |                                                                             | 150,469   |             |  | 250,781       |  |   |          |  |   |  | 
|Dennis
  Fantin        |  |             |  |          |  |                                                                               |  |                                                                             | 101,156   |             |  | 39,344        |  |   |          |  |   |  | 
|                       |  |             |   |          |  |                                                                                |  |                                                                             |           |             |  |               |  |   |           |  |   |   | 
|                       |  |             |   |          |  |                                                                                |  |                                                                             | 1,968,863 |             |  | 1,499,331     |  | $ | 2,174,150 |  | $ |  | 
|                       |  |             |   |          |  |                                                                                |  |                                                                             |           |             |  |               |  |   |           |  |   |   | 

|    |                                                                                                                              
|--- | -----------------------------------------------------------------------------------------------------------------------------
|   
|(1) | Based on the
  estimated fair market value of our common stock at year-end less the exercise
  price payable for such shares.

48

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Board Composition

Our
business and affairs are managed under the direction of our board of directors.
The primary responsibilities of our board of directors are to provide
oversight, strategic guidance, counseling and direction to our management. Our
board of directors meets regularly on a quarterly basis and additionally as
required. Written board materials are distributed in advance of meetings as a
general rule, and our board of directors schedules meetings with and
presentations from members of our senior management on a regular basis.

Flynn Board Designee

Pursuant
to an investment in our Series G Convertible Preferred Stock by Kevin F. Flynn
and other investors, or the Investors, we appointed Victor Casini to our board
of directors, as approved by the Nominating Committee. The right of Mr. Flynn
to designate a member to our board terminates upon the earlier of (1) the date
on which the Investors no longer own 85% of our Series G Convertible Preferred
Stock or shares issuable upon the conversion of the Series G Convertible
Preferred Stock, or (2) the sale, conveyance, encumbrance, or other transfer of
all or substantially of our business or property or, under certain
circumstances, our merger with or into any other corporation.

Director Compensation

Our
non-employee directors do not receive cash compensation for their service on
the Board of Directors. As compensation for their services, directors receive
options to purchase 10,000 shares of common stock per year and certain additional
option grants if serving on or chairing a Board Committee. Directors are
reimbursed for expenses incurred in attending meetings. Directors are not
precluded from serving us in any other capacity and receiving compensation
therefor.

Board Committees

Our
board of directors has an Audit Committee, Compensation Committee, Executive
Committee, Finance Committee, and a Nominating Committee.

Our
Audit Committee oversees our financial reporting process on behalf of the board
of directors. Our Compensation Committee makes recommendations to the board
concerning salaries and incentive compensation for our officers and employees
and serves as an advisor for our stock option plans, executive searches and
grants single employee stock options up to a preordained limit. Our Executive
Committee oversees the management of our affairs between meetings of the Board
of Directors. Our Finance Committee monitors all material financial
transactions, contracts, and activities with investment banks and advisors. The
Finance committee also oversees fundraising on behalf of the Board. Our
Nominating Committee is responsible for identifying potential candidates to
serve on our Board.

Our
Audit Committee is responsible for the following functions:

| |   |                                                                                                         
| | - | --------------------------------------------------------------------------------------------------------
| |  | approve and
  retain the independent auditors to conduct the annual audit of our financial
  statements;
| |   |                                                                                                         
| |  | review the
  proposed scope and results of the audit;                                                   
| |   |                                                                                                         
| |  | review and
  pre-approve the independent auditors audit and non-audited services rendered;             
| |   |                                                                                                         
| |  | approve the
  audit fees to be paid;                                                                    

49

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| |                                                                          |                                                                                                                                                                                                                                                                                                                                                                                                                                   |                                                                                                                                                                       
| | ------------------------------------------------------------------------ | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |                                                                         | review
  accounting and financial controls with the independent auditors and our
  financial and accounting staff;                                                                                                                                                                                                                                                                                                               
| |                                                                          |                                                                                                                                                                                                                                                                                                                                                                                                                                  
| |                                                                         | review and
  approve transactions between us and our directors, officers and affiliates;                                                                                                                                                                                                                                                                                                                                         
| |                                                                          |                                                                                                                                                                                                                                                                                                                                                                                                                                  
| |                                                                         | recognize
  and prevent prohibited non-audit services;                                                                                                                                                                                                                                                                                                                                                                           
| |                                                                          |                                                                                                                                                                                                                                                                                                                                                                                                                                  
| |                                                                         | review,
  prior to filing, all annual reports to be filed with the SEC;                                                                                                                                                                                                                                                                                                                                                          
| |                                                                          |                                                                                                                                                                                                                                                                                                                                                                                                                                  
| |                                                                         | establish
  procedures for complaints received by us regarding accounting matters; and                                                                                                                                                                                                                                                                                                                                           
| |                                                                          |                                                                                                                                                                                                                                                                                                                                                                                                                                  
| |                                                                         | oversee
  internal audit functions.                                                                                                                                                                                                                                                                                                                                                                                              
| |                                                                          |                                                                                                                                                                                                                                                                                                                                                                                                                                  
| | Our
  Compensation Committee is responsible for the following functions:
| |                                                                         
| |                                                                         | reviewing
  and recommending policy relating to compensation and benefits of our officers
  and employees, including reviewing and approving corporate goals and
  objectives relevant to compensation of our chief executive officer and other
  senior officers, evaluating the performance of these officers in light of
  those goals and objectives, and setting compensation of these officers based
  on such evaluations;
| |                                                                          |                                                                                                                                                                                                                                                                                                                                                                                                                                  
| |                                                                         | reviewing
  and approving our benefit plans and the issuance of stock options and other
  awards under our stock plans;                                                                                                                                                                                                                                                                                                          
| |                                                                          |                                                                                                                                                                                                                                                                                                                                                                                                                                  
| |                                                                         | reviewing
  and establishing appropriate insurance coverage for our directors and
  executive officers;                                                                                                                                                                                                                                                                                                                          
| |                                                                          |                                                                                                                                                                                                                                                                                                                                                                                                                                  
| |                                                                         | advising
  with respect to searches for executive officers and assisting in interviews;                                                                                                                                                                                                                                                                                                                                          
| |                                                                          |                                                                                                                                                                                                                                                                                                                                                                                                                                  
| |                                                                         | recommending
  the type and amount of compensation to be paid or awarded to members of our
  board of directors, including consulting, retainer, meeting, committee and
  committee chair fees and stock option grants or awards; and                                                                                                                                                                                            
| |                                                                          |                                                                                                                                                                                                                                                                                                                                                                                                                                  
| |                                                                         | reviewing
  and approving the terms of any employment agreements, severance arrangements,
  change-of-control protections and any other compensatory arrangements for our
  executive officers.                                                                                                                                                                                                                                  
| |                                                                          |                                                                                                                                                                                                                                                                                                                                                                                                                                  
| | Our
  Executive Committee is responsible for the following functions:   
| |                                                                         
| |                                                                         | exercising
  any and all of the powers of the Board of Directors (unless expressly
  prohibited by the Delaware General Corporation Law or otherwise delegated to
  another committee of the Board of Directors), except that the Executive
  Committee may not:                                                                                                                                                                 
| |                                                                          |                                                                                                                                                                                                                                                                                                                                                                                                                                  
| |                                                                          |                                                                                                                                                                                                                                                                                                                                                                                                                                  | amend our
  charter;                                                                                                                                                  
| |                                                                          |                                                                                                                                                                                                                                                                                                                                                                                                                                  | amend our
  By-laws;                                                                                                                                                  
| |                                                                          |                                                                                                                                                                                                                                                                                                                                                                                                                                  | authorize
  any action that also requires approval by stockholders;                                                                                                   
| |                                                                          |                                                                                                                                                                                                                                                                                                                                                                                                                                  | authorize
  the payment of dividends; or                                                                                                                              
| |                                                                          |                                                                                                                                                                                                                                                                                                                                                                                                                                  | approve the
  issuance of any common or preferred stock (although, in accordance with the
  stock option plans and prior resolutions of the Board of Directors, it may

50

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| |  |  |                                                                                                                                       
| |  |  | --------------------------------------------------------------------------------------------------------------------------------------
| |  |  | authorize
  the grant of stock options and determine the appropriate exercise price for
  incentive stock options then being awarded).

Our
Finance Committee is responsible for the following functions:

| |                                                                        |                                                                                                                                                                
| | ---------------------------------------------------------------------- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------
| |                                                                       | interviewing,
  selecting and monitoring the selection of Investment advisors                                                                                  
| |                                                                        |                                                                                                                                                                
| |                                                                       | managing
  offering processes                                                                                                                                  
| |                                                                        |                                                                                                                                                                
| |                                                                       | overseeing
  capital raising on behalf of the Board of Directors.                                                                                              
| |                                                                        |                                                                                                                                                                
| | Our
  Nominating Committee is responsible for the following functions:
| |                                                                        |                                                                                                                                                                
| |                                                                       | making
  recommendations to the Board of Directors regarding the size and composition
  of the Board of Directors;                                             
| |                                                                        |                                                                                                                                                                
| |                                                                       | establishing
  procedures for the nomination process;                                                                                                          
| |                                                                        |                                                                                                                                                                
| |                                                                       | screening
  and recommending candidates for election to the Board of Directors;                                                                                
| |                                                                        |                                                                                                                                                                
| |                                                                       | reviewing
  with the Board of Directors from time to time the appropriate skills and
  characteristics required of Board members; and                          
| |                                                                        |                                                                                                                                                                
| |                                                                       | establishing
  and administering a periodic assessment procedure relating to the performance
  of the Board of Directors as a whole and its individual members.

Compensation Committee Interlocks and Insider
Participation

Our
Compensation Committee is comprised of four members, John R. Block, William
Buckner, Peter Drake and Peter A. Meyer. No member of our Compensation
Committee has at any time been an officer or employee of ours, or our
subsidiary. No interlocking relationship exists between our board of directors
or compensation committee and the board of directors or Compensation Committee
of any other company, nor has any interlocking relationship existed in the
past.

Code of Ethics

We
have adopted a Code of Business Conduct and Ethics, or the Code, which applies
to our directors, officers and employees, including our Chief Executive Officer
and Chief Financial Officer (our principal executive officer and principal
financial and accounting officer, respectively). The Code is filed as Exhibit
14.1 to this Form 10-SB. A written copy of the Code will be provided upon
request at no charge by writing to our Chief Financial Officer, Mr. Thomas
Prescott Russo, at MetaMorphix, Inc., 8000 Virginia Manor Road, Suite 140,
Beltsville, Maryland 20705.

Employment Contracts, Termination of
Employment and Change-in-Control Arrangements

We
are a party to an employment agreement on January 1, 1998, or the Employment
Agreement, with Edwin C. Quattlebaum. The Employment Agreement provided for an
annual base salary of $200,000, which has been reviewed and increased annually
by the Board of Directors and is currently $400,000. Dr. Quattlebaum is
currently entitled to a bonus of up to 60% of his annual base salary upon achieving
certain performance-based goals.

51

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The
Employment Agreement provided for the issuance of incentive stock options to
purchase up to 233,100 shares of Common Stock pursuant to our 1996 Employees
Incentive Stock Option Plan with 166,500 shares granted outright with the
remainder conditional upon meeting milestones. As a result of successive
re-examinations of Dr. Quattlebaums compensation by the Board of Directors,
additional awards of options were made in 1998, 1999, 2000, 2001, 2002, 2004,
and 2005 bringing the total to 2,679,332. The options vest over a period of
four years from their respective grant dates. On August 3, 2001, the Board of
Directors granted Dr. Quattlebaum 247,112 shares of non-qualified stock options
vesting over a period of four years.

The
Employment Agreement provides that Dr. Quattlebaum may be terminated at any
time, with or without cause. The severance terms of Dr. Quattlebaums
Employment Agreement have been overridden by the adoption of the Salary Continuation
Program by the Board of Directors at their June 27, 2006 Board Meeting. This
program would guarantee Dr. Quattlebaum, as an officer, six months of severance
and COBRA payments, and thereafter, would be need-based for another six months.
Severance is also due upon our sale or merger of us unless the successor entity
assumes our obligations under the Employment Agreement. This agreement has no
expiration date.

We
have entered into an employment agreement with Mr. Russo providing for base annual
salaries in the amount of $250,000. The agreement, as amended by Board
resolution, contains severance provisions that have been overridden by the June
27, 2006 adoption of the Salary Continuation Program. Mr. Russo has the same
officer severance program as Dr. Quattlebaum, outlined above. This agreement
has no expiration date.

EMPLOYEE STOCK OPTION PLANS

Employees
Incentive Stock Option Plan

In
November 1996, our Board of Directors adopted our 1996 Employees Incentive
Stock Option Plan, or the Employees Plan, which was approved by security
holders, pursuant to which 8,000,000 shares of common stock are reserved for
issuance upon exercise of stock options or stock appreciation rights. The
purpose of the Employees Plan is to provide additional incentive to employees
by facilitating their purchase of common stock. The Employees Plan provides for
a term of 10 years from the date of its adoption by the Board of Directors,
after which no awards may be made, unless the Plan is earlier terminated by our
Board of Directors. Options granted under the Employees Plan are either
incentive stock options (i.e. options that afford favorable tax treatment to
recipients upon compliance with certain restrictions pursuant to Section 422 of
the Internal Revenue Code and that do not result in tax deductions to us unless
participants fail to comply with Section 422 of the Internal Revenue Code) or
options that do not so qualify.

The
Employees Plan is administered by the Compensation Committee of the Board of
Directors, or the Compensation Committee. The Compensation Committee selects
the employees to whom awards are to be granted, the number of shares to be
subject to such awards, and the terms and conditions of such awards (provided
that any discretion exercised by the Compensation Committee must be consistent
with resolutions adopted by the Board of Directors and the terms of the
Employees Plan).

As
of June 30, 2006, options to purchase an aggregate of 6,158,927 shares were
outstanding under the Employees Plan.

52

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Non-Qualified
Plan

In
December 1995, our Board of Directors adopted the Amended and Restated 1995
Non-Qualified Officer, Director, Employee, and Consultant Stock Option Plan, or
the Non-Qualified Plan, pursuant to which 3,050,000 shares of Common Stock are
reserved for issuance upon exercise of stock options or stock appreciation
rights. Options granted under the Non-Qualified Plan are not incentive stock
options. The purpose of the Non-Qualified Plan is to provide additional
incentive to officers, directors, employees and consultants by facilitating
their purchase of Common Stock. The Non-Qualified Plan provides for a term of
10 years from the date of its adoption or amendment by the Board of Directors,
after which no awards may be made, unless the Non-Qualified Plan is earlier
terminated by the Board of Directors.

The
Non-Qualified Plan is administered by the Board of Directors. The Board of
Directors selects the participants to whom awards are to be granted, the number
of shares to be subject to such awards, and the terms and conditions of such
awards (provided that any discretion exercised by the Board of Directors is
consistent with the terms of the Non-Qualified Plan). The Non-Qualified Plan
requires that all grants of options under the Option Plan vest at a rate of 25%
per year beginning on the first anniversary of the date of grant (and
thereafter such options shall vest monthly at a rate of 2.08% of the balance).
Options granted to date under the Non-Qualified Plan, unless sooner terminated
or expired in accordance with the terms of the Non-Qualified Plan, expire ten
years after the date of grant.

As
of June 30, 2006, options to purchase an aggregate of 3,113,573 shares were
outstanding under the Non-Qualified Plan.

401(k) Plan

Effective
January 1, 1998, we adopted a defined contribution 401(k) savings plan covering
all of our eligible, full-time employees. Participants may elect to defer a
percentage of their annual pre-tax compensation to the 401(k) plan, subject to
defined limitations.

Indemnification of directors and executive
officers and limitation on liability

Our
bylaws provide that we shall indemnify our directors and officers to the
fullest extent permitted by Delaware law, provided that, with respect to
proceedings initiated by our officers and directors, we are only required to
indemnify these persons if the proceeding was authorized by our board of
directors. Our bylaws permit us, by action of our board of directors, to
indemnify our other employees and agents to the same extent as we are required
to indemnify our officers and directors. We are also empowered under our bylaws
to enter into indemnification agreements with our directors, officers,
employees or agents and to purchase insurance on behalf of any of our
directors, officers, employees or agents whether or not we are required or
permitted to indemnify such persons under Delaware law.

In
addition, our bylaws provide that our directors will not be personally liable
to us or our stockholders for monetary damages for any breach of fiduciary duty
as a director, except for liability:

| |   |                                                                                                                   
| | - | ------------------------------------------------------------------------------------------------------------------
| |  | for any
  breach of the directors duty of loyalty to us or our stockholders;                                     
| |   |                                                                                                                   
| |  | for acts or
  omissions not in good faith or which involve intentional misconduct or a
  knowing violation of law;
| |   |                                                                                                                   
| |  | under
  Section 174 of the Delaware General Corporation Law; or                                                   

53

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| |   |                                                                                    
| | - | -----------------------------------------------------------------------------------
| |  | for any
  transaction from which the director derives an improper personal benefit.

There
is no pending litigation or proceeding involving any of our directors or
officers for which indemnification is being sought, nor are we aware of any
pending or threatened litigation that may result in claims for indemnification
by any director or officer.

Compliance with Section 16(a) of the Exchange
Act

After
a review of the forms submitted during 2005, the following forms were not filed in a timely manner:
a Form 3 by Stephen Bates, and a Form 4 by each of Howard Minigh, John Block, and Fergus Reid.

54

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|         |                                                                                                  
|-------- | -------------------------------------------------------------------------------------------------
|ITEM 11. | SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
  RELATED STOCKHOLDERS MATTERS

The
table below sets forth, as of August 31, 2006, certain information with respect
to the beneficial ownership of our common stock by:

|  |                                                                                                                                
|- | -------------------------------------------------------------------------------------------------------------------------------
| | each person known by us to
  beneficially own more than 5% of our common stock or any class or series of
  our preferred stock;
|  |                                                                                                                                
| | each of our directors and
  named executive officers; and                                                                      
|  |                                                                                                                                
| | all directors and
  executive officers as a group.                                                                             

Unless
otherwise indicated, the stockholders listed in the table have sole voting and
investment power with respect to the shares indicated.

|                                                                     |  |                                 |           |                                                |  |                                 |   |  |     |  
|-------------------------------------------------------------------- |  | ------------------------------- | --------- | ---------------------------------------------- |  | ------------------------------- | - |  | --- | -
|Name and
  Address of Beneficial Owner(1)                            |  | Shares Beneficially
  Owned (2) |           | Percentage of
  Shares
  BeneficiallyOwned (3) |  | Percentage of
  VotingPower (4) |  
|                                                                     |  |                                 |           |                                                |  |                                 |  
|Edwin C.
  Quattlebaum, Ph.D. (5)                                    |  |                                 | 2,245,039 |                                                |  | 9.7                             | % |  | 5.8 | %
|                                                                     |  |                                 |           |                                                |  |                                 |   |  |     |  
|Thomas P.
  Russo (6)                                                |  |                                 | 234,063   |                                                |  | 1.1                             | % |  | *   |  
|                                                                     |  |                                 |           |                                                |  |                                 |   |  |     |  
|Dennis
  Fantin(6)                                                   |  |                                 | 120,219   |                                                |  | *                               |   |  | *   |  
|                                                                     |  |                                 |           |                                                |  |                                 |   |  |     |  
|Clifton
  Baile, Ph.D. (7)                                           |  |                                 | 268,816   |                                                |  | 1.3                             | % |  | *   |  
|                                                                     |  |                                 |           |                                                |  |                                 |   |  |     |  
|John R. Block
  (8)                                                  |  |                                 | 166,047   |                                                |  | *                               |   |  | *   |  
|                                                                     |  |                                 |           |                                                |  |                                 |   |  |     |  
|William
  Buckner (6)                                                |  |                                 | 75,000    |                                                |  | *                               |   |  | *   |  
|                                                                     |  |                                 |           |                                                |  |                                 |   |  |     |  
|Victor M.
  Casini (9)                                               |  |                                 | 18,709    |                                                |  | *                               |   |  | *   |  
|                                                                     |  |                                 |           |                                                |  |                                 |   |  |     |  
|Peter F.
  Drake (10)                                                |  |                                 | 40,293    |                                                |  | *                               |   |  | *   |  
|                                                                     |  |                                 |           |                                                |  |                                 |   |  |     |  
|Peter A.
  Meyer (11)                                                |  |                                 | 711,797   |                                                |  | 3.3                             | % |  | 1.9 | %
|                                                                     |  |                                 |           |                                                |  |                                 |   |  |     |  
|Howard
  Minigh (12)                                                 |  |                                 | 107,276   |                                                |  | *                               |   |  | *   |  
|                                                                     |  |                                 |           |                                                |  |                                 |   |  |     |  
|All
  executive officers and directors as a group
  (10 persons)     |  |                                 | 3,987,259 |                                                |  | 16.2                            | % |  | 9.9 | %
|                                                                     |  |                                 |           |                                                |  |                                 |   |  |     |  
|Samuel R.
  Dunlap, Jr. (13)                                         |  |                                 | 1,314,770 |                                                |  | 5.9                             | % |  | 3.5 | %
|                                                                     |  |                                 |           |                                                |  |                                 |   |  |     |  
|Raynemark
  Investments LLC (14)3883 N. 57th StreetBoulder, CO 80301 |  |                                 | 1,598,063 |                                                |  | 7.5                             | % |  | 4.3 | %
|                                                                     |  |                                 |           |                                                |  |                                 |   |  |     |  
|Paul Moore
  (15)269 Market SquareLake Forest, IL 60045              |  |                                 | 1,549,402 |                                                |  | 7.4                             | % |  | 4.2 | %

55

---



|                                                                                         |  |                                 |           |                                                |  |                                  |   |  |      |  
|---------------------------------------------------------------------------------------- |  | ------------------------------- | --------- | ---------------------------------------------- |  | -------------------------------- | - |  | ---- | -
|Name and
  Address of Beneficial Owner(1)                                                |  | Shares Beneficially
  Owned (2) |           | Percentage of
  Shares
  BeneficiallyOwned (3) |  | Percentage of
  Voting Power (4) |  
|                                                                                         |  |                                 |           |                                                |  |                                  |  
|Theodore
  Swindells (16)11400 S.E. 8th Street, Suite 420Bellevue, WA 98004              |  |                                 | 1,203,139 |                                                |  | 5.7                              | % |  | 3.2  | %
|                                                                                         |  |                                 |           |                                                |  |                                  |   |  |      |  
|Biostar,
  Inc. (17)Suite 860 Saskatoon Square410 22nd Street East
Saskatoon, SK S7K 5T6 |  |                                 | 1,359,733 |                                                |  | 6.5                              | % |  | 3.7  | %
|                                                                                         |  |                                 |           |                                                |  |                                  |   |  |      |  
|New
  Frontiers Capital LLC (18)1111 S. Willis Ave.Wheeling, IL 60090                    |  |                                 | 8,006,266 |                                                |  | 27.7                             | % |  | 21.1 | %
|                                                                                         |  |                                 |           |                                                |  |                                  |   |  |      |  
|Applera
  Corporation (19)301 Merritt 7Norwalk, CT 06856-5435                            |  |                                 | 2,000,001 |                                                |  | 8.7                              | % |  | 5.4  | %
|                                                                                         |  |                                 |           |                                                |  |                                  |   |  |      |  
|Kevin F.
  Flynn (20)120 N. LaSalle Street, Suite 3300Chicago, IL 60602                  |  |                                 | 1,936,472 |                                                |  | 8.8                              | % |  | 5.2  | %

---

* Less than
1%.


|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Unless
  otherwise indicated, the address for each person or entity is MetaMorphix,
  Inc. 8000 Virginia Manor Road, Suite 140, Beltsville, Maryland, 20705.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|(2) | In computing
  the number of shares beneficially owned by a person and the percentage
  ownership of a person, shares of our common stock underlying options,
  warrants, convertible preferred stock and convertible notes held by that
  person that are currently exercisable or exercisable within 60 days of August
  31, 2006 are deemed outstanding. Such shares, however, are not deemed
  outstanding for purposes of computing the percentage ownership of each other
  person. Except as indicated in the footnotes to this table and pursuant to
  applicable community property laws, the persons named in the table have sole
  voting and investment power with respect to all shares of common stock.
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|(3) | The
  percentage of shares outstanding of 20,883,149 has been calculated based on
  the number of shares of our common stock outstanding.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|(4) | In computing
  the voting power held by a person, shares of our common stock underlying
  options, warrants, convertible preferred stock and convertible notes held by
  that person that are currently                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              

56

---



|     |                                                                                                                                                                                                                                                                                              
|---- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|     | exercisable
  or exercisable within 60 days of August 31, 2006 are deemed outstanding.
  Since shares of our convertible preferred stock vote together with our common
  on an as converted basis, the total voting shares outstanding are 36,750,320.                                       
|     |                                                                                                                                                                                                                                                                                              
|(5)  | Includes
  2,239,935 shares underlying stock options and 5,104 shares underlying Series
  C Convertible Preferred Stock.                                                                                                                                                                     
|     |                                                                                                                                                                                                                                                                                              
|(6)  | Represents
  shares underlying stock options only. See footnote (2) above.                                                                                                                                                                                                                   
|     |                                                                                                                                                                                                                                                                                              
|(7)  | Includes
  29,040 actual shares of common stock held, 220,090 shares underlying stock
  options and 17,686 shares underlying Series C Convertible Preferred Stock.                                                                                                                           
|     |                                                                                                                                                                                                                                                                                              
|(8)  | Includes 625
  actual shares of common stock held and 165,422 shares underlying stock options.                                                                                                                                                                                               
|     |                                                                                                                                                                                                                                                                                              
|(9)  | Includes
  15,000 shares underlying stock options and 3,709 shares underlying warrants.                                                                                                                                                                                                      
|     |                                                                                                                                                                                                                                                                                              
|(10) | Includes
  2,523 actual shares of common stock held, 12,500 shares underlying stock
  options and 25,270 shares underlying the conversion of 11,725 shares of
  Series G Convertible Preferred Stock.                                                                                        
|     |                                                                                                                                                                                                                                                                                              
|(11) | Includes
  243,250 actual shares of common stock held, 247,714 shares underlying stock
  options and 220,833 shares underlying convertible debt.                                                                                                                                             
|     |                                                                                                                                                                                                                                                                                              
|(12) | Includes
  59,164 shares underlying stock options, 17,842 shares underlying warrants,
  25,270 shares underlying the conversion of 11,725 shares of Series G
  Convertible Preferred Stock, and 5,000 shares underlying convertible debt.                                                    
|     |                                                                                                                                                                                                                                                                                              
|(13) | Includes
  780,000 shares underlying stock options and 534,770 shares underlying
  warrants. Mr. Dunlap is one of our former directors.                                                                                                                                                      
|     |                                                                                                                                                                                                                                                                                              
|(14) | Includes
  1,155,094 actual shares of common stock and 442,969 shares underlying
  convertible debt. Mr. Mark Crossen is a principal of Raynemark Investments
  LLC.                                                                                                                         
|     |                                                                                                                                                                                                                                                                                              
|(15) | Includes
  1,517,761 actual shares of common stock and 31,641 shares underlying
  convertible debt.                                                                                                                                                                                          
|     |                                                                                                                                                                                                                                                                                              
|(16) | Includes
  854,037 actual shares of common stock, 245,000 shares underlying warrants,
  and 104,102 shares underlying convertible debt.                                                                                                                                                      
|     |                                                                                                                                                                                                                                                                                              
|(17) | Represents
  actual shares of common stock. Mr. Todd Lahti represents Biostar, Inc. and
  has voting and dispositive control over shares held.                                                                                                                                               
|     |                                                                                                                                                                                                                                                                                              
|(18) | Includes
  477,500 shares underlying warrants, 778,767 shares underlying convertible
  debt and 6,749,999 shares underlying the conversion of 1,542,857 shares of
  Series E Convertible Preferred Stock.                                                                                    
|     |                                                                                                                                                                                                                                                                                              
|(19) | Represents
  shares issuable upon conversion of 457,143 shares of Series E Convertible
  Preferred Stock. See Description of Securities. Applera Corporation is a
  publicly traded company, and the corporation itself has voting and depository
  control over the preferred shares held.
|     |                                                                                                                                                                                                                                                                                              
|(20) | Includes
  786,282 actual shares of common stock held, 236,839 shares underlying
  warrants, 783,351 shares underlying the conversion of 363,475 shares of Series
  G Convertible Preferred                                                                                                  

57

---



| |                                                                                                                  
| | -----------------------------------------------------------------------------------------------------------------
| | Stock, and
  130,000 shares underlying convertible debt. Represents shares held directly
  and by family members.

ITEM 12. CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS

Management Loans

In
January, March and June, 2006, Peter Meyer, our Co-Chairman, made short-term
working capital loans to us in the amounts of $350,000, $400,000 and $200,000,
respectively. The $350,000 note was repaid in full in January 2006. At June 30,
2006, we had $600,000 due on these loans, with $13,205 of accrued and unpaid
interest.

In
February and March 2005, Peter Meyer, our Co-Chairman, made short-term working
capital loans to us in the aggregate principal amount of $300,000. These loans
are evidenced by a note which bears interest at the rate of 12% per annum and
is due on the earlier of (i) March 31, 2006 and, (ii) our receipt of a certain
milestone payment or proceeds of at least $1,000,000 from any debt or equity
financing. At June 30, 2006, we had $300,000 due on these loans, with $47,885
of accrued and unpaid interest.

In
February and March 2005, Clifton Baile and Howard Minigh, members of our board
of directors, and Fergus Reid, a former member of our board of directors, made
short-term working capital loans to us in the aggregate principal amount of
$70,000. These loans are evidenced by notes which bear interest at the rate of
10% per annum and which were due on April 15, 2005. These notes were not repaid
on April 15, 2005 and now bear interest at 15% per annum. These notes are due
upon our receipt of proceeds of at least $1,000,000 from an equity financing or
any milestone payment. At June 30, 2006, we had $70,000 due on these loans,
with $13,830 of accrued and unpaid interest.

In
August 2004, Howard Minigh, a member of our board of directors, purchased
11,725 shares of our Series G Convertible Preferred Stock and warrants to
purchase 12,342 shares of common stock for a purchase price of $6.00 per share
and warrants to purchase 2,500 shares of common stock for a purchase price of
$4.00 per share.

In
February 2004, Fergus Reid, a former member of our board of directors,
purchased $100,000 principal amount of our 12.5% Convertible Secured Promissory
Notes. In February 2005, Mr. Reid was issued an additional note with a
principal amount of $12,500 to satisfy the first years interest. At December
31, 2005, accrued but unpaid interest on these notes was $12,175. In February
2006, Mr. Reid was issued two additional notes with principal amounts of $12,500
and $1,563 to satisfy interest due. At June 30, 2006, we had $126,563 due on
these notes.

During
May and June 2003 we received working capital loans from Peter Meyer and
Clifton Baile, both members of our board of directors, totaling $560,000, which
loans bear interest at 12% per annum. We had outstanding amounts due on these
loans of $250,000 at June 30, 2006 and December 31, 2005 and 2004. We repaid
$280,000 plus accrued interest in November 2003 and $30,000 plus accrued
interest in February 2004. In connection with these loans, we issued warrants
to purchase 224,000 shares of common stock. On April 21, 2005, these warrants
were converted into 123,200 shares of common stock. In 2004 and 2005, we issued
additional warrants to purchase 296,000 and 40,000 shares of common stock,
respectively, to these lenders as a penalty provision and the interest rate was
increased to 18% per annum. On April 21, 2005, these penalty warrants were
converted into 147,840 shares of common stock.

58

---



During
the period of February through March 2002 we received working capital loans
from Peter Meyer and John Block, both members of our board of directors,
totaling $75,000, which loans bear interest at 20% per annum and are payable on
demand. We had outstanding amounts due on these loans of $75,000 at June 30,
2006, December 31, 2005 and 2004.

During
the period August 2000 through March 2001, Dr. Quattlebaum, our Co-Chairman and
Chief Executive Officer, made working capital loans to us totaling $264,000. At
June 30, 2006, December 31, 2005 and 2004, we had $264,000 due on these loans.
These loans are evidenced by notes bearing interest at prime plus 1% and are
due on demand.

59

---



CONSOLIDATED FINANCIAL STATEMENTS AND NOTES

|                                                                                                                  |     
|----------------------------------------------------------------------------------------------------------------- | ----
|TABLE OF CONTENTS                                                                                                 |     
|                                                                                                                  |     
|                                                                                                                  |     
|                                                                                                                  | Page
|                                                                                                                  |     
|REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM                                                           | F-2 
|                                                                                                                  |     
|FINANCIAL
  STATEMENTS:                                                                                           |     
|                                                                                                                  |     
|Consolidated Balance Sheets at
December 31,
  2005 and 2004                                                       | F-3 
|                                                                                                                  |     
|Consolidated Statements of
Operations for
  the Years Ended December 31, 2005, 2004, and 2003                     | F-4 
|                                                                                                                  |     
|Consolidated Statements of Cash
Flows for
  the Years Ended December 31, 2005, 2004, and 2003                     | F-5 
|                                                                                                                  |     
|Consolidated Statements of
Stockholders
  Equity (Deficit) for the Years Ended December 31, 2005, 2004, and 2003 | F-6 
|                                                                                                                  |     
|Notes to Consolidated Financial
Statements                                                                        | F-8 

F-1

---



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING
FIRM

To the Board of Directors and Shareholders of
MetaMorphix, Inc.
Beltsville, Maryland

We have audited the accompanying consolidated balance
sheets of MetaMorphix, Inc. and subsidiaries (the Company) as of December 31,
2005 and 2004, and the related consolidated statements of operations,
stockholders equity (deficit), and cash flows for each of the three years in
the period ended December 31, 2005. These financial statements are the
responsibility of the Companys management. Our responsibility is to express an
opinion on the financial statements based on our audits.

We conducted our audits in accordance with the
standards of the Public Company Accounting Oversight Board (United States).
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. The Company is not required to have, nor were we engaged to
perform, an audit of its internal control over financial reporting. Our audits
included consideration of internal control over financial reporting as a basis
for designing audit procedures that are appropriate in the circumstances, but
not for the purpose of expressing an opinion on the effectiveness of the
Companys internal control over financial reporting. Accordingly, we express no
such opinion. An audit also includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation. We believe
that our audits provide a reasonable basis for our opinion.

In our opinion, such consolidated financial statements
present fairly, in all material respects, the financial position of
MetaMorphix, Inc. and subsidiaries as of December 31, 2005 and 2004, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 2005, in conformity with accounting principles
generally accepted in the United States of America.

The accompanying financial statements have been
prepared assuming that the Company will continue as a going concern. As
discussed in Note 1 to the financial statements, the Companys recurring losses
and negative cash flows from operations, working capital deficiency and
significant accumulated deficit raise substantial doubt about its ability to
continue as a going concern. Managements plans concerning these matters are
also described in Note 1. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.

DELOITTE & TOUCHE LLP

McLean, Virginia
October 2, 2006

F-2

---



METAMORPHIX,
INC. AND SUBSIDIARIES

CONSOLIDATED
BALANCE SHEETS

|                                                                                                                                                                                                                      |  |                     |              |                     |   |              |  
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------------- | ------------ | ------------------- | - | ------------ | -
|                                                                                                                                                                                                                      |  | December
  31, 2005 |              | December
  31, 2004 |  
|                                                                                                                                                                                                                      |  |                     |              |                     |  
|                                                                                                                                                                                                                      |  |                     |              |                     |   |              |  
|ASSETS                                                                                                                                                                                                                |  |                     |              |                     |   |              |  
|CURRENT ASSETS:                                                                                                                                                                                                       |  |                     |              |                     |   |              |  
|Cash and cash equivalents                                                                                                                                                                                             |  | $                   | 1,382,225    |                     | $ | 507,973      |  
|Accounts receivable                                                                                                                                                                                                   |  |                     | 253,827      |                     |   | 242,857      |  
|Prepaid expenses and other current assets                                                                                                                                                                             |  |                     | 131,028      |                     |   | 103,122      |  
|                                                                                                                                                                                                                      |  |                     |              |                     |   |              |  
|Total current assets                                                                                                                                                                                                  |  |                     | 1,767,080    |                     |   | 853,952      |  
|                                                                                                                                                                                                                      |  |                     |              |                     |   |              |  
|PROPERTY AND EQUIPMENTNet                                                                                                                                                                                            |  |                     | 2,076,656    |                     |   | 2,081,669    |  
|GOODWILL                                                                                                                                                                                                              |  |                     | 3,739,870    |                     |   | 3,739,870    |  
|INTELLECTUAL PROPERTY RIGHTS                                                                                                                                                                                          |  |                     |             |                     |   | 2,126,003    |  
|LEASE SECURITY DEPOSITS                                                                                                                                                                                               |  |                     | 204,494      |                     |   | 207,263      |  
|DEFERRED DEBT ISSUE COSTS                                                                                                                                                                                             |  |                     | 5,396,050    |                     |   | 6,480,080    |  
|                                                                                                                                                                                                                      |  |                     |              |                     |   |              |  
|                                                                                                                                                                                                                      |  |                     | 11,417,070   |                     |   | 14,634,885   |  
|                                                                                                                                                                                                                      |  |                     |              |                     |   |              |  
|TOTAL ASSETS                                                                                                                                                                                                          |  | $                   | 13,184,150   |                     | $ | 15,488,837   |  
|                                                                                                                                                                                                                      |  |                     |              |                     |   |              |  
|                                                                                                                                                                                                                      |  |                     |              |                     |   |              |  
|LIABILITIES AND STOCKHOLDERS EQUITY
(DEFICIT)                                                                                                                                                                        |  |                     |              |                     |   |              |  
|CURRENT LIABILITIES:                                                                                                                                                                                                  |  |                     |              |                     |   |              |  
|Accounts payable and accrued expenses                                                                                                                                                                                 |  | $                   | 9,042,468    |                     | $ | 4,812,341    |  
|Accrued compensation                                                                                                                                                                                                  |  |                     | 5,766,847    |                     |   | 4,671,064    |  
|Accrued dividends                                                                                                                                                                                                     |  |                     | 1,877,160    |                     |   | 490,222      |  
|Short-term notes payable                                                                                                                                                                                              |  |                     | 2,489,004    |                     |   | 1,373,824    |  
|Notes payable to officers and directors                                                                                                                                                                               |  |                     | 1,584,498    |                     |   | 1,214,498    |  
|Deferred revenue                                                                                                                                                                                                      |  |                     | 1,420,827    |                     |   | 1,480,831    |  
|Celera purchase obligation                                                                                                                                                                                            |  |                     | 2,026,442    |                     |   | 1,495,000    |  
|Derivative liability                                                                                                                                                                                                  |  |                     | 43,214       |                     |   |             |  
|Accrued interest                                                                                                                                                                                                      |  |                     | 2,284,145    |                     |   | 2,042,065    |  
|                                                                                                                                                                                                                      |  |                     |              |                     |   |              |  
|Total current liabilities                                                                                                                                                                                             |  |                     | 26,534,605   |                     |   | 17,579,845   |  
|                                                                                                                                                                                                                      |  |                     |              |                     |   |              |  
|LONG-TERM NOTES PAYABLE, net of discount of $5,610,299 and $7,000,745
  at December 31, 2005 and 2004, respectively                                                                                                   |  |                     | 19,766,221   |                     |   | 11,399,886   |  
|CELERA PURCHASE OBLIGATION                                                                                                                                                                                            |  |                     | 3,933,767    |                     |   | 4,214,076    |  
|ACCRUED INTEREST                                                                                                                                                                                                      |  |                     | 1,188,332    |                     |   | 988,601      |  
|OTHER LONG-TERM LIABILITIES                                                                                                                                                                                           |  |                     | 177,575      |                     |   | 208,721      |  
|                                                                                                                                                                                                                      |  |                     |              |                     |   |              |  
|Total liabilities                                                                                                                                                                                                     |  |                     | 51,600,500   |                     |   | 34,391,129   |  
|                                                                                                                                                                                                                      |  |                     |              |                     |   |              |  
|                                                                                                                                                                                                                      |  |                     |              |                     |   |              |  
|COMMITMENTS AND CONTINGENCIES (Note 12)                                                                                                                                                                               |  |                     |              |                     |   |              |  
|                                                                                                                                                                                                                      |  |                     |              |                     |   |              |  
|STOCKHOLDERS EQUITY (DEFICIT):                                                                                                                                                                                       |  |                     |              |                     |   |              |  
|Convertible Preferred stock, $0.001 par
value22,000,000 shares
  authorized as of December 31, 2005 and 2004; 7,326,715 and 7,238,315 shares
  issued and outstanding as of December 31, 2005 and 2004, respectively |  |                     | 59,918,772   |                     |   | 59,269,687   |  
|Common stock, $0.001 par value75,000,000
shares authorized as of
  December 31, 2005 and 2004; 20,369,719 and 9,488,878 shares issued and
  outstanding as of December 31, 2005 and 2004, respectively               |  |                     | 20,370       |                     |   | 9,489        |  
|Additional paid-in capital                                                                                                                                                                                            |  |                     | 77,847,349   |                     |   | 74,365,319   |  
|Accumulated other comprehensive loss                                                                                                                                                                                  |  |                     | (76,458      | )                   |   | (32,228      | )
|Accumulated deficit                                                                                                                                                                                                   |  |                     | (176,126,383 | )                   |   | (152,514,559 | )
|                                                                                                                                                                                                                      |  |                     |              |                     |   |              |  
|Total stockholders equity (deficit)                                                                                                                                                                                  |  |                     | (38,416,350  | )                   |   | (18,902,292  | )
|                                                                                                                                                                                                                      |  |                     |              |                     |   |              |  
|TOTAL LIABILITIES AND STOCKHOLDERS EQUITY (DEFICIT)                                                                                                                                                                  |  | $                   | 13,184,150   |                     | $ | 15,488,837   |  
|                                                                                                                                                                                                                      |  |                     |              |                     |   |              |  

See notes to
consolidated financial statements.

F-3

---



METAMORPHIX,
INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

|                                                                            |  |                     |             |                     |   |                     |   |   |             |  
|--------------------------------------------------------------------------- |  | ------------------- | ----------- | ------------------- | - | ------------------- | - | - | ----------- | -
|                                                                            |  | Year Ended          |            
|                                                                            |  |                     |            
|                                                                            |  | December
  31, 2005 |             | December
  31, 2004 |   | December
  31, 2003 |  
|                                                                            |  |                     |             |                     |   |                     |  
|                                                                            |  |                     |             |                     |   |                     |   |   |             |  
|REVENUE                                                                     |  | $                   | 2,516,064   |                     | $ | 5,704,796           |   | $ | 7,406,743   |  
|                                                                            |  |                     |             |                     |   |                     |   |   |             |  
|OPERATING COSTS AND EXPENSES:                                               |  |                     |             |                     |   |                     |   |   |             |  
|Cost of revenue                                                             |  |                     | 1,552,312   |                     |   | 5,306,663           |   |   | 4,334,625   |  
|Research and development                                                    |  |                     | 4,311,880   |                     |   | 4,364,421           |   |   | 3,674,157   |  
|General and administrative                                                  |  |                     | 10,041,448  |                     |   | 10,698,706          |   |   | 8,431,135   |  
|Depreciation and amortization                                               |  |                     | 2,432,992   |                     |   | 12,991,210          |   |   | 12,954,432  |  
|                                                                            |  |                     |             |                     |   |                     |   |   |             |  
|Total operating costs and expenses                                          |  |                     | 18,338,632  |                     |   | 33,361,000          |   |   | 29,394,349  |  
|OTHER INCOME (EXPENSE):                                                     |  |                     |             |                     |   |                     |   |   |             |  
|Interest expense and accretion of debt discount                             |  |                     | (5,384,033  | )                   |   | (18,984,610         | ) |   | (5,182,107  | )
|Debt issue costs                                                            |  |                     | (2,119,070  | )                   |   | (2,297,702          | ) |   | (5,808,701  | )
|Debt conversion expense                                                     |  |                     | (93,696     | )                   |   | (3,281,462          | ) |   | (1,276,038  | )
|Other (expense) income                                                      |  |                     | (192,457    | )                   |   | 36,516              |   |   | 19,302      |  
|                                                                            |  |                     |             |                     |   |                     |   |   |             |  
|NET LOSS                                                                    |  |                     | (23,611,824 | )                   |   | (52,183,462         | ) |   | (34,235,150 | )
|                                                                            |  |                     |             |                     |   |                     |   |   |             |  
|Preferred stock dividends and accretion of beneficial conversion
  features |  |                     | (1,386,939  | )                   |   | (1,604,352          | ) |   |            |  
|                                                                            |  |                     |             |                     |   |                     |   |   |             |  
|NET LOSS ATTRIBUTABLE TO COMMON STOCKHOLDERS                                |  | $                   | (24,998,763 | )                   | $ | (53,787,814         | ) | $ | (34,235,150 | )
|                                                                            |  |                     |             |                     |   |                     |   |   |             |  
|Net loss per common share:                                                  |  |                     |             |                     |   |                     |   |   |             |  
|Basic and diluted                                                           |  | $                   | (1.48       | )                   | $ | (12.83              | ) | $ | (8.44       | )
|                                                                            |  |                     |             |                     |   |                     |   |   |             |  
|Weighted average number of shares outstanding:                              |  |                     |             |                     |   |                     |   |   |             |  
|Basic and diluted                                                           |  |                     | 16,925,770  |                     |   | 4,192,412           |   |   | 4,055,742   |  
|                                                                            |  |                     |             |                     |   |                     |   |   |             |  

See notes to
consolidated financial statements.

F-4

---



METAMORPHIX,
INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

|                                                                                    |  |                     |             |                     |   |                     |   |   |             |  
|----------------------------------------------------------------------------------- |  | ------------------- | ----------- | ------------------- | - | ------------------- | - | - | ----------- | -
|                                                                                    |  | Year Ended          |            
|                                                                                    |  |                     |            
|                                                                                    |  | December
  31, 2005 |             | December
  31, 2004 |   | December
  31, 2003 |  
|                                                                                    |  |                     |             |                     |  
|CASH FLOWS FROM OPERATING ACTIVITIES:                                               |  |                     |             |                     |   |                     |   |   |             |  
|Net loss                                                                            |  | $                   | (23,611,824 | )                   | $ | (52,183,462         | ) | $ | (34,235,150 | )
|Adjustments to reconcile net loss to net cash flows used in operating
  activities: |  |                     |             |                     |   |                     |   |   |             |  
|Depreciation and amortization                                                       |  |                     | 2,591,092   |                     |   | 13,131,841          |   |   | 13,096,933  |  
|Accretion of debt discount                                                          |  |                     | 1,838,401   |                     |   | 1,801,071           |   |   | 203,539     |  
|Amortization of deferred debt issue costs                                           |  |                     | 1,678,825   |                     |   | 1,576,856           |   |   | 896,745     |  
|Share-based payment expense                                                         |  |                     | 3,805,124   |                     |   | 18,215,132          |   |   | 8,501,371   |  
|Induced conversion expense                                                          |  |                     | 93,696      |                     |   | 3,281,462           |   |   | 1,276,038   |  
|(Gain) loss on disposal of fixed assets                                             |  |                     | 197,023     |                     |   | 4,990               |   |   | (17,675     | )
|Changes in assets and liabilities:                                                  |  |                     |             |                     |   |                     |   |   |             |  
|Accounts receivable                                                                 |  |                     | (10,969     | )                   |   | (132,222            | ) |   | (30,313     | )
|Prepaid expenses and other current assets                                           |  |                     | (27,906     | )                   |   | 29,844              |   |   | 84,476      |  
|Lease security deposits                                                             |  |                     | 2,770       |                     |   | (79,652             | ) |   |            |  
|Accounts payable and accrued expenses                                               |  |                     | 3,970,914   |                     |   | (1,326,929          | ) |   | 831,464     |  
|Accrued compensation                                                                |  |                     | 1,267,896   |                     |   | 1,262,089           |   |   | 1,060,379   |  
|Deferred purchase obligation                                                        |  |                     | 251,133     |                     |   | (1,400,000          | ) |   | (2,061,200  | )
|Deferred revenue                                                                    |  |                     | (60,004     | )                   |   | 980,831             |   |   | (680,000    | )
|Accrued interest                                                                    |  |                     | 2,764,091   |                     |   | 2,388,579           |   |   | 1,768,904   |  
|Other, net                                                                          |  |                     | (31,146     | )                   |   | 44,625              |   |   |            |  
|                                                                                    |  |                     |             |                     |   |                     |   |   |             |  
|Net
  cash flows used in operating activities                                       |  |                     | (5,280,884  | )                   |   | (12,404,945         | ) |   | (9,304,489  | )
|                                                                                    |  |                     |             |                     |   |                     |   |   |             |  
|CASH FLOWS FROM INVESTING ACTIVITIES:                                               |  |                     |             |                     |   |                     |   |   |             |  
|Purchases of property and equipment                                                 |  |                     | (72,913     | )                   |   | (281,039            | ) |   | (23,692     | )
|Proceeds from sale of property and equipment                                        |  |                     | 23,863      |                     |   | 5,000               |   |   | 16,000      |  
|                                                                                    |  |                     |             |                     |   |                     |   |   |             |  
|Net cash flows used in investing activities                                         |  |                     | (49,050     | )                   |   | (276,039            | ) |   | (7,692      | )
|                                                                                    |  |                     |             |                     |   |                     |   |   |             |  
|CASH FLOWS FROM FINANCING ACTIVITIES:                                               |  |                     |             |                     |   |                     |   |   |             |  
|Proceeds from debt issuances                                                        |  |                     | 6,329,208   |                     |   | 6,607,789           |   |   | 16,360,090  |  
|Payments of debt issue costs                                                        |  |                     | (548,903    | )                   |   | (1,500,406          | ) |   | (1,463,834  | )
|Principal payments on notes                                                         |  |                     | (119,528    | )                   |   | (3,205,027          | ) |   | (5,505,759  | )
|Principal payments under capital lease obligations                                  |  |                     |            |                     |   | (10,503             | ) |   | (4,640      | )
|Proceeds from stock issuances                                                       |  |                     | 564,618     |                     |   | 11,230,897          |   |   | 240         |  
|                                                                                    |  |                     |             |                     |   |                     |   |   |             |  
|Net cash flows provided by financing activities                                     |  |                     | 6,225,395   |                     |   | 13,122,750          |   |   | 9,386,097   |  
|                                                                                    |  |                     |             |                     |   |                     |   |   |             |  
|Effects of exchange rate differences on cash and cash
equivalents                   |  |                     | (21,209     | )                   |   | (17,025             | ) |   | 345         |  
|                                                                                    |  |                     |             |                     |   |                     |   |   |             |  
|NET INCREASE IN CASH AND CASH EQUIVALENTS                                           |  |                     | 874,252     |                     |   | 424,741             |   |   | 74,261      |  
|CASH AND CASH EQUIVALENTSBeginning of year                                         |  |                     | 507,973     |                     |   | 83,232              |   |   | 8,971       |  
|                                                                                    |  |                     |             |                     |   |                     |   |   |             |  
|CASH AND CASH EQUIVALENTSEnd of year                                               |  | $                   | 1,382,225   |                     | $ | 507,973             |   | $ | 83,232      |  
|                                                                                    |  |                     |             |                     |   |                     |   |   |             |  
|SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:                                  |  |                     |             |                     |   |                     |   |   |             |  
|Cash paid during the period for interest                                            |  | $                   | 108,509     |                     | $ | 263,213             |   | $ | 342,286     |  
|                                                                                    |  |                     |             |                     |   |                     |   |   |             |  
|NON-CASH INVESTING AND FINANCING ACTIVITIES:                                        |  |                     |             |                     |   |                     |   |   |             |  
|Debt converted into equity                                                          |  | $                   | 153,892     |                     | $ | 3,762,693           |   | $ | 4,720,068   |  
|Acquisition of fixed assets under capital lease                                     |  |                     |            |                     |   | 152,194             |   |   | 49,901      |  
|Conversion of notes and accrued interest into new notes                             |  |                     | 2,293,153   |                     |   | 2,933,489           |   |   | 329,939     |  
|Capital lease disposal                                                              |  |                     |            |                     |   |                    |   |   | 13,592      |  
|Additions of property included in accounts payable                                  |  |                     | 607,212     |                     |   |                    |   |   |            |  

See notes to
consolidated financial statements.

F-5

---



METAMORPHIX,
INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY
(DEFICIT)

|                                                                                                              |  |                     |            |                     |   |                     |  |        |           |        |   |            |   |  |           |  |   |             | 
|------------------------------------------------------------------------------------------------------------- |  | ------------------- | ---------- | ------------------- | - | ------------------- |  | ------ | --------- | ------ | - | ---------- | - |  | --------- |  | - | ----------- | 
|                                                                                                              |  | December
  31, 2005 |            | December
  31, 2004 |   | December
  31, 2003 | 
|                                                                                                              |  |                     |            |                     |   |                     | 
|                                                                                                              |  |                     |            |                     |   |                     |  |        |           |        |   |            |   |  |           |  |   |             | 
|                                                                                                              |  | Shares              |            | Amount              |   | Shares              |  | Amount |           | Shares |   | Amount     |  
|                                                                                                              |  |                     |            |                     |   |                     |  |        |           |        |   |            |  
|Convertible
  Preferred Stock, Series A                                                                       |  |                     |            |                     |   |                     |  |        |           |        |   |            |   |  |           |  |   |             | 
|Balance, beginning and end
  of year                                                                          |  |                     | 1,001,000  |                     | $ | 5,850,001           |  |        | 1,001,000 |        | $ | 5,850,001  |   |  | 1,001,000 |  | $ | 5,850,001   | 
|                                                                                                              |  |                     |            |                     |   |                     |  |        |           |        |   |            |   |  |           |  |   |             | 
|Convertible
  Preferred Stock, Series B                                                                       |  |                     |            |                     |   |                     |  |        |           |        |   |            |   |  |           |  |   |             | 
|Balance, beginning and end
  of year                                                                          |  |                     | 200,000    |                     |   | 500,000             |  |        | 200,000   |        |   | 500,000    |   |  | 200,000   |  |   | 500,000     | 
|                                                                                                              |  |                     |            |                     |   |                     |  |        |           |        |   |            |   |  |           |  |   |             | 
|Convertible
  Preferred Stock, Series C                                                                       |  |                     |            |                     |   |                     |  |        |           |        |   |            |   |  |           |  |   |             | 
|Balance, beginning and end
  of year                                                                          |  |                     | 714,661    |                     |   | 1,753,503           |  |        | 714,661   |        |   | 1,753,503  |   |  | 714,661   |  |   | 1,753,503   | 
|                                                                                                              |  |                     |            |                     |   |                     |  |        |           |        |   |            |   |  |           |  |   |             | 
|Convertible
  Preferred Stock, Series D                                                                       |  |                     |            |                     |   |                     |  |        |           |        |   |            |   |  |           |  |   |             | 
|Balance, beginning and end
  of year                                                                          |  |                     | 26,667     |                     |   | 360,017             |  |        | 26,667    |        |   | 360,017    |   |  | 26,667    |  |   | 360,017     | 
|                                                                                                              |  |                     |            |                     |   |                     |  |        |           |        |   |            |   |  |           |  |   |             | 
|Convertible
  Preferred Stock, Series E                                                                       |  |                     |            |                     |   |                     |  |        |           |        |   |            |   |  |           |  |   |             | 
|Balance, beginning and end
  of year                                                                          |  |                     | 2,000,000  |                     |   | 35,000,000          |  |        | 2,000,000 |        |   | 35,000,000 |   |  | 2,000,000 |  |   | 35,000,000  | 
|                                                                                                              |  |                     |            |                     |   |                     |  |        |           |        |   |            |   |  |           |  |   |             | 
|Convertible
  Preferred Stock, Series F                                                                       |  |                     |            |                     |   |                     |  |        |           |        |   |            |   |  |           |  |   |             | 
|Balance, beginning of year                                                                                    |  |                     | 1,834,440  |                     |   | 7,699,890           |  |        |          |        |   |           |   |  |          |  |   |            | 
|Issuance of Series F offering                                                                                 |  |                     |           |                     |   |                    |  |        | 352,156   |        |   | 1,472,367  |   |  |          |  |   |            | 
|Issuance of Series F shares upon debt conversion
transaction                                                  |  |                     |           |                     |   |                    |  |        | 1,482,284 |        |   | 6,227,523  |   |  |          |  |   |            | 
|Other                                                                                                         |  |                     |           |                     |   | 10,188              |  |        |          |        |   |           |   |  |          |  |   |            | 
|                                                                                                              |  |                     |            |                     |   |                     |  |        |           |        |   |            |   |  |           |  |   |             | 
|Balance, end of year                                                                                          |  |                     | 1,834,440  |                     |   | 7,710,078           |  |        | 1,834,440 |        |   | 7,699,890  |   |  |          |  |   |            | 
|Convertible
  Preferred Stock, Series G                                                                       |  |                     |            |                     |   |                     |  |        |           |        |   |            |   |  |           |  |   |             | 
|Balance, beginning of year                                                                                    |  |                     | 1,461,547  |                     |   | 8,106,276           |  |        |          |        |   |           |   |  |          |  |   |            | 
|Issuance of Series G shares upon debt conversion
transaction                                                  |  |                     | 16,882     |                     |   | 143,699             |  |        |          |        |   |           |   |  |          |  |   |            | 
|Issuance of Series G shares                                                                                   |  |                     | 71,518     |                     |   | 495,198             |  |        | 1,461,547 |        |   | 8,106,276  |   |  |          |  |   |            | 
|                                                                                                              |  |                     |            |                     |   |                     |  |        |           |        |   |            |   |  |           |  |   |             | 
|Balance, end of year                                                                                          |  |                     | 1,549,947  |                     |   | 8,745,173           |  |        | 1,461,547 |        |   | 8,106,276  |   |  |          |  |   |            | 
|                                                                                                              |  |                     |            |                     |   |                     |  |        |           |        |   |            |   |  |           |  |   |             | 
|Total
  Convertible Preferred Stock                                                                           |  |                     | 7,326,715  |                     |   | 59,918,772          |  |        | 7,238,315 |        |   | 59,269,687 |   |  | 3,942,328 |  |   | 43,463,521  | 
|                                                                                                              |  |                     |            |                     |   |                     |  |        |           |        |   |            |   |  |           |  |   |             | 
|Common
  Stock                                                                                                |  |                     |            |                     |   |                     |  |        |           |        |   |            |   |  |           |  |   |             | 
|Balance, beginning of year                                                                                    |  |                     | 9,488,878  |                     |   | 9,489               |  |        | 4,454,770 |        |   | 4,455      |   |  | 3,916,621 |  |   | 3,917       | 
|Exercise of stock options and warrants                                                                        |  |                     | 18,678     |                     |   | 19                  |  |        | 12,516    |        |   | 13         |   |  | 12,000    |  |   | 12          | 
|Issuance of common stock upon conversion of
debt                                                              |  |                     |           |                     |   |                    |  |        |          |        |   |           |   |  | 526,149   |  |   | 526         | 
|Issuance of common stock to satisfy accrued
expenses                                                          |  |                     | 100,000    |                     |   | 100                 |  |        |           |        |   |            |   |  |           |  |   |             | 
|Cancellation of common shares in connection with
issuance of Series F
  Preferred shares upon debt conversion |  |                     |            |                     |   |                     |  |        | (392,694  | )      |   | (393       | ) |  |          |  |   |            | 
|Conversion of warrants to common stock                                                                        |  |                     | 10,762,163 |                     |   | 10,762              |  |        | 5,414,286 |        |   | 5,414      |   |  |          |  |   |            | 
|                                                                                                              |  |                     |            |                     |   |                     |  |        |           |        |   |            |   |  |           |  |   |             | 
|Balance, end of year                                                                                          |  |                     | 20,369,719 |                     | $ | 20,370              |  |        | 9,488,878 |        | $ | 9,489      |   |  | 4,454,770 |  | $ | 4,455       | 
|                                                                                                              |  |                     |            |                     |   |                     |  |        |           |        |   |            |   |  |           |  |   |             | 
|                                                                                                              |  |                     |            |                     |   |                     |  |        |           |        |   |            |   |  |           |  |   | (Continued) | 

See notes to
consolidated financial statements.

F-6

---



METAMORPHIX,
INC. AND SUBSIDIARIES

CONSOLIDATED
STATEMENTS OF STOCKHOLDERS EQUITY (DEFICIT), CONTINUED

|                                                                                                              |  |                     |              |                     |   |                        |   |   |              |  
|------------------------------------------------------------------------------------------------------------- |  | ------------------- | ------------ | ------------------- | - | ---------------------- | - | - | ------------ | -
|                                                                                                              |  | December
  31, 2005 |              | December
  31, 2004 |   | December
  31, 
  2003 |  
|                                                                                                              |  |                     |              |                     |   |                        |  
|Additional
  Paid-In Capital                                                                                  |  |                     |              |                     |   |                        |   |   |              |  
|Balance, beginning of year                                                                                    |  | $                   | 74,365,319   |                     | $ | 46,465,366             |   | $ | 25,219,907   |  
|Exercise of stock options and warrants                                                                        |  |                     | 37,925       |                     |   | 11,316                 |   |   | 228          |  
|Issuance of common stock upon conversion of
debt                                                              |  |                     |             |                     |   |                       |   |   | 4,719,542    |  
|Issuance of common stock to satisfy accrued
expenses                                                          |  |                     | 264,900      |                     |   |                       |   |   |             |  
|Debt conversion                                                                                               |  |                     | 93,696       |                     |   | 2,463,759              |   |   | 1,276,038    |  
|Forgiveness of bonus by officer                                                                               |  |                     | 195,976      |                     |   |                       |   |   |             |  
|Cancellation of common shares in connection with
issuance of Series F
  Preferred shares upon debt conversion |  |                     |             |                     |   | (2,742,826             | ) |   |             |  
|Conversion of warrants to common stock                                                                        |  |                     | (10,762      | )                   |   | (5,414                 | ) |   |             |  
|Preferred stock beneficial conversion
feature                                                                 |  |                     |             |                     |   | 1,114,130              |   |   |             |  
|Preferred stock dividends and accretion of
beneficial conversion
  feature                                    |  |                     | (1,386,939   | )                   |   | (1,604,352             | ) |   |             |  
|Issuance of stock warrants                                                                                    |  |                     | 899,869      |                     |   | 25,303,025             |   |   | 12,229,510   |  
|Stock option expense                                                                                          |  |                     | 3,387,365    |                     |   | 3,360,315              |   |   | 3,020,141    |  
|                                                                                                              |  |                     |              |                     |   |                        |   |   |              |  
|                                                                                                             
|Balance, end of year                                                                                          |  |                     | 77,847,349   |                     |   | 74,365,319             |   |   | 46,465,366   |  
|                                                                                                              |  |                     |              |                     |   |                        |   |   |              |  
|Accumulated
  Other Comprehensive Loss                                                                        |  |                     |              |                     |   |                        |   |   |              |  
|Balance, beginning of year                                                                                    |  |                     | (32,228      | )                   |   | (3,662                 | ) |   | (54,563      | )
|Foreign currency translation adjustment
                                                                     |  |                     | (44,230      | )                   |   | (28,566                | ) |   | 50,901       |  
|                                                                                                              |  |                     |              |                     |   |                        |   |   |              |  
|                                                                                                             
|Balance, end of year                                                                                          |  |                     | (76,458      | )                   |   | (32,228                | ) |   | (3,662       | )
|                                                                                                              |  |                     |              |                     |   |                        |   |   |              |  
|Accumulated
  Deficit                                                                                         |  |                     |              |                     |   |                        |   |   |              |  
|Balance, beginning of year                                                                                    |  |                     | (152,514,559 | )                   |   | (100,331,097           | ) |   | (66,095,947  | )
|Net loss                                                                                                     |  |                     | (23,611,824  | )                   |   | (52,183,462            | ) |   | (34,235,150  | )
|                                                                                                              |  |                     |              |                     |   |                        |   |   |              |  
|                                                                                                             
|Balance, end of year                                                                                          |  |                     | (176,126,383 | )                   |   | (152,514,559           | ) |   | (100,331,097 | )
|                                                                                                              |  |                     |              |                     |   |                        |   |   |              |  
|                                                                                                             
|Total
  Shareholders Equity (Deficit)                                                                        |  | $                   | (38,416,350  | )                   | $ | (18,902,292            | ) | $ | (10,401,417  | )
|                                                                                                              |  |                     |              |                     |   |                        |   |   |              |  

|  |                                                                                                                                                                                
|- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Combined, these amounts represent total
  comprehensive loss of $23,656,054, $52,212,028 and $34,184,249 for the years
  ended December 31, 2005, 2004, and 2003, respectively.

See notes to consolidated financial statements.

F-7

---



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 
YEARS ENDED DECEMBER 31, 2005, 2004, AND 2003

|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|-- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|1. | NATURE OF THE BUSINESS AND GOING
  CONCERN-MANAGEMENTS PLANS                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|   | MetaMorphix, Inc. (the Company) is a
  biopharmaceutical company focused on discovering, acquiring, developing, and
  commercializing products and technologies to improve animal health, livestock
  production, and human health.  The
  Company was incorporated on September 1, 1994.                                                                                                                                                                                                                                                                                                                                             
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|   | The Company has two key technology platforms: a)
  livestock genomics and b) growth 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 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 December 31, 2005, the Company had a
  working capital deficiency of $24,767,525 and an accumulated deficit of
  $176,126,383.  The Company intends and
  is currently working to finance its operations primarily through future debt
  and equity financings and future revenues.                                                                                                                                                       
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|   | On June 28, 2004, the Companys Board of Directors
  granted approval to Company management to pursue applicable steps to
  undertake the initial public offering, or IPO, process.  This process is currently proceeding, although
  no completion date can be estimated at this time.  If we are unable to generate positive operating cash flow prior
  to an IPO, we anticipate that the proceeds from the IPO will be sufficient to
  become cash flow positive from operations.
  However, we may be unable to successfully complete the IPO
  process.                                                                           
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|   | In addition, on June 8, 2005, the Companys Board of
  Directors granted approval to Company management to pursue additional
  financings through the issuance of a new private placement of promissory
  notes.  Management is currently working
  with an investment banker to secure a note offering with terms acceptable to
  the Company.  To date, no final
  offering has been completed.  While we
  anticipate that the proceeds from additional financings will be sufficient to
  fund our operations until we can generate positive cash flow from operations,
  they may be insufficient.                                 
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|   | Although the Company recognizes the need to raise
  funds in the near future, we may be unsuccessful in consummating any such
  transaction, or, if we did consummate such a transaction, that the terms and
  conditions of such financing will be favorable to the Company.  The Company believes that its current
  assets will not be sufficient to fund operations in 2006.  This uncertainty raises substantial doubt
  about the Companys ability to continue as a going concern.  The accompanying consolidated financial
  statements do not include any adjustments that might result from the outcome
  of this uncertainty.

F-8

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|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|-- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|2. | SIGNIFICANT ACCOUNTING POLICIES                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|   | Principles of ConsolidationThe consolidated financial statements
  include the accounts of the Company and its wholly owned subsidiaries.  All significant intercompany balances and
  transactions have been eliminated in consolidation.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|   | Use of EstimatesThe preparation of consolidated financial
  statements in conformity with accounting principles generally accepted in the
  United States requires management to make estimates and assumptions that
  affect the reported amounts of assets and liabilities and disclosure of
  contingent assets and liabilities at the date of the consolidated financial
  statements and the reported amounts of revenues and expenses during the
  reporting period.  Actual results
  could differ from those estimates.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|   | Risks and UncertaintiesThe Companys future results of operations
  involve a number of risks and uncertainties.
  Factors that could affect the Companys future operations include
  delays or unexpected results in current research projects; the Companys
  ability to effectively manage operating costs and increase operating
  efficiencies; impairment of certain intangible assets; rapid technological
  and market change and the transition to new methodologies; the need to
  protect intellectual property; the capability of the Company to obtain
  additional capital financing on terms acceptable to the Company; the
  uncertainty of customer acceptance of the results of research projects; the
  ability to attract and retain highly qualified employees; and other one-time
  events.                                                                                                                                                                                                                                                                                        
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|   | Revenue Recognition and Deferred RevenueThe Companys revenue recognition policies
  are in accordance with the Securities and Exchange Commissions (SEC) Staff
  Accounting Bulletin No. 101, Revenue Recognition in Financial Statements,
  as amended by SEC Staff Accounting Bulletin No. 104, Revenue Recognition.  The Company has license and development
  agreements with several pharmaceutical, biotechnology, and food production
  companies.  The agreements typically
  include nonrefundable license fees paid to the Company, funding of research
  and development by the counterparty, payments to the Company based upon
  achievement of certain milestones and royalties on net product sales.  Revenues, including nonrefundable license
  fees, are recognized when the Company has a contractual right to receive such
  payments, provided a contractual arrangement exists, the contract price is
  fixed and determinable, the collection of the resulting receivable is
  reasonably assured, and the Company has no further performance obligations
  under the arrangement.
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|   | When the Company has performance
  obligations under an arrangement, revenue recognition is deferred until the
  obligations are fulfilled.  Where the
  Companys level-of-effort is relatively constant over the performance period,
  the revenue is recognized on a straight-line basis.  The determination of the performance period involves judgment
  by management. This judgment includes cost based estimates to establish
  level-of-effort progress.  Research
  and development revenues and other revenues from milestone payments are
  deferred until achievement of the related milestone, provided the Company has
  no continuing performance obligations and the milestone payment is reasonable
  in relation to the effort expended or the risk associated with its
  achievement.  If any of these
  conditions are not met, the milestone payments are deferred and recognized as
  revenue over the term of the arrangement as the Company completes its
  performance obligations.                                                                                               

F-9

---



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The Company currently
  provides parentage and identification genotyping services.  The Company recognizes revenue for
  genotyping services at the time the services are provided and no additional
  performance is required by the Company.
  Amounts received prior to being earned are recorded as deferred revenue
  until earned.                                                                                                                                                                                                                    
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| | Research and DevelopmentResearch and development costs include
  amounts spent for product development, patent costs, and personnel/overhead
  costs related to the development or acquisition of the Companys
  technology.  Research and development
  costs also include stock-based compensation expense and collaborative
  agreements requiring the Company to pay periodic license fees, research
  payments, additional payments, royalty fees, and milestone payments.  All research and development costs are
  expensed in the period incurred.
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| | Cash and Cash EquivalentsCash and cash equivalents include cash on
  hand, demand deposits, and short-term investments with maturities of less
  than 90 days.                                                                                                                                                                                                                                                                                                                                                                                             
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| | Accounts Receivable and Allowance for Doubtful AccountsTrade accounts receivable are recorded at
  the invoiced amount and do not bear interest.  The Company believes its customers are creditworthy based on
  its dealings and collection history, and currently has no allowance for
  doubtful accounts.  Account balances
  are charged off against an allowance when the Company feels it is probable
  the receivable will not be recovered.
  The Company does not have any off-balance-sheet credit exposure
  related to its customers.         
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| | Concentrations of Credit RiskFinancial instruments that potentially
  subject the Company to concentrations of credit risk are principally accounts
  receivable.  The Company had $253,827
  and $242,857 of accounts receivable outstanding at December 31, 2005 and
  December 31, 2004, respectively.
  Accounts receivable concentration by customer is as follows:                                                                                                                                                                                   

| |            |  |                                                    |      |      | 
| | ---------- |  | -------------------------------------------------- | ---- | ---- | 
| |            |  | Percentage of Accounts Receivable at
  December 31 |     
| |            |  | 2005                                               |      | 2004 | 
| |            |  |                                                    |      |      | 
| | Customer A |  |                                                    | 7.4  | %    | 
| | Customer B |  |                                                    | 31.5 | %    | 
| | Customer C |  |                                                    | 11.8 | %    | 
| |            |  |                                                    |      |      | 
| |            |  |                                                    |      |      | 
| | Total      |  |                                                    | 50.7 | %    | 
| |            |  |                                                    |      |      | 

| |                                                                                                                                                                                                                                                        
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The Companys customers
  are primarily associations which purchase the Companys parentage and
  identification genotyping services.
  The Company has not experienced any significant credit losses and does
  not require collateral on receivables.

F-10

---



| |                                                                                                                                                                                                                                                                                                                                   
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Property and EquipmentProperty and equipment is recorded at
  cost.  Improvements and replacements
  that extend the useful life of an asset are capitalized.  Maintenance and repairs are expensed as incurred.  Depreciation is
computed on the
  straight-line basis over the estimated useful lives of the assets as follows:

|                       |                                                          
|---------------------- | ---------------------------------------------------------
|Office equipment       | 3-15 years                                               
|Laboratory equipment   | 5-10 years                                               
|Leasehold improvements | Lesser of estimated useful life or remaining lease
  term

| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The Company evaluates its long-lived assets for impairment
  whenever events or changes in circumstances indicate that the carrying amount
  of such assets may not be recoverable.
  Recoverability of an asset to be held and used is measured by a
  comparison of the carrying amount of the asset to future net cash flows
  expected to be generated by the asset.
  Any impairment to be recognized is measured by the amount by which the
  carrying amount of the asset exceeds its fair value.  Based on the evaluations performed, the
  Company determined that the recorded property and equipment had not been
  impaired as of December 31, 2005 or 2004. Assets to be disposed of are
  reported at the lower of the carrying amount or fair value less estimated
  costs to sell.
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | Patent CostsPatent
  application and maintenance costs are expensed as incurred.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | Share-Based
  PaymentsIn 2003, the Company elected to adopt the fair
  value based method of accounting for employee stock options as set forth in
  Statement of Financial Accounting Standard, or SFAS, No. 123,Accounting for Stock-Based Compensation, using the retroactive
  restatement method described in SFAS No. 148, Accounting for Stock-Based
  Compensation  Transition and Disclosure.  Under the fair value based method of
  accounting, compensation cost is measured at the grant date based on the
  value of the award and is recognized as expense over the vesting period.                                                                                                                                                                                              
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | Effective January 1, 2004, the Company adopted SFAS
  No. 123(R), Share-Based Payment.
  SFAS No. 123(R) which, among other things, allows for nonpublic
  entities to use a calculated value, similar to the fair value based method of
  accounting set forth in SFAS No. 123.
  The adoption of SFAS No. 123(R) did not have a material impact on the
  Companys results of operations or financial position.                                                                                                                                                                                                                                                                                                                                                                                 
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | The Company utilizes the Black-Scholes option
  pricing valuation model to calculate the value of share-based payments in
  accordance with SFAS No. 123(R).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | Goodwill
  Goodwill, which is not subject to amortization, has a balance of $3,739,870
  at December 31, 2005 and December 31, 2004.
  Goodwill was evaluated at December 31, 2005 and 2004 for impairment in
  accordance with SFAS No. 142, Goodwill and Other Intangible Assets.  The evaluation takes into account
  operating results, business plans, forecasts, and other relevant
  factors.  To the extent impairments
  are identified, they would be charged to operations in such period. Based on
  the evaluations performed, the Company determined that the recorded goodwill
  had not been impaired as of December 31, 2005 or 2004.                                                                                                                                           
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | Intellectual
  Property RightsIntellectual property rights are
  acquisition-related intangible assets amortized over three years.  The recoverability of these assets is
  reviewed annually, or when fact or circumstances indicate impairment may be present.
  Based on the evaluations performed, the                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       

F-11

---



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Company determined that the recorded intellectual
  property rights had not been impaired as of December 31, 2004.  As of December 31, 2005, the balance was
  fully amortized.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| | Deferred Debt
  Issue CostsDirect costs incurred in connection with
  financing activities are amortized over the estimated lives of the related
  obligations using the interest method.
  These costs include commissions, professional fees, and the calculated
  value of share-based payments made for financial advisory services.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| | Income TaxesIncome
  taxes are accounted for under the asset and liability method.  Deferred tax assets and liabilities are
  identified for the future tax consequences attributable to differences
  between the financial statement carrying amounts of existing assets and
  liabilities and their respective tax bases, as well as operating loss and tax
  credit carryforwards.  Deferred tax
  assets and liabilities are measured using enacted tax rates expected to apply
  to taxable income in the years in which those temporary differences are
  expected to be recovered or settled.
  The effect on deferred tax assets and liabilities of a change in tax
  rates is recognized in income in the period that includes the enactment
  date.  Based on its history and
  consideration of other relevant factors, the Company establishes valuation
  allowances when it is more likely than not that the deferred tax assets will
  not be realized.
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| | Value of
  Financial InstrumentsOther than described below, the Company considers
  the recorded value of its financial assets and liabilities, which consist
  primarily of cash, accounts receivable, accounts payable and other accrued
  liabilities to approximate the fair value of the respective assets and
  liabilities at December 31, 2005 and 2004.  Management believes the principal balance of its long-term debt,
  which is $5,610,299 and $7,000,745 higher than the carrying value at December
  31, 2005 and 2004, respectively, is a better estimate of the fair value of
  that liability.  The debt is carried net
  of unamortized discount.                                                                                                                                                                                                                                                                                                  
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| | Comprehensive
  Income (Loss)Comprehensive income (loss) is defined to
  include all changes in equity except those resulting from investments by
  stockholders and distributions to stockholders and is reported in the
  Consolidated Statement of Stockholders Equity (Deficit).  Included in the Companys comprehensive
  loss are net loss and foreign exchange translation adjustments.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| | Foreign Currency
  TranslationThe consolidated financial statements of
  the Companys Canadian operations are translated into United States dollars
  using period-end exchange rates for assets and liabilities and average
  exchange rates during the period for revenue, expenses, and cash flows.  Foreign currency translation gains and
  losses are excluded from results of operations and recorded as a separate
  component of accumulated other comprehensive loss within stockholders equity
  (deficit).  Foreign currency
  transaction gains and losses are included in the consolidated statements of
  operations.                                                                                                                                                                                                                                                                                                                                 
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| | Recent Accounting PronouncementsIn
  September 2006, the Financial Accounting Standard Board issued a Statement of
  Financial Accounting Standards (SFAS) No. 157, Fair Value Measurement.  The Statement defines fair value,
  establishes a framework for measuring fair value in generally accepted
  accounting principles (GAAP), and expands disclosures about fair value
  measurements.  This Statement is
  effective for financial statements issued for fiscal years beginning after
  November 15, 2007, and interim periods within those fiscal years.  The Company is currently evaluating the
  impact of adopting SFAS No. 157 on its financial statements.                                                                                                                                                                                                                                                                                           
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| | In July 2006, the
  Financial Accounting Standards Board, or FASB, issued FASB Interpretation, or
  FIN, No. 48, Accounting for Uncertainty in Income Taxes, which is
  effective for fiscal years                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      

F-12

---



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | beginning after December
  15, 2006.  FIN No. 48 clarifies the
  accounting for uncertainty in income taxes recognized in the financial
  statements in accordance with SFAS Statement No. 109, Accounting for Income
  Taxes.  This Interpretation prescribes
  a comprehensive model for how a company should recognize, measure, present,
  and disclose in its financial statements uncertain tax positions that the company
  has taken or expects to take on a tax return.  The Company is currently evaluating the impact of adopting FIN
  No. 48 on its results of operations, financial position and cash flows.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | In February 2006, the FASB
  issued SFAS No. 155, Accounting for Certain Hybrid Financial
  Instruments, and amendment of FASB Statements No. 133 and 140.  SFAS No. 155 clarifies certain issues
  relating to embedded derivatives and beneficial interests in securitized
  financial assets.  The provisions of
  SFAS No. 155 are effective for all financial instruments acquired or issued
  after fiscal year beginning after September 15, 2006.  The Company is currently assessing the
  impact that the adoption of SFAS No. 155 will have on its operations,
  financial position and cash flows.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | In May 2005, the Financial
  Accounting Standards Board (FASB) issued SFAS No. 154, Accounting Changes and Error
  Corrections  a replacement of APB Opinion No. 20 and FASB Statement No. 3(SFAS
  No. 154), which replaces APB Opinion No. 20, Accounting Changes, and
  SFAS No. 3, Reporting Accounting Changes in Interim Financial Statements,
  and changes the requirements for the accounting for and reporting of a change
  in accounting principle. SFAS No. 154 applies to all voluntary changes in
  accounting principles, and also applies to changes required by an accounting
  pronouncement in the unusual instance that the pronouncement does not include
  specific transition provisions. SFAS No. 154 will be effective for accounting
  changes and corrections of errors made by the Company in fiscal years
  beginning after December 15, 2005. SFAS No. 154 does not change the
  transition provisions of any existing accounting pronouncements, including
  those that are in a transition phase as of the effective date of SFAS No.
  154.  The Company does not believe the
  adoption of SFAS No. 154 will have a material impact on its financial
  statements.
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | In March 2005, the FASB
  issued FASB Interpretation No. 47, Accounting for Conditional Asset Retirement
  Obligations  an interpretation of FASB Statement No. 143(FIN
  47), which requires companies to recognize a liability for the fair value of
  a legal obligation to perform asset retirement activities that are
  conditional on a future event if the amount can be reasonably estimated.  The Company adopted the provisions of FIN
  47 on December 31, 2005.  No
  conditional asset retirement obligations were recognized and, accordingly,
  the adoption of FIN 47 had no effect on its financial statements.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | In December 2004, the FASB
  issued SFAS No. 153, Exchanges of Non-monetary Assets, an
  amendment of APB Opinion No. 29, Accounting for Non-monetary Transactions.  SFAS No. 153 requires that exchanges of
  non-monetary assets are to be measured based on fair value, eliminates the
  exception for exchanges of non-monetary, similar productive assets, and adds
  an exemption for non-monetary exchanges that do not have commercial
  substance. SFAS No. 153 will be effective for fiscal periods beginning after
  June 15, 2005.  The adoption of this
  standard did not have a material impact on the Companys financial statements.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | Reclassifications Certain amounts previously reported have
  been reclassified to conform to the December 31, 2005 presentation.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     

F-13

---



|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|-- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|3. | NET EARNINGS (LOSS) PER SHARE                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|   | The Company presents basic earnings (loss) per
  share and, if applicable, diluted earnings per share pursuant to the
  provisions of SFAS No. 128, Earnings Per Share.  Basic earnings (loss) per share is
  calculated by dividing net income or loss applicable to common stock (which
  reflects a charge of $1,386,939 for preferred stock dividends in 2005, and
  $1,604,352 for preferred stock dividends and accretion of beneficial
  conversion feature in 2004) by the weighted average number of common shares
  outstanding during each period.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|   | The calculation of diluted earnings per share would
  be similar to that of basic earnings per share, except that the denominator
  is increased to include the number of additional common shares that would
  have been outstanding if all potentially dilutive common shares, such as
  those issuable upon the exercise of stock options and warrants, and the
  conversion of convertible securities, were issued during the period and
  appropriate adjustments were made for the application of the treasury stock
  method and the elimination of interest and other charges related to
  convertible securities.                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|   | As of December 31, 2005, 2004 and 2003, there were
  25,555,850, 26,967,372 and 20,311,644 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 2005, 2004, and 2003 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.                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|4. | COLLABORATIVE AGREEMENTS                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|   | Monsanto
  AgreementIn 2004, the Company entered into a Swine
  Improvement Agreement with Monsanto, which gives Monsanto an exclusive
  royalty-based license to use the Companys porcine genetic database, which
  consists of over 600,000 SNPs, and the associated intellectual property.  The Company will provide consulting and
  support in the use of its database resource.
  Monsanto will be obligated to pay royalties to the Company if the
  research performed using the database creates product enhancements which
  generate increased revenues.  The
  Company received $1,000,000 from Monsanto in June 2004 as an access fee for
  the database.  The Company recorded
  deferred revenue upon receipt of the payment, and is amortizing the fee on a
  straight-line basis over the license exclusivity period of five years.  The Company recognized revenue of $200,004
  and $116,669 for the years ended December 31, 2005 and December 31, 2004,
  respectively.  The unrecognized
  portion of the access fee remains as deferred revenue at December 31,
  2005.
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|   | Wyeth AgreementIn
  2002, the Company signed a Cross License Agreement with Wyeth, which further
  expanded the scope of research and development collaboration (as described in
  the 1999 Amended and Restated Collaboration Agreement noted below) and the
  sharing of discoveries and reagents with regard to Myostatin.  This agreement increased the Companys
  royalty entitlement under the JHU/GI agreement by 2% for any of Wyeths net
  sales derived from the use of Myostatin for human therapeutic application if
  Wyeth utilizes MMI patented technology.
  In return, the Company shall pay to Wyeth a maximum royalty of 2% of
  net sales for the use of any Wyeth technology in commercializing Myostatin
  within the agricultural or veterinary fields.  The first payment of $500,000 under the 1999 Agreement was made
  by Wyeth to the Company in July 2004 and was recognized as revenue in
  2004.  No other royalties have                                                                                                                                     

F-14

---



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | been paid or received under this agreement.  The Wyeth Agreement terminates upon the
  expiration of the last patent to be filed, which is currently November 10,
  2025.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| | Cargill AgreementIn
  2002, the Company signed a Joint Development and Joint Marketing Agreement
  with Excel Corporation (a subsidiary of Cargill, Inc.) and Cargill, Inc.
  through its Caprock Business unit, or Cargill.  Under the agreement, the parties will jointly develop and
  commercialize SNP-based selection tools for the cattle industry to identify
  cattle that possess superior production traits or meat quality.  As of December 31, 2004, all milestones
  had been completed under this agreement, and the Company has received an
  aggregate of $10,200,000.  The Company
  recognized revenue relating to these milestone payments of $0, $3,150,000,
  and $5,690,000 for the years ended December 31, 2005, 2004, and 2003,
  respectively.  Mr. William Buckner,
  President of Excel Corporation, currently serves on the Companys Board of
  Directors.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| | Myostatin Chicken
  Commercial LicensingDuring 2000, the Company entered
  into Letters of Intent, Limited License and Option Agreements with two
  chicken producers in the United States.
  Additionally, the Company executed a similar agreement with a chicken
  producer for the territory of Mexico.
  The agreements include an option to license Myostatin technology in
  chicken on predefined terms upon the successful completion of large-scale
  trials.  The Company has received
  $500,000 in non-refundable fees from these agreements, which has been
  recorded as deferred revenue. Based on anticipated progress of the project,
  the Company expects to recognize this $500,000 as revenue in 2006.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| | These agreements could provide significant license
  fees to be received in the future pending successful trial results.  In addition, the Company would receive 30%
  of the value added, for example, average weight gain over a pre-determined
  average weight (including but not limited to the incremental cost savings),
  as a result of the use of Myostatin technology.  License fees to cover development costs are to be paid once a
  product candidate has been developed and tested by the parties. Additionally,
  the Company is to receive a portion of the value added by the technology on a
  per treated bird basis.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| | Royalty
  Agreements On
  August 15, 2000, we acquired substantially all of the assets relating to the
  animal health immunopharmaceutical business (including certain patent and licenses
  relating to Myostatin technology) of Biostar Inc., a privately-held Canadian
  company.  The purchase price consisted
  of up to $2,500,000 in cash and 1,359,733 shares of our common stock.  Of the cash amount, $500,000 has been paid
  to date, with payment of the remaining $2,000,000 being subject to attainment
  of the following two performance milestones: (1) if Biostar obtains a
  particular claim from the U.S. Patent and Trademark Office, it will be
  entitled to a $1,000,000 payment from us, and (2) if we demonstrate proof of
  concept by August 2004, Biostar will be entitled to a $1,000,000 payment by
  us.  The proof of concept milestone
  payment was not demonstrated by August 2004, and thus, Biostar will not be
  paid the $1,000,000 milestone.  The
  Company does not anticipate that Biostar will obtain the particular claim
  from the U.S. Patent and Trademark Office, however, the Company is committed
  to make this payment when and if this milestone is met.  In conjunction with its acquisition
  of the animal health immunopharmaceutical business of Biostar, Inc. in 2000
  (now known as MetaMorphix Canada, Inc., a wholly-owned subsidiary of the
  Company), the Company entered into an agreement with Vaccine & Infectious
  Disease Organization, or VIDO, in August 2000.  This agreement gives the Company exclusive licenses for the
  Pasteurella Haemolytica Leukotoxin Vaccine and related technology in the
  non-infectious disease animal field.
  VIDO is a division of The University of Saskatchewan.  The term of the agreement is from August
  2000 to the later of (a) the expiration or invalidation of the last remaining
  licensed patents or (b) ten years from the date of first marketing of a
  product developed from the licensed patents.
  This agreement requires that the Company pay VIDO minimum

F-15

---



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | royalty payments on a quarterly basis.  We are obligated to make quarterly payments of $37,500 Cdn. (which
  will increase to $50,000 Cdn. in 2006) as a minimum royalty fee.  The Company recorded license fee expense
  relating to these royalties of USD $124,752, $115,915 and $105,075 for the
  years ended December 31, 2005, 2004 and 2003, respectively.  The Company has recorded a
  liability for these royalties of USD $225,225 and $93,409 at December 31,
  2005 and December 31, 2004, respectively.
  The Company is currently in default of this agreement due to
  non-payment and is subject to a breach notification from the licensor.  The breach notification would cause the
  license agreement to end if the default is not remedied in 90 days.
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| | Agreement with
  The Johns Hopkins University and Genetics Institute, Inc.In
  December 1994, the Company entered into a collaborative agreement with The
  Johns Hopkins University, or JHU, and Genetics Institute, Inc., or GI, a
  wholly owned subsidiary of American Home Products Corporation (now
  Wyeth).  The agreement was amended and
  restated in January 1999.  The Amended
  and Restated Agreement provides the Company with the right to develop and commercialize,
  for agricultural and veterinary uses, certain growth and differentiation
  factors, or GDFs, discovered by JHU while licensing human rights to
  Wyeth.  Dr. Se-Jin Lee, a shareholder
  and scientific founder of the Company, has a laboratory at JHU.                           
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| | The Company is entitled to certain milestone
  payments and royalties from Wyeth related to GDFs.  Wyeth is currently developing one of these factors called GDF-8
  (Myostatin), a naturally occurring protein that regulates the development of
  skeletal muscle.  The first payment of
  $500,000 under this agreement was made by Wyeth to the Company in July 2004,
  and was recorded as revenue by the Company in 2004.                                                                                                                                                                                                                                                                                                                                              
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| | The Company was required under the agreement to make
  certain payments to JHU to support collaborative research during the term of
  the collaborative research agreement.
  The Company agreed to fund JHU-sponsored research from January 2001 to
  June 30, 2003.  The collaborative
  research expenses were $0, $0 and $300,000 for the years ended December 31,
  2005, 2004, and 2003, respectively.  A
  total of $750,000 of collaborative research expenses was unpaid and included
  in accrued expenses as of December 31, 2005 and 2004.                                                                                                                                                                                                                       
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| | The Company was required to make annual payments to
  cover the administration of patent costs in addition to license fee payments
  to JHU for the animal rights to certain GDFs. Expenses incurred for patent
  administration and license fee costs were $0, $5,000, and $5,000 for the
  years ended December 31, 2005, 2004, and 2003, respectively.                                                                                                                                                                                                                                                                                                                                                                                                                    
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| | United States
  Department of Agriculture (USDA) AgreementIn 1999, the
  Company signed a Co-operative Research and Development Agreement with the
  USDA in connection with the generation of Myostatin transgenic animals.  Four transgenic pigs were born in 2002 as
  part of this program, to which further progeny have been born.  Under this agreement, the Company made
  payments to the USDA of $94,000 for the year ended December 31, 2002.  The Company had a payable of $127,000 as
  of December 31, 2005 and 2004 related to this program.                                                                                                                                                                                                                 
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| | Research and
  License Agreement with AviGenics, Inc.In 1998, the
  Company entered into a Research and License Agreement with AviGenics,
  Inc.  The Research and License
  Agreement was terminated in August 2001.
  The Company recorded a liability of $250,000 in 2000, which remains
  unpaid as of December 31, 2005, due to a dispute over the amounts due.                                                                                                                                                                                                                                                                                                                                                                                                        

F-16

---



|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|-- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|5. | CELERA AgGen ACQUISITION                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|   | In February 2002, the Company acquired (1) a canine
  and cattle genotyping business operating in Davis, California, and (2) a
  non-exclusive, perpetual world-wide license to certain cattle, swine and
  poultry database products; single nucleotide polymorphism, or SNP, maps; and
  software, in a business combination involving affiliates of Applera
  Corporation (the Celera AgGen Acquisition).  The Company is using these license rights to create diagnostic
  and selection tools for the detection of desirable production traits and
  longer term discovery product candidates in a livestock population.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|   | The cost of the Celera AgGen Acquisition was
  $43,530,847, consisting of 2,000,000 shares of the Companys Series E
  Convertible Preferred Stock having an estimated fair value of $35,000,000;
  fixed amounts payable to the seller having a present value of $8,268,051; and
  acquisition costs of $262,796.  The
  present value of the fixed amounts payable to the seller were determined
  using an effective interest rate of 5.75%, which was the prime rate plus 1%
  at the date of acquisition.  The fixed
  amounts include 12 quarterly $125,000 payments per quarter for 2002, 2003 and
  2004 for a subscription-based
  access to Celeras human genome database and analysis software,
  $2,000,000 for the first years license rights in 2003, and 15 annual
  $500,000 minimum royalty payments in 2003 through 2017.  In total, the fixed amounts payable to the
  seller consist of $500,000 payable in 2002, $3,000,000 payable in 2003,
  $1,000,000 payable in 2004, and $500,000 payable each year thereafter through
  2017.  Such payments total
  $11,000,000.  As of December 31, 2005,
  $500,000 of the fixed amount payable in 2003, $600,000 of the fixed amount
  payable in 2004, and $500,000 of the fixed amount payable in 2005 remain
  unpaid and accrued.  As of December
  31, 2005, the liability recorded for the deferred fixed amounts payable was
  $5,960,209 with $2,026,442 payable within 12 months and the remaining
  $3,933,767 classified as long term.
  An employee of Applera Corporation served on the Companys Board of
  Directors from the date of the Celera AgGen Acquisition until his resignation
  on April 27, 2005.
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|   | The Company was required to make a payment of
  $1,000,000 to Celera following the receipt of $1,000,000 from Monsanto in
  conjunction with a swine improvement agreement entered into June 1,
  2004.  This amount was originally a
  contingent payment obligation and is separate from the fixed amounts payable
  described above.  This payment of
  $1,000,000 was recorded as cost of revenue in 2004. This agreement gives
  Monsanto an exclusive royalty-based license to use the Companys porcine
  genetic database and the associated intellectual property.  See Note 4 above for more information
  regarding this swine improvement agreement.
  The Company will provide consulting and support in the use of its
  database resource.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     

| |                                                                                                                                             |                                                                                                                                                                                                                                                          
| | ------------------------------------------------------------------------------------------------------------------------------------------- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Also as part of the Celera AgGen Acquisition, the
  Company may be required to make contingent payments as follows:                        
| |                                                                                                                                            
| | (1)                                                                                                                                         | A royalty equal to 20% of all economic consideration
  derived from agreements deploying certain of the license rights and made
  within four years of the date of acquisition.                                                                          
| |                                                                                                                                             |                                                                                                                                                                                                                                                          
| | (2)                                                                                                                                         | A royalty equal to 3% of all economic consideration
  derived for 15 years from the date of acquisition under agreements deploying
  bovine elements of the license rights to the extent such royalty exceeds a
  cumulative amount of $500,000 annually.
| |                                                                                                                                             |                                                                                                                                                                                                                                                          
| | The Company has made no contingent payments noted
  above, but will charge such contingent payments to operations when, and if,
  incurred.

F-17

---



| |                                                                                                                                                                                                                                                                                                                                                                                                                        
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Amortization of the goodwill arising from the Celera
  AgGen Acquisition meets federal criteria for income tax deductibility and is
  being treated as such on the Companys income tax returns.  However, since the Company has accumulated
  net operating losses, a full valuation allowance has been provided against
  the benefit of such deductions for book purposes.  See Note 11 for further tax information.
| |                                                                                                                                                                                                                                                                                                                                                                                                                        
| | The results of operations of Celera AgGen are
  included in the accompanying consolidated financial statements from the date
  of acquisition.  The allocation of the
  purchase price is summarized below:                                                                                                                                                                                                            

| |                                   |  |             |                |              |   |            | 
| | --------------------------------- |  | ----------- | -------------- | ------------ | - | ---------- | 
| |                                   |  | Useful Life |                | Celera AgGen |  
| |                                   |  |             |                |              |  
| |                                   |  |             |                |              |   |            | 
| | Intellectual property rights      |  |             | 3 years        |              | $ | 38,268,051 | 
| |                                   |  |             |                |              |   |            | 
| | Goodwill                          |  |             | Not applicable |              |   | 3,739,870  | 
| |                                   |  |             |                |              |   |            | 
| | Fixed assets                      |  |             | 6-10 years     |              |   | 1,455,468  | 
| |                                   |  |             |                |              |   |            | 
| | Inventory                         |  |             | Not applicable |              |   | 67,458     | 
| |                                   |  |             |                |              |   |            | 
| |                                   |  |             |                |              |   |            | 
| | Total purchase
  price allocation |  |             |                |              | $ | 43,530,847 | 
| |                                   |  |             |                |              |   |            | 

| |                                                                                                                                                                                  
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Goodwill was a result of the purchase price
  exceeding the value of assets acquired and is attributable to the
  technologies and products of the animal genomics business unit.

F-18

---



|   |                                                                                                                                                                                                          | 
|-- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 
|6. | SHARE-BASED PAYMENT EXPENSE                                                                                                                                                                             
|   |                                                                                                                                                                                                          | 
|   | The consolidated statements of operations include
  the following share-based payment expense as calculated pursuant to the
  provisions of SFAS No. 123 for 2003 and SFAS No. 123(R) for 2005 and 2004:

|                                                |  |              |           |      |   |            |  |   |           | 
|----------------------------------------------- |  | ------------ | --------- | ---- | - | ---------- |  | - | --------- | 
|                                                |  | December 31, |          
|                                                |  |              |          
|                                                |  | 2005         |           | 2004 |   | 2003       | 
|                                                |  |              |           |      |   |            | 
|Research and development                        |  | $            | 482,197   |      | $ | 644,797    |  | $ | 482,818   | 
|                                               
|General and administrative                      |  |              | 2,905,168 |      |   | 2,715,518  |  |   | 2,537,323 | 
|                                               
|Interest expense and accretion of debt discount |  |              | 417,759   |      |   | 14,301,157 |  |   | 2,907,589 | 
|                                               
|Debt issue costs                                |  |              |          |      |   | 553,660    |  |   | 2,573,641 | 
|                                                |  |              |           |      |   |            | 
|Total                                           |  | $            | 3,805,124 |      | $ | 18,215,132 |  | $ | 8,501,371 | 
|                                                |  |              |           |      |   |            | 

|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|-- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   | Included in debt conversion expense in 2005 and 2004
  were warrants given as an inducement to convert from debt to preferred stock
  with a calculated value of $6,147 and $817,703, respectively.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|   | Share-based payments in the expense categories above
  include expense associated with stock options granted to employees and
  directors as compensation and to outsiders for services performed.  In addition, share-based payment expense
  includes the expense recorded from the calculated value of warrants granted
  in connection with debt securities being issued and the expense recorded from
  the calculated value of penalty warrants granted, which is included in
  interest expense and accretion of debt discount.  Penalty warrants are contractually granted when the Company
  fails to meet certain specified criteria, such as failure to repay the
  obligation when due, or failure to consummate an IPO within one year of the
  debt being issued.
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|7. | PREPAID EXPENSES AND OTHER CURRENT
  ASSETS                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    

Prepaid expenses and other current assets consist of
the following:

|                   |  |              |         |  |   |         | 
|------------------ |  | ------------ | ------- |  | - | ------- | 
|                   |  | December 31, |        
|                   |  |              |        
|                   |  |              | 2005    |  |   | 2004    | 
|                   |  |              |         |  |   |         | 
|Prepaid expenses   |  | $            | 35,171  |  | $ | 46,638  | 
|Supplies inventory |  |              | 95,857  |  |   | 56,484  | 
|                   |  |              |         |  |   |         | 
|Total              |  | $            | 131,028 |  | $ | 103,122 | 
|                   |  |              |         |  |   |         | 

The Company capitalized deferred financing costs
relating to short-term debt of $0 in the years ended December 31, 2005 and
2004.  Amortization expense related to
deferred debt issue cost

F-19

---



|   |                                                                                                   
|-- | --------------------------------------------------------------------------------------------------
|   | was $0, $98,565 and $734,829 for the years ended
  December 31, 2005, 2004 and 2003, respectively.
|   |                                                                                                   
|8. | PROPERTY AND EQUIPMENTNET                                                                        
|   |                                                                                                   
|   | Property and equipment consists of the following:                                                 
|   |                                                                                                   

|                                     |  | December
  31, |           
|------------------------------------ |  | -------------- | ----------
|                                     |  |                |           
|                                     |  | 2005           |           
|                                     |  |                |           
|Office equipment                     |  | $              | 1,219,938 
|Production equipment                 |  |                | 1,814,799 
|Office equipment under capital lease |  |                | 213,224   
|Laboratory equipment                 |  |                |          
|Leasehold improvements               |  |                | 129,062   
|                                     |  |                |           
|                                    
|                                     |  |                | 3,377,023 
|Less:
  Accumulated depreciation     |  |                | (1,300,367
|                                     |  |                |           
|                                    
|Total                                |  | $              | 2,076,656 
|                                     |  |                |           

|   |                                                                                                                                                                                                                                                                                          
|-- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   | The Company recorded depreciation expense of
  $465,089, $375,826 and $340,917 for years ended December 31, 2005, 2004 and
  2003, respectively.  Accumulated
  depreciation for equipment under capital leases was $47,380 and $23,114 as of
  December 31, 2005 and 2004, respectively.
|   |                                                                                                                                                                                                                                                                                          
|   | The Company acquired assets through capital leases
  in a non-monetary transaction in the amount of $152,194 in 2004.                                                                                                                                                                    
|   |                                                                                                                                                                                                                                                                                          
|   | The Company disposed of fixed assets from
  MetaMorphix Canada, Inc. with a net book value of $225,720 in the third
  quarter of 2005.                                                                                                                                                   
|   |                                                                                                                                                                                                                                                                                          
|9. | INTELLECTUAL PROPERTY RIGHTS                                                                                                                                                                                                                                                             
|   |                                                                                                                                                                                                                                                                                          
|   | Acquired intangible assets subject to amortization
  as of December 31, 2005 and 2004 are as follows:                                                                                                                                                                                    

|                                 |  |              |             |   |   |             |  
|-------------------------------- |  | ------------ | ----------- | - | - | ----------- | -
|                                 |  | December 31, |            
|                                 |  |              |            
|                                 |  |              | 2005        |   |   | 2004        |  
|                                 |  |              |             |   |   |             |  
|Intellectual property rights     |  | $            | 38,268,051  |   | $ | 38,268,051  |  
|Less:
  Accumulated amortization |  |              | (38,268,051 | ) |   | (36,142,048 | )
|                                 |  |              |             |   |   |             |  
|Total                            |  | $            |            |   | $ | 2,126,003   |  
|                                 |  |              |             |   |   |             |  

F-20

---



|    |                                                                                                                                                                      
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    | Amortization expense related to intangible assets
  was $2,126,003, $12,756,015 and $12,756,016 for the years ended December 31,
  2005, 2004 and 2003, respectively.
|    |                                                                                                                                                                      
|10. | LONG-TERM DEFERRED DEBT ISSUE COSTS                                                                                                                                  
|    |                                                                                                                                                                      
|    | The long-term deferred debt issue cost activity in
  2005, 2004 and 2003 is as follows:                                                                              

| |                                     |  |   |           
| | ----------------------------------- |  | - | ----------
| | Balance at January 1, 2003          |  | $ |          
| | Allocated value of warrants granted |  |   | 2,677,496 
| | Other debt issue costs              |  |   | 1,176,404 
| | Amortization to debt issue costs    |  |   | (161,917  
| |                                     |  |   |           
| | Balance at December 31, 2003        |  |   | 3,691,983 
|
| | Allocated value of warrants granted |  |   | 2,765,531 
| | Other debt issue costs              |  |   | 1,500,858 
| | Amortization to debt issue costs    |  |   | (1,478,292
| |                                     |  |   |           
| | Balance at December 31, 2004        |  |   | 6,480,080 
|
| | Allocated value of warrants granted |  |   | 62,562    
| | Other debt issue costs              |  |   | 532,233   
| | Amortization to debt issue costs    |  |   | (1,678,825
| |                                     |  |   |           
|
| | Balance at December 31, 2005        |  | $ | 5,396,050 
| |                                     |  |   |           

|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    | Other debt issue costs were related to commissions
  and other professional services.
  Warrants were granted for financial advisory service fees.  These deferred debt issue costs are being
  amortized over the term of the notes.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|11. | INCOME TAXES                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|    | The Company accounts for income taxes pursuant to
  SFAS No. 109, Accounting for Income Taxes, which provides for an asset
  and liability approach to accounting for income taxes.  Deferred tax assets and liabilities
  represent the future tax consequences of the differences between the
  financial statement carrying amounts of assets and liabilities versus the tax
  bases of assets and liabilities.
  Under this method, deferred tax assets are recognized for deductible
  temporary differences, and operating loss and tax credit carryforwards.  Deferred liabilities are recognized for
  taxable temporary differences.
  Deferred tax assets are reduced by a valuation allowance when, in the
  opinion of management, it is more likely than not that some portion or all of
  the deferred tax assets will not be realized.  The impact of tax rate changes on deferred tax assets and
  liabilities is recognized in the year that the change is enacted.

F-21

---



The provision for income taxes consists of the
following:

|                                                                   |  |                           |             |      |   |             |   |   |             |  
|------------------------------------------------------------------ |  | ------------------------- | ----------- | ---- | - | ----------- | - | - | ----------- | -
|                                                                   |  | Year ended
  December 31, |            
|                                                                   |  |                           |            
|                                                                   |  | 2005                      |             | 2004 |   | 2003        |  
|                                                                   |  |                           |             |      |   |             |  
|Current:                                                           |  |                           |             |      |   |             |   |   |             |  
|Federal                                                            |  | $                         |            |      | $ |            |   | $ |            |  
|State                                                              |  |                           |            |      |   |            |   |   |             |  
|                                                                   |  |                           |             |      |   |             |   |   |             |  
|Total current                                                      |  | $                         |            |      | $ |            |   | $ |            |  
|                                                                   |  |                           |             |      |   |             |   |   |             |  
|Deferred:                                                          |  |                           |             |      |   |             |   |   |             |  
|Federal                                                            |  |                           | (9,217,000  | )    |   | (18,279,000 | ) |   | (12,003,000 | )
|State                                                              |  |                           | (1,027,000  | )    |   | (2,037,000  | ) |   | (1,338,000  | )
|Foreign                                                            |  |                           |            |      |   | (195,000    | ) |   | (230,000    | )
|                                                                   |  |                           |             |      |   |             |   |   |             |  
|Total deferred                                                     |  |                           | (10,244,000 | )    |   | (20,511,000 | ) |   | (13,571,000 | )
|                                                                   |  |                           |             |      |   |             |   |   |             |  
|Change in
  valuation allowance, net of the effect of acquisitions |  |                           | 10,244,000  |      |   | 20,511,000  |   |   | 13,571,000  |  
|                                                                   |  |                           |             |      |   |             |   |   |             |  
|Provision for
  income taxes                                       |  | $                         |            |      | $ |            |   | $ |            |  
|                                                                   |  |                           |             |      |   |             |   |   |             |  

The tax effects of the temporary differences that
  give rise to significant portions of deferred tax assets and liabilities are
  as follows;

|                                          |  |                |             |      |   |             |  
|----------------------------------------- |  | -------------- | ----------- | ---- | - | ----------- | -
|                                          |  | December
  31, |            
|                                          |  |                |            
|                                          |  | 2005           |             | 2004 |   | 2003        |  
|                                          |  |                |             |      |   |             |  
|Deferred tax assets:                      |  |                |             |      |   |             |  
|Stock
  compensation                      |  | $              | 6,806,000   |      | $ | 5,475,000   |  
|Accrued
  liabilities                     |  |                | 1,501,000   |      |   | 1,568,000   |  
|Net operating
  loss                      |  |                | 46,584,000  |      |   | 37,033,000  |  
|Intangible
  assets                       |  |                | 9,662,000   |      |   | 10,181,000  |  
|Capital loss                              |  |                | 195,000     |      |   | 195,000     |  
|Foreign tax credit                        |  |                | 860,000     |      |   | 841,000     |  
|                                          |  |                |             |      |   |             |  
|                                          |  |                | 65,608,000  |      |   | 55,293,000  |  
|                                          |  |                |             |      |   |             |  
|Deferred tax liabilities:                 |  |                |             |      |   |             |  
|Depreciation                              |  |                | (309,000    | )    |   | (238,000    | )
|                                          |  |                |             |      |   |             |  
|                                          |  |                | (309,000    | )    |   | (238,000    | )
|                                          |  |                |             |      |   |             |  
|Net deferred tax
  asset before allowance |  |                | 65,299,000  |      |   | 55,055,000  |  
|Valuation allowance                       |  |                | (65,299,000 | )    |   | (55,055,000 | )
|                                          |  |                |             |      |   |             |  
|Net deferred tax
  assets                 |  | $              |            |      | $ |            |  
|                                          |  |                |             |      |   |             |  

Realization of deferred tax assets is primarily
  dependent on future taxable income, the amount and timing of which is
  uncertain given the Companys history of losses.  Therefore a valuation allowance has been recorded for the
  entire deferred tax asset.  The valuation
  allowance is adjusted on a periodic basis to reflect managements estimate of
  the realizable value of the net deferred assets.

F-22

---



| |                                                                                                                              
| | -----------------------------------------------------------------------------------------------------------------------------
| | The
  reconciliation of the tax provision (benefit) computed at the statutory rate
  to the effective tax rate is as follows:

| |                                 |  |                           |        |      |  |        |    |  |        |   
| | ------------------------------- |  | ------------------------- | ------ | ---- |  | ------ | -- |  | ------ | --
| |                                 |  | Year ended
  December 31, |       
| |                                 |  |                           |       
| |                                 |  | 2005                      |        | 2004 |  | 2003   |   
| |                                 |  |                           |        |      |  |        |   
| | Federal
  income tax rate       |  |                           | (35.00 | %)   |  | (35.00 | %) |  | (35.00 | %)
| | State                           |  |                           | (3.90  | %)   |  | (3.90  | %) |  | (3.90  | %)
| | Foreign                         |  |                           |       |      |  | (0.95  | %) |  | (1.69  | %)
| | Permanent
  tax differences     |  |                           | .04    | %    |  | .04    | %  |  | .03    | % 
| | Change in
  valuation allowance |  |                           | 38.86  | %    |  | 39.81  | %  |  | 40.56  | % 
| |                                 |  |                           |        |      |  |        |    |  |        |   
| | Effective
  tax rate            |  |                           | 0.00   | %    |  | 0.00   | %  |  | 0.00   | % 
| |                                 |  |                           |        |      |  |        |    |  |        |   

|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    | As of
  December 31, 2005, the Company had federal net operating loss carryforwards
  of approximately $117,000,000 and capital loss carryforwards of approximately
  $500,000. The federal net operating loss carryforwards will expire from 2010
  through 2025 and the capital loss carryforwards will expire in 2006.                                                                                                                                                                                                            
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|    | The Tax
  Reform Act of 1986 contains provisions that may limit the amount of NOL
  carryforwards that may be used in any given year if certain events, including
  a significant change in ownership, occur. The provisions of these ownership
  change rules could limit the Companys ability to utilize its loss
  carryforwards.                                                                                                                                                                                              
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|12. | COMMITMENTS AND CONTINGENCIES                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|    | Leases and Royalty Agreements
  The Company has office facilities and equipment under capital and operating
  leases. In addition, the Company has certain agreements that provide for
  minimum future royalty payments and sublease income. Future minimum payments
  for capital leases, noncancelable operating leases, and royalty agreements
  with terms in excess of one year, as well as expected minimum payments to be
  received from subleases with terms in excess of one year at December 31,
  2005, are as follows:

| |                                       |  |         |         |           |   |           |  |            |          |   |   |         | 
| | ------------------------------------- |  | ------- | ------- | --------- | - | --------- |  | ---------- | -------- | - | - | ------- | 
| |                                       |  | Capital |         | Operating |   | Sublease  |  | Royalty    |         
| |                                       |  | Leases  |         | Leases    |   | Income    |  | Agreements |         
| |                                       |  |         |         |           |   |           |  |            |         
|
| | 2006                                  |  | $       | 42,390  |           | $ | 964,261   |  | $          | (278,550 | ) | $ | 171,600 | 
| | 2007                                  |  |         | 42,390  |           |   | 579,228   |  |            |         |   |   | 171,600 | 
| | 2008                                  |  |         | 42,390  |           |   | 437,825   |  |            |         |   |   | 171,600 | 
| | 2009                                  |  |         | 29,155  |           |   | 488,913   |  |            |         |   |   | 171,600 | 
| | 2010                                  |  |         | 17,480  |           |   | 504,104   |  |            |         |   |   | 171,600 | 
| |                                       |  |         |         |           |   |           |  |            |          |   |   |         | 
| | Thereafter                            |  |         | 24,764  |           |   | 696,001   |  |            |         |   |   |        | 
| |                                       |  |         |         |           |   |           |  |            |          |   |   |         | 
| |                                       |  |         |         |           |   |           |  |            |          |   |   |         | 
| | Total
  payments/(receipts)           |  |         | 198,569 |           |   | 3,670,332 |  |            | (278,550 | ) |   | 858,000 | 
| |                                       |  |         |         |           |   |           |  |            |          |   |   |         | 
| | Less:
  Amounts representing interest |  |         | (34,474 | )         |   |          |  |            |         |   |   |        | 
| |                                       |  |         |         |           |   |           |  |            |          |   |   |         | 
| |                                       |  |         |         |           |   |           |  |            |          |   |   |         | 
| | Net
  payments/(receipts)             |  | $       | 164,095 |           | $ | 3,670,332 |  | $          | (278,550 | ) | $ | 858,000 | 
| |                                       |  |         |         |           |   |           |  |            |          |   |   |         | 

| |                                                                                                                                                
| | -----------------------------------------------------------------------------------------------------------------------------------------------
| | The
  commitments for capital leases and operating leases set forth in the above
  table have not been reduced for anticipated sublease income.

F-23

---



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Rent expense
  under operating leases was $1,150,928, $832,259, and $764,517 for the years
  ended December 31, 2005, 2004, and 2003, respectively. Sublease income was
  $135,708, $92,404, and $7,190 for the years ended December 31, 2005, 2004,
  and 2003, respectively.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| | The Company
  is currently leasing space in Savage, Maryland which it no longer occupies.
  This lease commenced on January 1, 2002 and will terminate on December 31,
  2011. The Company currently subleases this space. This sublease commenced on
  December 1, 2004 and will terminate on December 31, 2011. The sublease covers
  the primary lease obligation. MetaMorphix, Inc. has the option and intends to
  assign the lease to the sub-lessee and effectively terminate the lease on
  December 31, 2006.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| | LitigationFrom
  time to time, the Company and its subsidiaries face lawsuits and claims
  related to commercial, employment and patent-related matters.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| | Regions
  Bank, a secured, $5 million lender of Samuel R. Dunlap, Jr., a former
  Director who is in bankruptcy, has sued us in U.S. District Court for the
  Northern District of Georgia, Gainesville Division, for payment of an August
  1, 2001 $731,000 Promissory Note made by us to Mr. Dunlap. The amount that is
  owed is in dispute (due to offsets made prior to the bankruptcy at Mr.
  Dunlaps direction) and we contend that the conditions precedent to the
  maturity of the loan have not occurred. We also note that our December 31,
  2005 financial statements reflect principal and interest of $625,498 as being
  owed as of such date. Regions Bank has also claimed that we (in the operation
  of our securities transfer function) and our legal counsel enabled Mr. Dunlap
  to pledge one of his several Warrants to another creditor in breach of an already
  existing Commercial Pledge Agreement between the Bank and Mr. Dunlap. We
  dispute this claim. We have incurred $65,189 of legal expense to date related
  to the defense of this lawsuit.
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| | In addition,
  during 2005, we settled and dismissed four lawsuits for a total cost of
  $105,640. There are no such cases presently pending as of December 31, 2005.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| | Although the
  possible loss or range of loss for these matters cannot be estimated,
  management of the Company, after reviewing developments to date with legal
  counsel, is of the opinion that the outcome of such matters will not have a
  material adverse effect on the Companys consolidated financial position,
  results of operations, or cash flows.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| | Director and Officer IndemnificationThe
  Companys certificate of incorporation provides that it will indemnify and
  hold harmless its officers, directors and others serving the corporation in
  various capacities to the fullest extent permitted by the Delaware General
  Corporation Law, or DGCL. Section 145 of the DGCL provides that a Delaware
  corporation has the power to indemnify officers and directors in specified
  circumstances. As of December 31, 2005, the only outstanding matter relating
  to director and officer indemnification is regarding the Regions Bank matter
  described above. We will indemnify
  and hold harmless our legal counsel, who is also the Secretary of the
  Company, in this matter.                                                                                                                                                                                                                                                                                                                                           
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| | Management CompensationThe
  Company has entered into agreements with four employees, including three
  executives and one scientist, which require payments by the Company totaling
  approximately $1,009,000 annually based on their current salaries.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 

F-24

---



|    |                                                                                                     
|--- | ----------------------------------------------------------------------------------------------------
|13. | DEBT                                                                                                
|    |                                                                                                     
|    | The table
  below summarizes the short-term debt activity and year-end balances for 2005
  and 2004:

| |                                                           |  |                                      |            |                                      |   |            |   | 
| | --------------------------------------------------------- |  | ------------------------------------ | ---------- | ------------------------------------ | - | ---------- | - | 
| |                                                           |  | Year ended
  
  December 31, 
  2005 |            | Year ended
  
  December 31, 
  2004 |   |           
| |                                                           |  |                                      |            |                                      |   |           
| | SHORT-TERM NOTES PAYABLE                                  |  |                                      |            |                                      |   |            |   | 
| |                                                           |  |                                      |            |                                      |   |            |   | 
| | 8% Secured Convertible Promissory Notes                   |  |                                      |            |                                      |   |            |   | 
| | Face amount, beginning of year                            |  | $                                    | 195,956    |                                      | $ | 3,640,987  |   | 
| | Issuance of new notes to satisfy accrued interest
payable |  |                                      | 11,140     |                                      |   | 19,876     |   | 
| | Repayments                                                |  |                                      | (55,080    | )                                    |   | (748,249   | ) | 
| | Conversion from (to) common stock                         |  |                                      |           |                                      |   | 51,029     |   | 
| | Conversion to preferred stock                             |  |                                      | (10,001    | )                                    |   | (2,767,687 | ) | 
| |                                                           |  |                                      |            |                                      |   |            |   | 
| | Face amount, end of year                                  |  |                                      | 142,015    |                                      |   | 195,956    |   | 
| |                                                           |  |                                      |            |                                      |   |            |   | 
| |                                                           |  |                                      |            |                                      |   |            |   | 
| | 10.9% Secured Convertible Promissory Notes                |  |                                      |            |                                      |   |            |   | 
| | Face amount, beginning of year                            |  |                                      | 979,402    |                                      |   | 2,544,984  |   | 
| | Issuance of new notes to satisfy accrued interest
payable |  |                                      | 140,332    |                                      |   | 84,198     |   | 
| | Repayments                                                |  |                                      | (64,448    | )                                    |   | (910,371   | ) | 
| | Conversion to preferred stock                             |  |                                      | (117,442   | )                                    |   | (739,409   | ) | 
| |                                                           |  |                                      |            |                                      |   |            |   | 
| | Face amount, end of year                                  |  |                                      | 937,844    |                                      |   | 979,402    |   | 
| |                                                           |  |                                      |            |                                      |   |            |   | 
| |                                                           |  |                                      |            |                                      |   |            |   | 
| | 8% - 15% Bridge Loans                                     |  |                                      |            |                                      |   |            |   | 
| | Face amount, beginning of year                            |  |                                      | 170,000    |                                      |   | 3,755,000  |   | 
| | Proceeds from debt issuance                               |  |                                      | 3,292,958  |                                      |   |           |   | 
| | Repayments                                                |  |                                      |           |                                      |   | (1,472,500 | ) | 
| | Conversion to long-term debt                              |  |                                      | (2,084,958 | )                                    |   | (2,112,500 | ) | 
| |                                                           |  |                                      |            |                                      |   |            |   | 
| | Face amount, end of year                                  |  |                                      | 1,378,000  |                                      |   | 170,000    |   | 
| |                                                           |  |                                      |            |                                      |   |            |   | 
| |                                                           |  |                                      |            |                                      |   |            |   | 
| | Capital Lease Notes Payable                               |  |                                      | 31,145     |                                      |   | 28,466     |   | 
| |                                                           |  |                                      |            |                                      |   |            |   | 
| |                                                           |  |                                      |            |                                      |   |            |   | 
| | SHORT-TERM NOTES PAYABLE                                  |  | $                                    | 2,489,004  |                                      | $ | 1,373,824  |   | 
| |                                                           |  |                                      |            |                                      |   |            |   | 



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 8.0% Secured Convertible Promissory NotesThese
  notes (or 8% Notes) bear interest at 8.0%. Each holder has the right at maturity,
  or the closing of a firm commitment for an initial public offering, for the
  principal and interest to convert into common stock of the Company at the
  election of the holder at a discounted price determined by the level of
  participation in the offering. The discount ranges from 20% to 40%.                                      
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | The Company
  repaid $55,080 and $748,249 in the years ended December 31, 2005 and 2004,
  respectively. The Company converted $2,767,687 of 8% Notes as well as accrued
  interest of $239,610, into 683,477 shares of Series F Convertible Preferred
  Stock of the Company in the year ended December 31, 2004. In connection with
  the 8% Note conversion to Series F Convertible Preferred Stock, the Company
  issued warrants to purchase 819,757 shares of common stock with

F-25

---



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | an exercise
  price of $6.00 during the year ended December 31, 2004. The warrants expire
  in 2014 and had a calculated value of $659,923.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | The
  conversion of the 8.0% Notes into the Series F Convertible Preferred Stock in
  2004 described above qualified as an induced conversion of convertible debt.
  The Company has recorded debt conversion expense in the amount of $2,613,102
  in the year ended December 31, 2004, related to this induced conversion. This
  expense includes the calculated value of warrants granted. There were no
  conversions of our 8% Notes into equity during 2005.                                                                                                                                                                                                                                                   
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | 10.9% Secured Convertible Promissory NotesThese
  notes, or the 10.9% Notes, bear interest at 10.9%. As of December 31, 2005,
  each holder has the right to convert the principal and interest at a price of
  $4.00 per share.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | The Company
  repaid $64,448 and $910,371 in the years ended December 31, 2005 and 2004,
  respectively. The holders converted principal of $117,442 as well as accrued
  interest of $26,550 into 16,883 shares of Series G Convertible Preferred
  Stock of the Company in the year ended December 31, 2005. In connection with
  the 10.9% Note conversion to Series G Convertible Preferred Stock, the
  Company issued warrants to purchase 17,769 shares of common stock with an exercise
  price of $6.00, and warrants to purchase 3,599 shares of common stock with an
  exercise price of $4.00 during the year ended December 31, 2005. The warrants
  expire in 2015 and had a calculated value of $6,147.
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | The Company
  issued new rollover notes which included amounts to satisfy accrued interest
  of $140,332 and $84,198 for the year ended December 31, 2005 and 2004,
  respectively, at the election of the noteholders.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | The holders
  converted principal of $739,409 as well as accrued interest of $67,018 into
  183,277 shares of Series F Preferred stock of the Company in the year ended
  December 31, 2004. In connection with the 10.9% Note conversion to Series F
  Convertible Preferred Stock, the Company issued warrants to purchase 195,995
  shares of common stock with an exercise price of $6.00 during the year ended
  December 31, 2004. The warrants expire in 2014 and had a calculated value of
  $157,780.                                                                                                                                                                                                        
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | The
  conversion of the 10.9% Notes into shares of Series G Convertible Preferred
  Stock in 2005 and Series F Convertible Preferred Stock in 2004 described
  above qualified as induced conversions of convertible debt. The Company has
  recorded debt conversion expense in the amount of $93,696 and $668,360 in the
  years ended December 31, 2005 and 2004, respectively, related to these
  induced conversions. This expense includes the calculated value of warrants
  granted.                                                                                                                                                                                                                          
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | Bridge LoansThe
  Company issued bridge loans in 2005 which totaled $3,292,958. These loans
  bear interest at 10% and are repayable one year from the original issue date.
  The Company issued warrants in connection with these loans to purchase
  257,495 shares of common stock. These warrants have an exercise price of
  $4.00 and a calculated value of $157,395, which was recorded as interest
  expense in 2005. Holders of bridge notes totaling $2,084,958 converted their
  bridge loans, along with accrued interest into $2,180,336 of 10.0% Secured
  Convertible Promissory Notes on December 30, 2005. There was no gain or loss
  on the conversion.                                           
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | The Company
  also issued warrants to purchase 50,248 shares of common stock in the year
  ended December 31, 2005 for advisory services in connection with obtaining
  the bridge loans. The                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         

F-26

---



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | warrants
  have an exercise price of $4.00 per share, expire in 2015, had a calculated
  value of $31,712 and were recorded as debt issue costs in the year ended
  December 31, 2005.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| | The Series
  C, D, and E Bridge Loans were issued in May through July 2003 and totaled
  $5,975,000. The Company had no amounts due under these loans at either
  December 31, 2005 or December 31, 2004. The loans had a 12% interest rate and
  were due on December 31, 2003. The Company repaid $0 and $1,392,500 plus
  accrued interest during the years ended December 31, 2005 and 2004,
  respectively. The Company incurred penalty interest at a rate of 18% on
  past-due balances. During the year ended December 31, 2004, holders of the
  Series C, D, and E Bridge Notes converted $2,112,500 plus accrued interest
  into $2,203,730 of 12.5% Convertible Secured Promissory Notes. In connection
  with the Series C, D, and E Bridge Loans, the Company issued warrants to
  purchase 2,390,000 of common stock with an initial exercise price of $12.00.
  These warrants expire in 2013, have an allocated value of $917,761, and were
  recorded as interest expense during the year ended December 31, 2003. The
  exercise price of these warrants was subsequently adjusted down to $6.00 due
  to the triggering of a contingently adjustable exercise price clause in the
  warrant document. The calculated value of this adjustment was $1,241,704,
  which was recorded as interest expense in 2003. During the year ended
  December 31, 2004, the Company also issued penalty warrants to purchase
  3,325,000 shares of common stock with an initial exercise price of $6.00.
  Penalty warrants were granted because the Series C, D, and E Bridge Loans
  were not repaid in full by the due date. These warrants had a calculated
  value of $2,262,531 which was recorded as interest expense in 2004. The
  exercise price of the penalty warrants was adjusted to $4.00 in 2004 due to
  the triggering of a contingently adjustable exercise price clause in the
  warrant document. The calculated value of this adjustment was $1,777,950,
  which was recorded as interest expense in 2004.
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| | Other Various Bridge Loans
  The Company issued a promissory bridge loan for $225,000 to an accredited
  investor in a private placement in December 2002. This loan bears interest at
  8% with no stated maturity date. The Company converted $75,000 of this loan,
  plus accrued interest of $6,211 into 13,333 shares of common stock in January
  2003. The Company repaid $80,000 of the remaining loan during the year ended
  December 31, 2004. The outstanding balance on this loan was $70,000 at
  December 31, 2005 and 2004.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| | The Company
  issued a promissory bridge loan for $100,000 to an unrelated investor in
  January 2003. This loan bears interest at 12% with no stated maturity date.
  The outstanding balance on this loan was $100,000 at December 31, 2005 and
  2004.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| | Promissory Notes due to Related PartiesThe
  Company had amounts due to related parties of $1,584,498 and $1,214,498 as of
  December 31, 2005 and December 31, 2004, respectively. These notes are
  promissory notes and bridge loans with members of management and directors,
  bearing interest at various rates, the lowest of which being prime plus 1%,
  and the highest being 12%, and are payable on demand. Proceeds from these
  borrowings were used to fund continuing operations. The Company repaid $0 and
  $35,000 in the years ended December 31, 2005 and 2004, respectively.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| | In the
  connection with the issuance of the promissory notes from related parties,
  the Company granted warrants to purchase 374,028 shares of the Companys
  common stock, with an allocated value of $737,104 in 2002. The Company recorded
  the value of these warrants as interest expense for the year ended December
  31, 2002. The warrants have exercise prices of $5.00 and expire in 2012.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              

F-27

---



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Mr. Sam
  Dunlap served as a financial advisor to the Company and secured financing for
  the Company during his term as a director between January 14, 2000 and August
  27, 2002. A retainer fee of $10,000 per month was payable to him from
  November 1999 to June 2003 for services as a financial advisor. Unpaid
  retainer fees and various bridge loans made by Mr. Dunlap to the Company
  together total $625,498 and remain unpaid as of December 31, 2005. During the
  period August 2000 through March 2001, Dr. Quattlebaum, the Companys
  Co-Chairman and Chief Executive Officer, made working capital loans to the Company
  totaling $264,000. At December 31, 2005 and 2004, we had $264,000 due on
  these loans. These loans are evidenced by notes bearing interest at prime
  plus 1% and are due on demand.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | The Company
  obtained bridge loans in May and June 2003 from directors totaling $560,000.
  The loans bear interest at 12%. The Company had outstanding amounts due from
  these loans of $250,000 at December 31, 2005 and 2004. The Company repaid
  $280,000 plus accrued interest in November 2003. The Company repaid $30,000
  plus accrued interest in February 2004. In connection with these loans, the
  Company issued warrants to purchase 224,000 shares of common stock in 2003
  with an exercise price of $12.00. The warrants had an allocated value of
  $94,891 which was recorded as interest expense in 2003. The exercise price
  was subsequently adjusted down to $6.00 due to a contingently adjustable
  exercise price clause in the warrant document. The calculated value of the
  exercise price adjustment was $116,377, which was recorded as interest expense
  in 2003. These warrants expire in 2013. In the year ended December 31, 2004,
  due to non-repayment of these bridge loans, the Company issued penalty
  warrants to purchase 296,000 shares of common stock with an initial exercise
  price of $4.00 and $6.00. The penalty warrants had a calculated value of
  $264,193 which was recorded as interest expense in 2004. The exercise price
  of the $6.00 warrants was subsequently adjusted down to $4.00 due to a
  contingently adjustable exercise price clause in the warrant document. The
  calculated value of the exercise price adjustment was $88,764, which was
  recorded as interest expense in 2003. In 2005, the Company issued penalty
  warrants to purchase 40,000 shares of common stock with an exercise price of
  $4.00. The penalty warrants had a calculated value of $18,032 which was
  recorded as interest expense in 2005. These penalty warrants were issued due
  to the past-due balances on the loans and expire in 2014. Also due to the
  past-due balances, the loans bear a penalty interest rate of 18% for the
  years ended December 31, 2005 and 2004.

F-28

---



| |                                                                                                    
| | ---------------------------------------------------------------------------------------------------
| | The table
  below summarizes the long-term debt activity and year-end balances for 2005
  and 2004:

|                                                                                  |  |                                      |            |                                      |   |            |  
|--------------------------------------------------------------------------------- |  | ------------------------------------ | ---------- | ------------------------------------ | - | ---------- | -
|                                                                                  |  | Year ended
  
  December 31, 
  2005 |            | Year ended
  
  December 31, 
  2004 |  
|                                                                                  |  |                                      |            |                                      |  
|LONG-TERM
  NOTES PAYABLE                                                         |  |                                      |            |                                      |   |            |  
|                                                                                  |  |                                      |            |                                      |   |            |  
|12.5% Convertible Secured Promissory Notes                                        |  |                                      |            |                                      |   |            |  
|Face amount, beginning of year                                                    |  | $                                    | 16,200,631 |                                      | $ | 6,567,973  |  
|Proceeds from debt issuance                                                       |  |                                      |           |                                      |   | 6,607,939  |  
|Conversion from short-term notes including accrued
interest of
  $91,230          |  |                                      |           |                                      |   | 2,203,730  |  
|Issuance of new notes to satisfy accrued interest
payable                         |  |                                      | 2,046,303  |                                      |   | 820,989    |  
|                                                                                  |  |                                      |            |                                      |   |            |  
|                                                                                  |  |                                      |            |                                      |   |            |  
|Face amount, end of year                                                          |  |                                      | 18,246,934 |                                      |   | 16,200,631 |  
|                                                                                  |  |                                      |            |                                      |   |            |  
|Unaccreted debt discount, beginning of
year                                       |  |                                      | (7,000,745 | )                                    |   | (3,867,245 | )
|Debt discount from allocated value of warrants
granted                            |  |                                      |           |                                      |   | (4,934,571 | )
|Accretion of discount to interest expense                                         |  |                                      | 1,801,071  |                                      |   | 1,801,071  |  
|                                                                                  |  |                                      |            |                                      |   |            |  
|Unaccreted debt discount, end of year                                             |  |                                      | (5,199,674 | )                                    |   | (7,000,745 | )
|                                                                                  |  |                                      |            |                                      |   |            |  
|                                                                                  |  |                                      |            |                                      |   |            |  
|12.5%
  Convertible Secured Promissory Notes net outstanding balance, end of year |  |                                      | 13,047,260 |                                      |   | 9,199,886  |  
|                                                                                  |  |                                      |            |                                      |   |            |  
|                                                                                  |  |                                      |            |                                      |   |            |  
|10% Secured Convertible Promissory Notes                                          |  |                                      |            |                                      |   |            |  
|Face amount, beginning of year                                                    |  |                                      |           |                                      |   |           |  
|Proceeds from debt issuance                                                       |  |                                      | 2,749,250  |                                      |   |           |  
|Conversion from short-term notes including accrued
interest of
  $95,378          |  |                                      | 2,180,336  |                                      |   |           |  
|                                                                                  |  |                                      |            |                                      |   |            |  
|                                                                                  |  |                                      |            |                                      |   |            |  
|Face amount, end of year                                                          |  |                                      | 4,929,586  |                                      |   |           |  
|                                                                                  |  |                                      |            |                                      |   |            |  
|Unaccreted debt discount, beginning of
year                                       |  |                                      |           |                                      |   |           |  
|Debt discount from allocated value of warrants
granted                            |  |                                      | (404,741   | )                                    |   |           |  
|Debt discount from allocated value of embedded
derivative                         |  |                                      | (43,214    | )                                    |   |           |  
|Accretion of discount to interest expense                                         |  |                                      | 37,330     |                                      |   |           |  
|                                                                                  |  |                                      |            |                                      |   |            |  
|Unaccreted debt discount, end of year                                             |  |                                      | (410,625   | )                                    |   |           |  
|                                                                                  |  |                                      |            |                                      |   |            |  
|                                                                                  |  |                                      |            |                                      |   |            |  
|10%
  Secured Convertible Promissory Notes net outstanding balance, end of year   |  |                                      | 4,518,961  |                                      |   |           |  
|                                                                                  |  |                                      |            |                                      |   |            |  
|                                                                                  |  |                                      |            |                                      |   |            |  
|Note Payable to Wyeth                                                             |  |                                      |            |                                      |   |            |  
|Face amount, beginning and end of year                                            |  |                                      | 2,200,000  |                                      |   | 2,200,000  |  
|                                                                                  |  |                                      |            |                                      |   |            |  
|LONG-TERM
  NOTES PAYABLE, net of debt discount                                   |  | $                                    | 19,766,221 |                                      | $ | 11,399,886 |  
|                                                                                  |  |                                      |            |                                      |   |            |  

F-29

---



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 12.5% Convertible Secured NotesThese
  notes bear interest at 12.5%. As of December 31, 2005, each holder has the
  right to convert the principal and interest at a price of $4.00 per share.
  The notes will automatically convert into common stock at the conversion
  price upon the closing of an initial public offering of the Companys
  securities. These notes mature between November 2008 and March 2009.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| | In connection
  with the issuance of the 12.5% Convertible Secured Promissory Notes (or
  12.5% Notes) in 2004 and 2003, the Company granted warrants to purchase
  4,360,250 and 3,283,956 shares of common stock, respectively. These warrants
  had an exercise price of $6.00 per share, expire in 2014 and 2013, and had an
  allocated value of $2,797,723 and $2,240,641, in 2004 and 2003, respectively.
  The value of these warrants was recorded as a debt discount to be amortized
  over the life of the debt. In addition, these convertible notes with
  detachable warrants contained an embedded beneficial conversion feature. The
  Company calculated the value of this beneficial conversion feature to be
  $2,136,848 and $1,830,143 relating to the notes issued in 2004 and 2003,
  respectively. This value was recorded as additional discount and will be
  amortized over the life of the debt.                                                                                                                                           
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| | During the
  second quarter of 2004, a triggering event occurred which caused an
  adjustment in the terms of the warrants which were issued in connection with
  the 12.5% Notes. This adjustment caused the exercise price of the warrant
  issued to decrease from $6.00 to $4.00 per share. It also caused the number
  of warrants to increase by 50%, from 7,644,206 to 11,466,309. Additional
  interest expense of $9,208,160 was recorded in 2004 as a result of the
  adjustment. Future adjustments could occur due to the full-ratchet clause in
  the warrant agreements for those warrants issued in connection with the 12.5%
  Notes. No such triggering events occurred in 2005.                                                                                                                                                                                                                                                                                                                                                                        
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| | Amortization
  expense relating to the debt discounts, both the value of the warrants
  granted as well as the beneficial conversion feature, was $1,801,071,
  $1,801,071 and $203,539 for the years ended December 31, 2005, 2004, and
  2003, respectively.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| | Based on the
  terms of the 12.5% Notes, the Company is required to issue penalty warrants
  to the holders of the 12.5% Notes if an initial public offering has not been
  completed within one year of the date of the notes. The Company issued
  penalty warrants, each with an exercise price of $8.00 per share, to purchase
  1,614,582 shares of common stock as of December 31, 2004. These warrants
  expire in 2014, were valued at $655,443 and were expensed as interest expense
  in 2004. In 2005, the Company issued additional penalty warrants, each with
  an exercise price of $8.00 per share, to purchase 1,461,346 shares of common
  stock. These warrants were valued at $205,692 and were expensed as interest
  expense in 2005. Based on the warrant exchange discussed in Note 14 to the
  consolidated financial statements, the warrant exchange completed by the
  Company in 2005 served to amend the terms of the original note agreement. The
  amendment was to eliminate the obligation to issue penalty warrants into the
  future.
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| | The Company
  also issued warrants to purchase 700,000 and 3,600,000 shares of common stock
  in the years ended December 31, 2004 and 2003, respectively, for advisory
  services in connection with obtaining the 12.5% Note financing. The warrants
  had an exercise price of $6.00 per share, expire in 2014 and 2013, had a
  calculated value of $466,228 and $2,677,496 and were recorded as deferred
  financing costs in the years ended December 31, 2004 and 2003, respectively,
  to be amortized over the life of the debt. During the second quarter of 2004,
  a triggering event occurred which caused an adjustment in the terms of the
  warrants for advisory services in connection with the 12.5% Notes. This
  adjustment caused the exercise price of the warrant issued to decrease from
  $6.00 to $4.00 per share, and the Company recorded an additional $2,299,304
  in deferred financing costs associated with the adjustment in the year ended                                                                                           

F-30

---



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | December 31,
  2004. Amortization expense relating to the deferred financing cost was
  $991,793 and $133,875 for the years ended December 31, 2004 and 2003,
  respectively.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| | Based on the
  terms of the 12.5% Notes, accrued interest is due and payable on the one year
  anniversary date of the notes. The interest is payable in cash or in the form
  of identical new notes, at the option of the Company. The Company has
  satisfied the interest payment on those notes with an anniversary date before
  December 31, 2004 by issuing identical 12.5% Notes in the amount of $820,989.
  The Company has satisfied the interest payment on those notes with an
  anniversary date between January 1, 2005 and December 31, 2005 by issuing
  identical 12.5% Notes in the amount of $2,046,303.                                                                                                                                                                                                                                                                                                                                                                                                                                             
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| | 10% Secured Convertible Promissory NotesThese
  notes bear interest at 10%. As of December 31, 2005, each holder has the
  right to convert the principal and interest at a price of $4.00 per share.
  The notes will automatically convert into common stock upon the closing of an
  initial public offering of the Companys securities. These notes mature in
  December 2008.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| | In connection
  with the issuance of the 10% Notes in 2005, the Company granted warrants to
  purchase 809,379 shares of common stock. These warrants had an exercise price
  of $4.00 per share, expire in 2015, and had an allocated value of $404,741 in
  2005. The value of these warrants was recorded as a debt discount to be
  amortized over the life of the debt.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| | Contained in
  the registration rights section of the subscription agreement for the 10%
  Notes is a liquidated damages clause which the Company has accounted for as
  an embedded derivative in accordance with Emerging Issues Task Force, or
  EITF, Issue No. 05-4,The Effects of Liquidated Damages Clause on a
  Freestanding Financial Instrument Subject to EITF Issue No. 00-19,
  Accounting for Derivative Financial Instruments Indexed to, and Potentially
  Settled in, a Companys Own Stock. Management, with the
  assistance from a valuation specialist, determined the fair value of this
  embedded derivative to be $43,214 at December 31, 2005. This value was
  recorded as a debt discount to be amortized over the life of the debt.
  Management will continue to re-value this embedded derivative each reporting
  period that it remains outstanding. Any changes to the fair value subsequent
  to the initial valuation will be recorded as expense per SFAS No. 133, Accounting
  for Derivative Instruments and Hedging Activities.
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| | Amortization
  expense relating to the debt discount was $37,330 for the year ended December
  31, 2005.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| | The Company
  also issued warrants to purchase 116,041 shares of common stock in the years
  ended December 31, 2005 for advisory services in connection with obtaining
  the 10% Note financing. The warrants had an exercise price of $4.00 per
  share, expire in 2015, had a calculated value of $62,562 and were recorded as
  deferred financing costs in the year ended December 31, 2005, to be amortized
  over the life of the debt. Amortization expense relating to these deferred
  financing costs was $1,738 for the year ended December 31, 2005.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| | Note Payable to WyethIn
  February 1998, the Company entered into a $2,000,000 promissory note
  agreement with Wyeths predecessor, Genetics Institute, Inc. The note bore
  interest at the prime rate plus two percent, which was 7.25% at December 31,
  2005 and 5.25% at December 31, 2004. In August 1998, the Company obtained an
  additional $200,000 under this note. In January 1999, the due date of the
  note was extended to January 1, 2005. Wyeth received the right to have the
  note satisfied by receipt of shares at either (a) 125% of the IPO price if shares
  are publicly traded or (b) a price to be negotiated in good faith by the two
  parties before December 31, 2004. Wyeth has the option to convert to equity
  or call the note due to them upon the closing of an                                                                                                                                                                                                                                                                

F-31

---



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | initial
  public offering of the Companys securities. The Company has recorded accrued
  interest of $1,188,332 and $988,601 as of December 31, 2005 and 2004,
  respectively, related to this debt. In April 2005, the Company obtained an
  extension on the due date of the $2,200,000 note which was originally due on
  January 1, 2005. The new due date is January 1, 2008, and as such, the
  Company has classified the debt and related accrued interest as long-term on
  the consolidated balance sheet as of December 31, 2005 and 2004.
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | MaturitiesAggregate
  maturities of long-term notes payable for each of the next five years are as
  follows:                                                                                                                                                                                                                                                                                                                                                                                                                                        

|                                |  |                     |            |  
|------------------------------- |  | ------------------- | ---------- | -
|                                |  | December
  31, 2005 |           
|                                |  |                     |           
|                                |  |                     |            |  
|2006                            |  |                     |           |  
|2007                            |  |                     |           |  
|2008                            |  |                     | 13,697,559 |  
|2009                            |  |                     | 9,632,658  |  
|2010                            |  |                     | 2,046,303  |  
|Thereafter                      |  |                     |           |  
|                                |  |                     |            |  
|Total                           |  |                     | 25,376,520 |  
|Unaccreted discount             |  |                     | (5,610,299 | )
|                                |  |                     |            |  
|Total long-term notes
  payable |  | $                   | 19,766,221 |  
|                                |  |                     |            |  

|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|14. | STOCKHOLDERS EQUITY (DEFICIT)                                                                                                                                                                                                                                                                                                                                                                                                                                
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|    | Convertible Preferred StockPreferred
  Stock issued by the Company ranks senior to all other classes of stock as to
  liquidation, dissolution, or winding up of the Company. Each share of
  Preferred Stock is entitled to the number of votes per share on each action
  as is equal to the number of shares of common stock into which each share of
  Preferred Stock is convertible. The following table summarizes the terms of
  each class of stock:

|                  |  |                                   |       |                   |  |                                   |  |                                 |   |                         |  |                                 |           |                         |            |            |  |           |           |   |            |           
|----------------- |  | --------------------------------- | ----- | ----------------- |  | --------------------------------- |  | ------------------------------- | - | ----------------------- |  | ------------------------------- | --------- | ----------------------- | ---------- | ---------- |  | --------- | --------- | - | ---------- | ----------
|Preferred
  Stock |  | Liquidation
  preference
  amount |       | Conversion
  Rate |  | Liquidation
  value
  at 12/31/05 |  | 12/31/05
  Shares
  Outstanding |   | 12/31/05
  Book
  Value |  | 12/31/04
  Shares
  Outstanding |           | 12/31/04
  Book
  Value |           
|                  |  |                                   |       |                   |  |                                   |  |                                 |   |                         |  |                                 |           |                         |           
|Series A          |  | $                                 | 5.84  |                   |  | 1.000                             |  |                                 | $ | 5,850,001               |  |                                 | 1,001,000 |                         | $          | 5,850,001  |  |           | 1,001,000 |   | $          | 5,850,001 
|Series B          |  | $                                 | 2.50  |                   |  | 1.000                             |  |                                 | $ | 500,000                 |  |                                 | 200,000   |                         | $          | 500,000    |  |           | 200,000   |   | $          | 500,000   
|Series C          |  | $                                 | 2.50  |                   |  | 1.000                             |  |                                 | $ | 1,786,653               |  |                                 | 714,661   |                         | $          | 1,753,503  |  |           | 714,661   |   | $          | 1,753,503 
|Series D          |  | $                                 | 15.00 |                   |  | 1.000                             |  |                                 | $ | 400,005                 |  |                                 | 26,667    |                         | $          | 360,017    |  |           | 26,667    |   | $          | 360,017   
|Series E          |  | $                                 | 17.50 |                   |  | 4.375                             |  |                                 | $ | 35,000,000              |  |                                 | 2,000,000 |                         | $          | 35,000,000 |  |           | 2,000,000 |   | $          | 35,000,000
|Series F          |  | $                                 | 4.40  |                   |  | 1.000                             |  |                                 | $ | 8,071,536               |  |                                 | 1,834,440 |                         | $          | 7,710,078  |  |           | 1,834,440 |   | $          | 7,699,890 
|Series G          |  | $                                 | 25.00 |                   |  | 2.105                             |  |                                 | $ | 38,748,675              |  |                                 | 1,549,947 |                         | $          | 8,745,173  |  |           | 1,461,547 |   | $          | 8,106,276 
|                  |  |                                   |       |                   |  |                                   |  |                                 |   |                         |  |                                 |           |                         |            |            |  |           |           |   |            |           
|                  |  |                                   |       |                   |  |                                   |  |                                 |   |                         |  | 7,326,715                       |           | $                       | 59,918,772 |            |  | 7,238,315 |           | $ | 59,269,687 |           
|                  |  |                                   |       |                   |  |                                   |  |                                 |   |                         |  |                                 |           |                         |            |            |  |           |           |   |            |           

| |                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | With the
  exception of the holders of Series G Convertible Preferred Stock, Preferred
  Stock holders are entitled to receive dividends at the same rate as dividends
  are paid with respect to the common stock. Each share of preferred stock
  shall be treated as being equal to the number of shares of common stock into
  which each share of preferred stock is then convertible in determining the
  dividend for the preferred stock.
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| | During the
  first quarter of 2005, the Company raised $610,000 through the sale of 71,517
  shares of its Series G Convertible Preferred Stock. Series G Preferred Stock
  is convertible to shares of                                                                                                                                                                                                                                          

F-32

---



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | common stock
  at a rate determined by multiplying such shares by $10.00 and dividing the
  result by $4.75. In connection with this offering, the Company issued
  warrants to purchase 75,282 shares of common stock at an exercise price of
  $6.00 and warrants to purchase 15,253 shares of common stock at an exercise
  price of $4.00. These warrants expire in 2009. The amount allocated to such
  warrants was $26,800. The Company also issued warrants to purchase 22,593
  shares of common stock for advisory services performed in the offering. These
  warrants have an exercise price of $6.00 and expire in 2009. The calculated
  value of these warrants was $7,820.                                                                                                                                                                                           
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | In 2005,
  certain holders of our 10.9% Notes converted principal of $117,442 and
  accrued interest of $26,550 into 16,883 shares of Series G Preferred Stock.
  In connection with the 10.9% Note conversion to Series G Preferred Stock, the
  Company issued warrants to purchase 17,769 shares of common stock with an
  exercise price of $6.00, and warrants to purchase 3,599 shares of common
  stock with and exercise price of $4.00 during the year ended December 31,
  2005. The warrants expire in 2015 and had a calculated value of $6,147. The
  conversion of notes to Series G Preferred Stock qualified as an induced
  conversion and $93,696 of debt conversion expense was recorded for the year
  ended December 31, 2005.                                                                                                                                  
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | In 2004, the
  Company raised $12,464,865 through the sale of 1,461,547 shares of its Series
  G Preferred Stock. Series G Preferred Stock is convertible into a number of
  shares of common stock determined by multiplying the Preferred G shares by
  $10.00 and dividing the result by $4.75. In connection with this offering,
  the Company issued warrants to purchase 1,538,440 shares of common stock at
  an exercise price of $6.00 and warrants to purchase 311,631 shares of common
  stock at an exercise price of $4.00. These warrants expire in 2009. The
  amount allocated to warrants was $1,226,887. The Company also issued warrants
  to purchase 561,579 shares of common stock for advisory services performed in
  the offering. These warrants have an exercise price of $6.00 and expire in 2009.
  The calculated value of these warrants was $414,345.
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | The Series G
  Preferred Stock accrues annual dividends at the rate of $0.90 per share,
  payable upon liquidation or conversion, either in cash or in common stock at
  the holders option. The Company has accrued $1,877,160 and $490,222 as
  dividends payable at December 31, 2005 and 2004, respectively.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | In April
  2004, the Company completed a rights offering to all existing stockholders to
  purchase its Series F Convertible Preferred Stock at a price of $4.40 per
  unit. Series F Preferred Stock converts to common stock at a one-to-one basis
  upon an initial public offering. Rights to purchase units representing
  352,156 shares of Series F Preferred Stock and warrants to purchase 387,364
  shares of common stock were issued for $1,549,490, less commissions of
  $77,123. The warrants have an exercise price of $6.00, and an allocated value
  of $289,171.                                                                                                                                                                                                                                                                                                  
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | In May 2004,
  the Company entered into a Repayment, Option, and Consent Agreement with
  Applera Corporation where the Company paid $1,000,000 to Applera for the
  right and option to repurchase 500,000 of the Companys Series E Preferred
  Stock at the original price of $17.50 per share. Additionally, Applera, as
  holder of the then senior Series E Preferred Stock, gave its consent for the
  Company to issue the Series G Preferred Stock. The Company completed the
  Celera AgGen Acquisition (see note 5) from Applera in 2002.                                                                                                                                                                                                                                                                                                                                 
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | Also in
  2004, certain of the Companys 10.9% and 8% Secured Convertible Promissory
  Note holders accepted an offer to convert their remaining outstanding balance
  of $3,507,096 principal amount of notes plus accrued interest into 867,205
  shares of Series F Preferred Stock and warrants to purchase 1,015,753 shares
  of common stock. The warrants have an exercise price of $6.00, expire in
  2014, and had a calculated value of $817,703.                                                                                                                                                                                                                                                                                                                                                                                                                          

F-33

---



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | In 2004,
  certain investors who converted debt to common stock in 2003 re-negotiated
  the original conversion and converted to Series F Preferred Stock. The Company
  issued 615,079 shares of Series F Preferred Stock relating to these
  re-conversions, and reversed the conversion of 392,694 shares of common
  stock.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | In addition,
  both the rights offering of the Series F and the 2004 offering of the Series
  G Preferred Stock contain a beneficial conversion feature as defined in
  Emerging Issues Task Force Abstract, or EITF, No. 98-5, Accounting for Convertible Securities
  with Beneficial Conversion Features or Contingently Adjustable Conversion
  Ratios. The calculated value associated with the beneficial
  conversion feature was $71,932 for the Series F Preferred Stock and
  $1,042,198 for the Series G Preferred Stock. The Company immediately
  recognized the beneficial conversion feature as a deemed dividend in 2004.                                                                                                                                                                                                                                                                                                                                                                                                                                             
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | Shares of
  preferred stock are convertible at any time prior to mandatory conversion at
  the option of the holder thereof into shares of common stock at the
  conversion rate shown above. The conversion rates are subject to adjustment
  upon the occurrence of certain dilutive events. Upon certain criteria being
  met, the preferred stock shall be automatically converted into common stock
  at the conversion rates in the event of the Companys initial public
  offering. Moreover, in the event of voluntary conversion by holders of a
  stated percentage of the originally issued shares of a particular series of
  preferred stock, other holders are automatically converted. The stated
  percentage for Series A through D Preferred Stock is 85%, the stated
  percentage for Series E Preferred Stock is 75%, and the stated percentage for
  Series G Preferred Stock is 50%. The Series F Preferred Stock is not subject
  to automatic conversion in the event of a voluntary conversion by holders of
  a percentage of the originally issued shares.
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | In the event we liquidate,
  dissolve or wind-up, or in the event we are sold by way of merger,
  reorganization or asset sale, the holders of our Preferred Stock shall be
  entitled to be paid out of our assets and funds legally available for
  distribution, prior to the distribution of any of our assets or funds to our
  common stockholders, in the following order:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     

| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Holders of
  our Series G Preferred Stock will be entitled to an initial liquidation
  payment of $10.00 (inclusive of dividends actually paid) for each share of
  Series G Preferred Stock that a holder owns.                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| |  | Holders of
  our Series E Preferred Stock will then be entitled to receive as a
  liquidation payment the greater of (1) $17.50 (plus declared and unpaid
  dividends) for each share of Series E Preferred Stock that such holder owns,
  or (2) the amount that such holder would receive if the holder converted its
  shares of Series E Preferred Stock into common stock.                                                                                                                                                                                                                                                                                                       
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| |  | Holders of
  our Series G Preferred Stock will then be entitled to receive the greater of
  (1) $15.00 per share (inclusive of dividends actually paid) or (2) the amount
  that such holder would receive if the holder converted its shares of Series G
  Preferred Stock into common stock.                                                                                                                                                                                                                                                                                                                                                                                        
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| |  | Following
  the payments listed above, (before our holders of common stock receive any
  payment) holders of each of the remaining series of Preferred Stock will be
  entitled to receive their respective Liquidation Payments based on seniority
  as follows: (1) to our Series A Preferred Stock, which ranks senior to our
  Series B Preferred Stock, our Series C Preferred Stock, our Series D
  Preferred Stock, and our Series F Preferred Stock; (2) then to our Series B
  Preferred Stock, which ranks senior to our Series C Preferred Stock, our
  Series D Preferred Stock, and our Series F Preferred Stock; (3) next to our
  Series C Preferred Stock, which ranks

F-34

---



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |                                                                                                                                                                                                                                                                                                           
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             | senior to
  our Series D Preferred Stock and Series F Preferred Stock; (4) then to our
  Series D Preferred Stock, which ranks senior to our Series F Preferred Stock;
  (5) then to our Series F Preferred Stock, which ranks senior only to our
  common stock; (6) then to our holders of common stock.
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| | A
  Liquidation Payment for a series of Preferred Stock is the amount which is
  equal to the greater of (1) the applicable liquidation preference for such
  series of Preferred Stock, plus any declared but unpaid dividends, or (2) the
  amount per share that would have been payable to holders of the series of
  Preferred Stock had the shares of such Preferred Stock been converted to our
  common stock immediately prior to our liquidation. The applicable per share
  liquidation payment price for our Preferred Stock is as follows: Series A
  Preferred Stock is $1.24, Series B Preferred Stock is $2.50, Series C
  Preferred Stock is $2.50, Series D Preferred Stock is $15.00, Series E
  Preferred Stock is $17.50, and Series F Preferred Stock is $4.40. Our Series
  G Preferred Stock does not have a per share price, rather its value is as
  described in the bullets immediately above.                                                                                                                                                               
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| | Common StockThe
  holders of common stock are entitled to receive dividends when and as
  declared by the Board of Directors (the Board) out of funds legally
  available therefore. Upon dissolution of the Company, the holders of common
  stock are entitled to share, pro rata, in the Companys net assets after
  payment of, or provision for, all debts and liabilities of the Company and
  after provision for any class of preferred stock or other senior security
  which may be issued by the Company. Each share of common stock is entitled to
  participate on a pro rata basis with each other share of such stock in
  dividends and other distributions declared on common stock.                                                                                                                                                                                                                                                                                                                                                                                  
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| | The holders
  of common stock are entitled to one vote per share on all matters submitted
  to a vote of the stockholders and may not cumulate their votes for the
  election of directors. The holders of common stock do not have preemptive
  rights to subscribe for additional shares of any class that may be issued by
  the Company, and no share of common stock is entitled in any manner to any
  preference over any other share of such stock.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| | On November
  30, 2004, the Company signed a warrant exchange agreement with a financial
  advisor who facilitated various debt and equity offerings in 2003 and 2004.
  The exchange agreement called for warrants issued to purchase 6,700,000
  shares of common stock to be exchanged for common stock at an exchange ratio
  of 1.4. This agreement was the first step in the investor warrant exchange
  program which was completed in 2005. In connection with consulting on this
  proposed investor warrant exchange, the Company granted additional warrants
  to purchase 1,000,000 shares of common stock to the financial advisor in
  2004. These warrants had a calculated value of $457,422 and were recorded as
  consulting expense in 2004. On December 30, 2004, the Companys financial
  advisor elected to exchange warrants to purchase 7,580,000 shares of common
  stock, out of its total warrants to purchase 7,700,000 shares of common
  stock, for 5,414,286 shares of the Companys common stock. There was no
  expense associated with this transaction.
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| | In 2005, the
  Company completed an investor warrant exchange program with certain holders
  of its warrants to purchase common stock. This exchange offer was sent to all
  investors who had warrants to purchase common stock, whether from debt or
  preferred stock investments. Holders of warrants to purchase 21,544,726
  shares of common stock exchanged their warrants for 10,762,163 actual shares
  of common stock. The warrants had exercise prices ranging from $0.35 to
  $15.00. The exchange ratio ranged from 1.1 to 27.8 warrants for one share of
  common stock. The Company obtained a fairness opinion on the ratio to ensure
  an equitable exchange through the different warrant classes. There was no expense
  associated with this transaction.                                                                                                                                                                                                                                                                                                            

F-35

---



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The Board
  authorized two amendments to the Companys Certificate of Incorporation
  increasing the number of authorized shares of common stock to 50,000,000 in
  2003, and 75,000,000 in 2004.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| | Management,
  with the assistance from a valuation specialist, determined the fair value of
  our common stock for each quarter during the period January 1 2005 through
  March 31, 2006. The analyses were preformed retrospectively and not
  contemporaneously, because during this period, our efforts were focused on
  product development and filing our initial 10-SB filing. As a result, our
  financial and managerial resources were limited. The valuation analyses
  considered the guidance set forth in the AICPA Audit and Accounting Practice
  Aid Series, Valuation of Privately-Held-Company Equity Securities Issued as
  Compensation (the Guide). Accordingly, the valuation allocates the value of
  the business enterprise among our classes of stock with consideration given
  to the methodologies prescribed in the Guide.            
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| | Determining
  the fair value of our stock requires making complex and subjective judgments.
  The valuation of the business enterprise is based on a discounted future cash
  flow approach that uses managements estimates of revenue, anticipated growth
  rates, and estimated costs. The estimates are consistent with the plans and
  estimates being used to manage the business. There is inherent uncertainty in
  making these estimates. The risks associated with achieving the forecasts
  were assessed in the selection of the appropriate discount rates, as well as
  probability weighting certain revenue based on the likelihood of achieving
  specific milestones. If different discount rates and probabilities had been
  used, the valuations would have been different.                                                                       
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| | The
  enterprise value was then allocated to preferred and common shares. The
  allocation of value to the preferred stock was based on treating the
  preferred shares as if they were concerted to common stock. Therefore, the
  value of the preferred stock was estimated as the fully diluted per share
  value of equity as if all preferred shares were converted to common shares. A
  discount for lack of marketability was applied to the portion of business
  enterprise allocated to the common stock. The discount was based on specific
  characteristics of the underlying stock. Had a different methodology used to
  allocate the business enterprise value or a different discount for lack of
  marketability been used, the allocations between preferred and common shares
  and the resulting value of common stock would have been different.
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| | The results
  of the analyses indicated a fair value of $3.15 at March 31, 2005, $3.00 at
  June 30, 2005, $2.95 at September 30, 2005, and $3.20 at December 31, 2005.
  These fair value amounts were used in our Black-Scholes option pricing
  calculations in order to determine the proper stock option and warrant
  accounting.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| | Share-Based PaymentsCollectively,
  warrants and stock options comprise share-based payments.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          

F-36

---



| |                                                                                                                                                                    
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | WarrantsWarrants
  are granted to non-employees in connection with financings or services
  provided to the Company. Stock warrant information is set forth below:

| |                                 |  |          |             |                                        |   |      | 
| | ------------------------------- |  | -------- | ----------- | -------------------------------------- | - | ---- | 
| |                                 |  | Warrants |            
| |                                 |  |          |            
| |                                 |  | Shares   |             | Weighted
  Average
  Exercise
  Prices |  
| |                                 |  |          |             |                                        |  
| |                                 |  |          |             |                                        |   |      | 
| | Outstanding
  January 1, 2003   |  |          | 3,710,781   |                                        | $ | 5.69 | 
| | Granted                         |  |          | 13,352,470  |                                        |   | 4.97 | 
| |                                 |  |          |             |                                        |   |      | 
| |                                 |  |          |             |                                        |   |      | 
| | Outstanding
  December 31, 2003 |  |          | 17,063,251  |                                        | $ | 5.13 | 
| | Granted                         |  |          | 19,211,355  |                                        |   | 4.75 | 
| | Exercised                       |  |          | (3,625      | )                                      |   | 0.35 | 
| | Canceled                        |  |          | (7,580,000  | )                                      |   | 4.60 | 
| |                                 |  |          |             |                                        |   |      | 
| |                                 |  |          |             |                                        |   |      | 
| | Outstanding
  December 31, 2004 |  |          | 28,690,981  |                                        | $ | 5.01 | 
| | Granted                         |  |          | 2,869,555   |                                        |   | 6.12 | 
| | Canceled                        |  |          | (21,544,726 | )                                      |   | 5.10 | 
| |                                 |  |          |             |                                        |   |      | 
| |                                 |  |          |             |                                        |   |      | 
| | Outstanding
  December 31, 2005 |  |          | 10,015,810  |                                        | $ | 5.13 | 
| |                                 |  |          |             |                                        |   |      | 

| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Stock OptionsThe
  Company has a nonqualified stock option plan and an incentive stock option
  plan that were established in December 1995 and November 1996, respectively.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | The plans
  permit the grant of share options to its officers, employees, directors, and
  consultants for up to a combined 11,050,000 shares of stock. Option awards
  are generally granted with an exercise price equal to the market value of the
  Companys stock at the date of grant and generally vest based on four years
  of continuous service and have 10-year contractual terms. The plans are
  combined for disclosure purposes due to the similar characteristics. The
  compensation cost that has been charged against income for those plans was
  $3,387,365, $3,360,315, and $3,020,141 for the years ended December 31, 2005,
  2004, and 2003, respectively.

F-37

---



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The fair
  value of each option award is estimated on the date of grant using the
  Black-Scholes option valuation model that uses the weighted average
  assumptions noted in the following table. Expected volatility is based on the
  average historical volatilities on the stock of 15 similar companies in the
  agricultural and biotech industries that are publicly traded. The average
  historical volatilities were calculated using the time period corresponding
  to the vesting period. The Company uses historical data to estimate a
  weighted-average percentage of forfeitures within the valuation model. The
  expected term of options granted represents the period of time the options
  granted are expected to be outstanding. The risk free rate for periods within
  the contractual life of the option is based on the U.S. Treasury constant
  maturities in effect at the time of the grant and for instruments with a life
  equal to the vesting period of the grant.

|                           |      |   |      |      |      |  |      |  
|-------------------------- | ---- | - | ---- | ---- | ---- |  | ---- | -
|                           | 2005 |   | 2004 |      | 2003
|                           |      |   |      |      |     
|Expected
  volatility      | 42   | % |      | 49   | %    |  | 55   | %
|Expected
  dividends       | 0    | % |      | 0    | %    |  | 0    | %
|Expected
  term (in years) | 4    |   |      | 4    |      |  | 4    |  
|Risk-free
  rate           | 3.99 | % |      | 3.11 | %    |  | 2.54 | %

A
summary of option activity under the plans for the three years ended December
31, 2005 is presented below:

|                                   |  |        |           |                                        |   |                                                                   |  |                                   |      |  |   |          
|---------------------------------- |  | ------ | --------- | -------------------------------------- | - | ----------------------------------------------------------------- |  | --------------------------------- | ---- |  | - | ---------
|Options                            |  | Shares |           | Weighted-
  Average
  Exercise
  Price |   | Weighted-
  Average
  Remaining
  Contractual
  Term
  (In years) |  | Aggregate
  Intrinsic
  Value ($)
|                                   |  |        |           |                                        |   |                                                                   |  |                                  
|Outstanding at January1,
  2003    |  |        | 4,282,016 |                                        | $ | 4.13                                                              |  |                                   | 8.13 |  | $ | 754,223  
|Granted                            |  |        | 1,111,750 |                                        |   | 3.45                                                              |  |                                   |      |  |   |          
|Exercised                          |  |        | (12,000   | )                                      |   | 0.02                                                              |  |                                   |      |  |   |          
|Forfeited or expired               |  |        | (74,840   | )                                      |   | 1.22                                                              |  |                                   |      |  |   |          
|                                   |  |        |           |                                        |   |                                                                   |  |                                   |      |  |   |          
|Outstanding at December
  31, 2003 |  |        | 5,306,926 |                                        | $ | 3.97                                                              |  |                                   | 7.60 |  | $ | 1,689,519
|                                   |  |        |           |                                        |   |                                                                   |  |                                   |      |  |   |          
|Granted                            |  |        | 3,833,319 |                                        |   | 4.00                                                              |  |                                   |      |  |   |          
|Exercised                          |  |        | (8,896    | )                                      |   | 1.13                                                              |  |                                   |      |  |   |          
|Forfeited or expired               |  |        | (175,947  | )                                      |   | 3.94                                                              |  |                                   |      |  |   |          
|                                   |  |        |           |                                        |   |                                                                   |  |                                   |      |  |   |          
|Outstanding at December
  31, 2004 |  |        | 8,955,402 |                                        | $ | 3.70                                                              |  |                                   | 7.65 |  | $ | 3,589,433
|                                   |  |        |           |                                        |   |                                                                   |  |                                   |      |  |   |          
|                                   |  |        |           |                                        |   |                                                                   |  |                                   |      |  |   |          
|Granted                            |  |        | 1,174,216 |                                        |   | 4.00                                                              |  |                                   |      |  |   |          
|Exercised                          |  |        | (18,678   | )                                      |   | 2.05                                                              |  |                                   |      |  |   |          
|Forfeited or expired               |  |        | (762,507  | )                                      |   | 4.38                                                              |  |                                   |      |  |   |          
|                                   |  |        |           |                                        |   |                                                                   |  |                                   |      |  |   |          
|Outstanding at December
  31, 2005 |  |        | 9,348,433 |                                        | $ | 3.68                                                              |  |                                   | 6.89 |  | $ | 2,081,304
|                                   |  |        |           |                                        |   |                                                                   |  |                                   |      |  |   |          
|                                   |  |        |           |                                        |   |                                                                   |  |                                   |      |  |   |          
|Exercisable at December
  31, 2005 |  |        | 6,846,784 |                                        | $ | 3.53                                                              |  |                                   | 6.34 |  | $ | 3,281,807
|                                   |  |        |           |                                        |   |                                                                   |  |                                   |      |  |   |          

| |                                                                                                                                                                                                                                                                                                                            
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The weighted-average
  grant-date fair value of options granted during the years 2005, 2004, and
  2003 was $0.67, $1.54, and $3.24, respectively. The total grant-date
  intrinsic value of options exercised during the years ended December 31,
  2005, 2004, and 2003 was $(12,219), $15,422, and $2,760, respectively.

F-38

---



| |                                                                                                                                                                    
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | A summary of
  the status of the Companys nonvested shares as of December 31, 2005, 2004,
  and 2003, and changes during the years then ended are presented below:

|                                 |  |            |   |                                               |   |      | 
|-------------------------------- |  | ---------- | - | --------------------------------------------- | - | ---- | 
|Nonvested
  Shares               |  | Shares     |   | Weighted-
  Average
  Grant-Date
  Fair Value
|                                 |  |            |   |                                              
|Nonvested at January 1,
  2003   |  | 1,846,624  |   |                                               | $ | 2.62 | 
|Granted                          |  | 1,111,750  |   |                                               |   | 3.24 | 
|Vested                           |  | (1,139,710 | ) |                                               |   | 2.88 | 
|Forfeited                        |  | (70,977    | ) |                                               |   | 4.57 | 
|                                 |  |            |   |                                               |   |      | 
|Nonvested at December 31,
  2003 |  | 1,747,687  |   |                                               |   | 2.95 | 
|                                 |  |            |   |                                               |   |      | 
|Granted                          |  | 3,833,319  |   |                                               |   | 1.54 | 
|Vested                           |  | (937,019   | ) |                                               |   | 2.73 | 
|Forfeited                        |  | (162,697   | ) |                                               |   | 2.17 | 
|                                 |  |            |   |                                               |   |      | 
|Nonvested at December 31,
  2004 |  | 4,481,290  |   |                                               |   | 1.82 | 
|                                 |  |            |   |                                               |   |      | 
|Granted                          |  | 1,174,216  |   |                                               |   | 0.67 | 
|Vested                           |  | (2,519,933 | ) |                                               |   | 3.91 | 
|Forfeited                        |  | (633,925   | ) |                                               |   | 1.59 | 
|                                 |  |            |   |                                               |   |      | 
|                                 |  |            |   |                                               |   |      | 
|Nonvested at December 31,
  2005 |  | 2,501,648  |   |                                               | $ | 1.39 | 
|                                 |  |            |   |                                               |   |      | 

| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | As of
  December 31, 2005, 2004 and 2003 there was $4,081,773, $7,090,272, and
  $4,965,892 of total unrecognized compensation cost, respectively, related to
  nonvested share-based compensation arrangements granted under the plans. That
  cost is expected to be recognized over a period of four years. The total fair
  value of shares vested during the years ended December 31, 2005, 2004 and
  2003 was $4,440,049, $2,561,528, and $3,286,984, respectively.                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| | During the
  years ended December 31, 2004 and 2003, the Company repriced 688,000 options
  held by employees. These options had originally been granted during 2002 and
  2003 at a price of $7.50 and $10.00, respectively. On December 15, 2003,
  these options were repriced to $7.00. As a result of that modification, the
  Company recognized additional compensation expense of $27,842 for the year
  ended December 31, 2003. On June 28, 2004, these same options were again
  repriced to the estimated fair value of the Companys common stock at that
  date of $4.00. As a result of that modification, the Company recognized
  additional compensation expense of $125,480 for the year ended December 31,
  2004.                                                                                                                                                                                                  
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| | During 2004,
  the Company offered an election for option modification to all Maryland and
  Canada employees to be made effective as of May 26, 2004. These employees
  were given the choice to modify their options, in the form of receiving
  additional options at a lower exercise price, or to reprice their existing
  options. Under this modification, certain employees elected to receive
  397,469 total additional options at an exercise price of $4.00, the estimated
  fair value of the Companys common stock at that date. As a result of that
  modification, the Company recognized additional compensation expense of
  $94,793 for the year ended December 31, 2004. Under this same election, other
  employees chose to reprice 101,000 total options to $4.00. As a result of
  that modification, the Company recognized additional compensation expense of
  $21,426 for the year ended December 31, 2004.

F-39

---



|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|15. | 401(K) BENEFIT PLAN                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|    | The Company
  has a 401(k) retirement plan for the benefit of qualified employees. All
  full-time employees are eligible to participate and may contribute a portion
  of their compensation to the plan. The Company does not match contributions
  and the only costs to the Company for the plan are administration fees.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|16. | BUSINESS SEGMENTS                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|    | The Company
  operates in three industry segments: Growth and Differentiation Factors,
  Animal Genomics and Immunopharmaceuticals. All segments are dedicated to
  discovering and commercializing multiple technology platforms to improve the
  food supply and human health. The Growth and Differentiation Factors business
  unit 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 business unit operates in California
  with revenue generated in California through the pioneering of the use of
  genome information companion animal health and livestock production. The
  Immunopharmaceuticals business unit is operated in Canada and, 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. This amount remains unpaid at December 31, 2005.
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|    | MetaMorphix,
  Inc.s President is the chief operating decision maker. The segment structure
  corresponds to the Companys subsidiary structure. The three segments relate
  to the Companys technology platforms and its three distinct business
  opportunities: livestock genomics in the Genomics segment, and human
  biopharmaceuticals and livestock biopharmaceuticals in the Growth and
  Differentiation Factors segment. The Immunopharmaceuticals segment is
  primarily a research and development segment.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        

F-40

---



|                                               |  |                                                          |             |                            |   |                                     |   |       |            |   |   |             |  
|---------------------------------------------- |  | -------------------------------------------------------- | ----------- | -------------------------- | - | ----------------------------------- | - | ----- | ---------- | - | - | ----------- | -
|                                               |  | Segment
  Information                                    |            
|                                               |  |                                                          |            
|                                               |  | 2005                                                     |            
|                                               |  |                                                          |            
|                                               |  | Corporate/Growth
  and DifferentiationFactors - Maryland |             | AnimalGenomics California |   | Immunopharmaceuticals
  Canada (1) |   | Total |           
|                                               |  |                                                          |             |                            |   |                                     |   |       |           
|                                               |  |                                                          |            
|Revenues from external customers               |  | $                                                        |            |                            | $ | 2,516,064                           |   | $     |           |   | $ | 2,516,064   |  
|                                              
|Interest revenue (2)                           |  |                                                          | 16,600      |                            |   |                                    |   |       |           |   |   | 16,600      |  
|                                              
|Interest expense (2)                           |  |                                                          | 5,121,264   |                            |   | 268,108                             |   |       | 7,660      |   |   | 5,397,032   |  
|                                              
|Depreciation and amortization                  |  |                                                          | 111,293     |                            |   | 2,290,265                           |   |       | 31,434     |   |   | 2,432,992   |  
|                                              
|Segment profit (loss)                          |  |                                                          | (18,895,346 | )                          |   | (4,820,140                          | ) |       | 103,662    |   |   | (23,611,824 | )
|                                              
|Other significant non-cash items:              |  |                                                          |             |                            |   |                                     |   |       |            |   |   |             |  
|Debt converted into equity                     |  |                                                          | 153,892     |                            |   |                                    |   |       |           |   |   | 153,892     |  
|Value of warrants issued for advisory
services |  |                                                          | 60,080      |                            |   |                                    |   |       |           |   |   | 60,080      |  
|                                               |  |                                                          |            
|Segment assets                                 |  |                                                          | 11,075,101  |                            |   | 2,109,049                           |   |       |           |   |   | 13,184,150  |  
|                                               |  |                                                          |            
|Expenditures for segment assets:               |  |                                                          |             |                            |   |                                     |   |       |            |   |   |             |  
|Cash payments for property, plant & equipment  |  |                                                          | 23,784      |                            |   | 48,689                              |   |       | 440        |   |   | 72,913      |  
|                                               |  |                                                          |            
|Segment loss                                   |  |                                                          |             |                            |   |                                     |   |       |            |   |   |             |  
|Total (loss) profit for reportable segments    |  |                                                          | (18,895,346 | )                          |   | (4,820,140                          | ) |       | 103,662    |   |   | (23,611,824 | )
|Elimination of intersegment profits            |  |                                                          | 1,288,610   |                            |   |                                    |   |       | (1,288,610 | ) |   |            |  
|                                               |  |                                                          |             |                            |   |                                     |   |       |            |   |   |             |  
|Net (loss) profit                              |  | $                                                        | (17,606,736 | )                          | $ | (4,820,140                          | ) | $     | (1,184,948 | ) | $ | (23,611,824 | )
|                                               |  |                                                          |             |                            |   |                                     |   |       |            |   |   |             |  

(1) The
Immunopharmaceuticals business unit was operated in Canada and, 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.

(2) These
amounts are combined as shown in the consolidated statement of operations.

F-41

---



|                                                       |  |                                                             |             |                                  |   |                                     |   |       |            |   |   |             |  
|------------------------------------------------------ |  | ----------------------------------------------------------- | ----------- | -------------------------------- | - | ----------------------------------- | - | ----- | ---------- | - | - | ----------- | -
|                                                       |  | Segment
  Information                                       |            
|                                                       |  |                                                             |            
|                                                       |  | 2004                                                        |            
|                                                       |  |                                                             |            
|                                                       |  | Corporate/Growth
  and Differentiation
  Factors - Maryland |             | Animal
  Genomics 
  California |   | Immunopharma
  ceuticals -
  Canada |   | Total |           
|                                                       |  |                                                             |             |                                  |   |                                     |   |       |           
|                                                       |  |                                                             |            
|Revenues from external customers                       |  | $                                                           | 500,000     |                                  | $ | 5,204,796                           |   | $     |           |   | $ | 5,704,796   |  
|                                                      
|Interest revenue (1)                                   |  |                                                             | 14,101      |                                  |   |                                    |   |       |           |   |   | 14,101      |  
|                                                      
|Interest expense (1)                                   |  |                                                             | 18,707,999  |                                  |   | 286,929                             |   |       | 3,783      |   |   | 18,998,711  |  
|                                                      
|Depreciation and amortization                          |  |                                                             | 45,365      |                                  |   | 12,904,923                          |   |       | 40,922     |   |   | 12,991,210  |  
|                                                      
|Segment profit (loss)                                  |  |                                                             | (35,792,816 | )                                |   | (16,491,959                         | ) |       | 101,313    |   |   | (52,183,462 | )
|                                                      
|Other significant non-cash items:                      |  |                                                             |             |                                  |   |                                     |   |       |            |   |   |             |  
|Debt converted into equity                             |  |                                                             | 3,762,692   |                                  |   |                                    |   |       |           |   |   | 3,762,692   |  
|Purchase of fixed assets under capital
lease           |  |                                                             | 152,194     |                                  |   |                                    |   |       |           |   |   | 152,194     |  
|Value of warrants issued for advisory
services         |  |                                                             | 3,179,876   |                                  |   |                                    |   |       |           |   |   | 3,179,876   |  
|                                                       |  |                                                             |            
|Segment assets                                         |  |                                                             | 11,364,668  |                                  |   | 3,855,390                           |   |       | 268,779    |   |   | 15,488,837  |  
|                                                       |  |                                                             |            
|Expenditures for segment assets:                       |  |                                                             |             |                                  |   |                                     |   |       |            |   |   |             |  
|Cash payments for property, plant & equipment          |  |                                                             | 184,076     |                                  |   | 82,031                              |   |       | 14,932     |   |   | 281,039     |  
|Capital lease additions to property, plant & equipment |  |                                                             | 152,194     |                                  |   |                                    |   |       |           |   |   | 152,194     |  
|                                                       |  |                                                             |            
|Segment loss                                           |  |                                                             |             |                                  |   |                                     |   |       |            |   |   |             |  
|Total (loss) profit for reportable segments            |  |                                                             | (35,792,816 | )                                |   | (16,491,959                         | ) |       | 101,313    |   |   | (52,183,462 | )
|Elimination of intersegment profits                    |  |                                                             | 1,219,585   |                                  |   |                                    |   |       | (1,219,585 | ) |   |            |  
|                                                       |  |                                                             |             |                                  |   |                                     |   |       |            |   |   |             |  
|Net (loss) profit                                      |  | $                                                           | (34,573,231 | )                                | $ | (16,491,959                         | ) | $     | (1,118,272 | ) | $ | (52,183,462 | )
|                                                       |  |                                                             |             |                                  |   |                                     |   |       |            |   |   |             |  

(1)     These amounts are combined
as shown in the consolidated statement of operations.

F-42

---



|                                                         |  |                                                              |             |                                    |   |                                     |   |       |            |   |   |             |  
|-------------------------------------------------------- |  | ------------------------------------------------------------ | ----------- | ---------------------------------- | - | ----------------------------------- | - | ----- | ---------- | - | - | ----------- | -
|                                                         |  | Segment
  Information                                        |            
|                                                         |  |                                                              |            
|                                                         |  | 2003                                                         |            
|                                                         |  |                                                              |            
|                                                         |  | Corporate/Growth
  and Differentiation 
  Factors - Maryland |             | Animal 
  Genomics  
  California |   | Immunopharm
  aceuticals -
  Canada |   | Total |           
|                                                         |  |                                                              |             |                                    |   |                                     |   |       |           
|Revenues from external customers                         |  | $                                                            |            |                                    | $ | 7,406,743                           |   | $     |           |   | $ | 7,406,743   |  
|                                                         |  |                                                              |             |                                    |   |                                     |   |       |            |   |   |             |  
|Interest revenue (1)                                     |  |                                                              |            |                                    |   | 7,189                               |   |       |           |   |   | 7,189       |  
|                                                         |  |                                                              |             |                                    |   |                                     |   |       |            |   |   |             |  
|Interest expense (1)                                     |  |                                                              | 4,845,210   |                                    |   | 329,396                             |   |       | 14,690     |   |   | 5,189,296   |  
|                                                         |  |                                                              |             |                                    |   |                                     |   |       |            |   |   |             |  
|Depreciation and amortization                            |  |                                                              | 30,081      |                                    |   | 12,884,465                          |   |       | 39,886     |   |   | 12,954,432  |  
|                                                         |  |                                                              |             |                                    |   |                                     |   |       |            |   |   |             |  
|Segment profit (loss)                                    |  |                                                              | (21,379,630 | )                                  |   | (12,946,655                         | ) |       | 91,135     |   |   | (34,235,150 | )
|                                                         |  |                                                              |             |                                    |   |                                     |   |       |            |   |   |             |  
|Other significant non-cash items:                        |  |                                                              |             |                                    |   |                                     |   |       |            |   |   |             |  
|Debt converted into equity                               |  |                                                              | 4,720,068   |                                    |   |                                    |   |       |           |   |   | 4,720,068   |  
|Purchase of fixed assets under capital
  lease           |  |                                                              | 49,901      |                                    |   |                                    |   |       |           |   |   | 49,901      |  
|Value of warrants issued for advisory
  services         |  |                                                              | 2,677,496   |                                    |   |                                    |   |       |           |   |   | 2,677,496   |  
|Capital lease disposal                                   |  |                                                              | (13,592     | )                                  |   |                                    |   |       |           |   |   | (13,592     | )
|                                                         |  |                                                              |             |                                    |   |                                     |   |       |            |   |   |             |  
|Segment assets                                           |  |                                                              | 7,944,879   |                                    |   | 16,670,858                          |   |       | 276,037    |   |   | 24,891,774  |  
|                                                         |  |                                                              |             |                                    |   |                                     |   |       |            |   |   |             |  
|Expenditures for segment assets:                         |  |                                                              |             |                                    |   |                                     |   |       |            |   |   |             |  
|Cash payments for property, plant &
  equipment          |  |                                                              | 15,640      |                                    |   | 5,228                               |   |       |           |   |   | 20,868      |  
|Capital lease additions to property, plant
  & equipment |  |                                                              | 49,901      |                                    |   |                                    |   |       |           |   |   | 49,901      |  
|                                                         |  |                                                              |             |                                    |   |                                     |   |       |            |   |   |             |  
|Segment loss                                             |  |                                                              |             |                                    |   |                                     |   |       |            |   |   |             |  
|Total (loss) profit for reportable segments              |  |                                                              | (21,379,630 | )                                  |   | (12,946,655                         | ) |       | 91,135     |   |   | (34,235,150 | )
|Elimination of intersegment profits                      |  |                                                              | 1,230,318   |                                    |   |                                    |   |       | (1,230,318 | ) |   |            |  
|                                                         |  |                                                              |             |                                    |   |                                     |   |       |            |   |   |             |  
|                                                         |  |                                                              |             |                                    |   |                                     |   |       |            |   |   |             |  
|Net (loss) profit                                        |  | $                                                            | (20,149,312 | )                                  | $ | (12,946,655                         | ) | $     | (1,139,183 | ) | $ | (34,235,150 | )
|                                                         |  |                                                              |             |                                    |   |                                     |   |       |            |   |   |             |  

|    |                                                                                   
|--- | ----------------------------------------------------------------------------------
|(1) | These
  amounts are combined as shown in the consolidated statement of operations.

F-43

---



|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|17. | RELATED PARTY TRANSACTIONS                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|    | In the opinion of management, all transactions with related parties
  have been conducted on terms which are fair and equitable; however, the
  transactions are not necessarily on the same terms as those which would have
  been made between wholly unrelated parties.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|    | Directors and Employees
  In February 2004, Fergus Reid, a former member of our board of directors,
  purchased $100,000 principal amount of our 12.5% Notes. In February 2005, Mr.
  Reid was issued an additional note with a principal amount of $12,500 to
  satisfy the first years interest. At December 31, 2005, accrued but unpaid
  interest on these notes was $12,175. In February 2006, Mr. Reid was issued
  two additional notes with principal amounts of $12,500 and $1,563 to satisfy
  interest due.                                                                                                                                                                                                                                                                                                                             
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|    | Mr. Howard
  Minigh is a current member of the Companys board of directors and a holder
  of 11,725 shares of the Companys Series G preferred stock. Mr. Minigh
  received warrants to purchase 12,342 shares of common stock at an exercise
  price of $6.00, and warrants to purchase 2,500 shares of common stock at an exercise
  price of $4.00. These warrant grants were in accordance with the Series G
  terms.                                                                                                                                                                                                                                                                                                                                                                                                                            
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|    | Mr. Sam
  Dunlap served as a financial advisor to the Company and secured financing for
  the Company during his term as a director between January 14, 2000 and August
  27, 2002. A retainer fee of $10,000 per month was payable to him from
  November 1999 to June 2003 for services as a financial advisor. Unpaid
  retainer fees and various bridge loans made by Mr. Dunlap to the Company
  together total $625,498 and remain unpaid as of December 31, 2005. During
  2002, Mr. Dunlap also received a grant of 275,000 nonqualified stock options
  at an exercise price of $8.00 for financial advisory services provided, which
  had a calculated value of $771,967. Mr. Dunlap was also granted 265,616
  warrants in 2002 at an exercise price of $5.00 for financial advisory
  services, which had a calculated value of $523,454.
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|    | The Company
  had amounts due to related parties of $1,584,498 and $1,214,498 as of
  December 31, 2005 and December 31, 2004, respectively. These notes are
  promissory notes and bridge loans with members of management and directors,
  bearing interest at rates ranging from prime plus 1% to 12%, and are payable
  on demand.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|    | The Company
  had a liability accrued for bonuses payable to employees of $3,526,183 and
  $3,931,032 at December 31, 2005 and 2004, respectively. Management is
  currently working with the Board of Directors to formally grant and pay
  bonuses for the years 2004 and 2005. The Company intends to satisfy all
  employee bonus obligations.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|    | In 2005, the
  Companys President declined the bonus which was awarded to him by the Board
  of Directors. This bonus was for $180,703 ($195,976 including accrued
  employer payroll taxes payable). The declination was accounted for as forgiveness
  of debt by a related party, and recorded as a capital contribution in 2005.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 

F-44

---



|    |                                                                                                                                                                                                                                                                                                                                                                                                                          
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|18. | QUARTERLY DATA (unaudited)                                                                                                                                                                                                                                                                                                                                                                                               
|    |                                                                                                                                                                                                                                                                                                                                                                                                                          
|    | The
  following tables summarize our quarterly results of operations for each of
  the quarters in 2005 and 2004. These quarterly results are unaudited, but in
  the opinion of management have been prepared on the same basis as our audited
  financial information and include all adjustments (consisting only of normal
  recurring adjustments) necessary for a fair presentation of our results of
  operations.

|                                                                                               |  |                             |            |                             |   |                                  |   |                                 |            |   |   |            |  
|---------------------------------------------------------------------------------------------- |  | --------------------------- | ---------- | --------------------------- | - | -------------------------------- | - | ------------------------------- | ---------- | - | - | ---------- | -
|                                                                                               |  | 2005                        |           
|                                                                                               |  |                             |           
|                                                                                               |  | Quarter
  ended
  March 31, |            | Quarter
  ended 
  June 30, |   | Quarter
  ended 
  September 30, |   | Quarter
  ended 
  December 31, |           
|                                                                                               |  |                             |            |                             |   |                                  |   |                                 |           
|                                                                                               |  |                             |            |                             |   |                                  |   |                                 |            |   |   |            |  
|Revenue                                                                                        |  | $                           | 729,811    |                             | $ | 621,951                          |   | $                               | 600,407    |   | $ | 563,895    |  
|                                                                                               |  |                             |            |                             |   |                                  |   |                                 |            |   |   |            |  
|Operating costs and expenses                                                                   |  |                             | (7,126,499 | )                           |   | (4,949,844                       | ) |                                 | (4,231,432 | ) |   | (2,030,857 | )
|                                                                                               |  |                             |            |                             |   |                                  |   |                                 |            |   |   |            |  
|                                                                                               |  |                             |            |                             |   |                                  |   |                                 |            |   |   |            |  
|Operating loss                                                                                 |  |                             | (6,396,688 | )                           |   | (4,327,893                       | ) |                                 | (3,631,025 | ) |   | (1,466,962 | )
|                                                                                               |  |                             |            |                             |   |                                  |   |                                 |            |   |   |            |  
|Other costs                                                                                    |  |                             | (2,199,377 | )                           |   | (1,690,787                       | ) |                                 | (2,135,862 | ) |   | (1,763,230 | )
|                                                                                               |  |                             |            |                             |   |                                  |   |                                 |            |   |   |            |  
|                                                                                               |  |                             |            |                             |   |                                  |   |                                 |            |   |   |            |  
|Net loss                                                                                       |  | $                           | (8,596,065 | )                           | $ | (6,018,680                       | ) | $                               | (5,766,887 | ) | $ | (3,230,192 | )
|                                                                                               |  |                             |            |                             |   |                                  |   |                                 |            |   |   |            |  
|                                                                                               |  |                             |            |                             |   |                                  |   |                                 |            |   |   |            |  
|Preferred stock dividends and accretion of
  beneficial conversion features                    |  |                             | (336,393   | )                           |   | (347,336                         | ) |                                 | (351,604   | ) |   | (351,606   | )
|                                                                                               |  |                             |            |                             |   |                                  |   |                                 |            |   |   |            |  
|                                                                                               |  |                             |            |                             |   |                                  |   |                                 |            |   |   |            |  
|Net loss attributable to common
  stockholders                                                 |  | $                           | (8,932,458 | )                           | $ | (6,366,016                       | ) | $                               | (6,118,491 | ) | $ | (3,581,798 | )
|                                                                                               |  |                             |            |                             |   |                                  |   |                                 |            |   |   |            |  
|                                                                                               |  |                             |            |                             |   |                                  |   |                                 |            |   |   |            |  
|Basic and diluted net loss per share                                                           |  | $                           | (0.94      | )                           | $ | (0.37                            | ) | $                               | (0.30      | ) | $ | (0.18      | )
|                                                                                               |  |                             |            |                             |   |                                  |   |                                 |            |   |   |            |  
|                                                                                               |  |                             |            |                             |   |                                  |   |                                 |            |   |   |            |  
|Weighted-average shares outstanding used in
  computing basic and diluted net loss per share * |  |                             | 9,500,531  |                             |   | 17,310,003                       |   |                                 | 20,365,586 |   |   | 20,369,719 |  
|                                                                                               |  |                             |            |                             |   |                                  |   |                                 |            |   |   |            |  

F-45

---



|                                                                                               |  |                             |             |                            |   |                                 |   |                                |            |   |   |             |  
|---------------------------------------------------------------------------------------------- |  | --------------------------- | ----------- | -------------------------- | - | ------------------------------- | - | ------------------------------ | ---------- | - | - | ----------- | -
|                                                                                               |  | 2004                        |            
|                                                                                               |  |                             |            
|                                                                                               |  | Quarter
  ended
  March 31, |             | Quarter
  ended
  June 30, |   | Quarter
  ended
  September 30, |   | Quarter
  ended
  December 31, |           
|                                                                                               |  |                             |             |                            |   |                                 |   |                                |           
|                                                                                               |  |                             |             |                            |   |                                 |   |                                |           
|Revenue                                                                                        |  | $                           | 417,744     |                            | $ | 3,304,688                       |   | $                              | 1,036,389  |   | $ | 945,975     |  
|                                                                                               |  |                             |             |                            |   |                                 |   |                                |            |   |   |             |  
|Operating costs and expenses                                                                   |  |                             | (8,003,776  | )                          |   | (8,970,149                      | ) |                                | (7,922,215 | ) |   | (8,464,860  | )
|                                                                                               |  |                             |             |                            |   |                                 |   |                                |            |   |   |             |  
|                                                                                               |  |                             |             |                            |   |                                 |   |                                |            |   |   |             |  
|Operating loss                                                                                 |  |                             | (7,586,032  | )                          |   | (5,665,461                      | ) |                                | (6,885,826 | ) |   | (7,518,885  | )
|                                                                                               |  |                             |             |                            |   |                                 |   |                                |            |   |   |             |  
|Other costs                                                                                    |  |                             | (6,356,039  | )                          |   | (13,802,861                     | ) |                                | (1,617,560 | ) |   | (2,750,798  | )
|                                                                                               |  |                             |             |                            |   |                                 |   |                                |            |   |   |             |  
|                                                                                               |  |                             |             |                            |   |                                 |   |                                |            |   |   |             |  
|Net loss                                                                                       |  | $                           | (13,942,071 | )                          | $ | (19,468,322                     | ) | $                              | (8,503,386 | ) | $ | (10,269,683 | )
|                                                                                               |  |                             |             |                            |   |                                 |   |                                |            |   |   |             |  
|                                                                                               |  |                             |             |                            |   |                                 |   |                                |            |   |   |             |  
|Preferred stock dividends and accretion of beneficial conversion
  features                    |  |                             | (34,394     | )                          |   | (37,538                         | ) |                                | (1,017,857 | ) |   | (514,563    | )
|                                                                                               |  |                             |             |                            |   |                                 |   |                                |            |   |   |             |  
|                                                                                               |  |                             |             |                            |   |                                 |   |                                |            |   |   |             |  
|Net loss attributable to common stockholders                                                   |  | $                           | (13,976,465 | )                          | $ | (19,505,860                     | ) | $                              | (9,521,243 | ) | $ | (10,784,246 | )
|                                                                                               |  |                             |             |                            |   |                                 |   |                                |            |   |   |             |  
|                                                                                               |  |                             |             |                            |   |                                 |   |                                |            |   |   |             |  
|Basic and diluted net loss per share                                                           |  | $                           | (3.14       | )                          | $ | (4.79                           | ) | $                              | (2.34      | ) | $ | (2.58       | )
|                                                                                               |  |                             |             |                            |   |                                 |   |                                |            |   |   |             |  
|                                                                                               |  |                             |             |                            |   |                                 |   |                                |            |   |   |             |  
|Weighted-average shares outstanding used in computing basic and
  diluted net loss per share * |  |                             | 4,449,240   |                            |   | 4,068,833                       |   |                                | 4,069,060  |   |   | 4,186,815   |  
|                                                                                               |  |                             |             |                            |   |                                 |   |                                |            |   |   |             |  

| |                                                                                                                                                                                                                                                                                                                                                                                                
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | * - The net
  loss per share in each quarter is computed using the weighted-average number
  of shares outstanding during the quarter. The net loss per share for the full
  year, however, is computed using the weighted-average number of shares
  outstanding during the year. Thus, the sum of the quarterly net loss per
  share amounts does not equal the full-year net loss per share.

F-46

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|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|19. | 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 $6,152,177 of promissory notes in January through August
  2006, each with a three year term. In connection with this offering, the
  Company issued warrants to purchase 1,055,071 shares of common stock. These
  warrants have an exercise price of $4.00 per share and expire in 2011. In
  addition, the Company paid a commission of $26,714 in connection with these
  investments, and granted warrants to purchase 33,417 shares of common stock
  for financial advisory services. These warrants have an exercise price of
  $4.00 per share and expire in 2011.
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|    | The Company
  obtained additional financing under the 10% Secured Convertible Promissory
  Note offering through the issuance of $1,857,000 of promissory notes in
  September 2006, each with a three year term. In connection with this
  offering, the Company issued warrants to purchase 46,425 shares of common
  stock. These warrants have an exercise price of $4.00 per share and expire in
  2011. In addition, the Company incurred expenses of $92,520 relating to these
  investments.                                                                                                                                                                                                                                                            
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|    | The Company,
  with the assistance from a valuation specialist, recalculated the fair value
  of the embedded derivative associated with the 10% Notes for the first two
  quarters of 2006. The value was determined to be $73,070 and $69,588 at March
  31, 2006 and June 30, 2006, respectively.                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|    | Additional 12.5% Note IssuanceBased
  on the terms of the 12.5% Notes, accrued interest is due and payable on the
  one year anniversary date of the notes. The interest is payable in cash or in
  the form of identical new notes, at the option of the Company. In 2006, the
  Company issued additional identical 12.5% Notes in the amount of $1,241,803
  to satisfy accrued interest payable.                                                                                                                                                                                                                                                                                                                                                           
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|    | Bridge Loan from a Director
  The Company obtained a bridge loan from Mr. Peter Meyer, a current member of
  our board of directors, on January 3, 2006 in the amount of $350,000. The
  loan was for working capital needs and was repaid in full on January 10,
  2006. The Company also obtained bridge loans from Mr. Meyer on March 9, 2006,
  March 15, 2006, June 7, 2006, and June 23, 2006 in the amounts of $300,000,
  $100,000, $100,000 and $100,000, respectively, all of which are outstanding
  as of August 31, 2006.                                                                                                                                                                                                                         

F-47

---



|         |  |                                                                                                                                                                                                                                                                                                                                   
|-------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|ITEM 13. |  | EXHIBITS                                                                                                                                                                                                                                                                                                                          
|         |  |                                                                                                                                                                                                                                                                                                                                   
|Section  |  | Document Name                                                                                                                                                                                                                                                                                                                     
|         |  |                                                                                                                                                                                                                                                                                                                                   
|3.1*     |  | Certificate
   of Incorporation of MetaMorphix, Inc., as amended.                                                                                                                                                                                                                                                                 
|         |  |                                                                                                                                                                                                                                                                                                                                   
|3.2*     |  | Amended
   & Restated By-laws of MetaMorphix, Inc.                                                                                                                                                                                                                                                                                
|         |  |                                                                                                                                                                                                                                                                                                                                   
|4.1*     |  | Form of
   12.5% Convertible Promissory Note, as amended.; Form of Convertible Secured
   Promissory Note; Form of Warrant to Purchase Common Stock of MetaMorphix,
   Inc.                                                                                                                                                       
|         |  |                                                                                                                                                                                                                                                                                                                                   
|10.1*    |  | Employment
   Agreement dated January 1, 1998 by and between Edwin C. Quattlebaum and
   MetaMorphix, Inc.                                                                                                                                                                                                                        
|         |  |                                                                                                                                                                                                                                                                                                                                   
|10.2*    |  | Employment
   Agreement dated as of May 31, 2004 by and between Thomas P. Russo and
   MetaMorphix, Inc.                                                                                                                                                                                                                          
|         |  |                                                                                                                                                                                                                                                                                                                                   
|10.3*    |  | Employment
   Agreement dated as of September 5, 2000 by and between Ronald Stotish and
   MetaMorphix, Inc.                                                                                                                                                                                                                      
|         |  |                                                                                                                                                                                                                                                                                                                                   
|10.4*    |  | Fourth
   Amended Consulting Agreement dated as of April 1, 2000 by and between Se-Jin
   Lee and MetaMorphix, Inc.                                                                                                                                                                                                               
|         |  |                                                                                                                                                                                                                                                                                                                                   
|10.5*    |  | Amended and
   Restated 1996 Employees Incentive Stock Option Plan of MetaMorphix, Inc.                                                                                                                                                                                                                                           
|         |  |                                                                                                                                                                                                                                                                                                                                   
|10.6*    |  | Amended and
   Restated 1995 Non-Qualified Officer, Director, Employee, and Consultant
   Stock Option Plan of MetaMorphix, Inc.                                                                                                                                                                                                  
|         |  |                                                                                                                                                                                                                                                                                                                                   
|10.7*    |  | Sublease by
   and between Baxter Healthcare Corporation and MetaMorphix, Inc. dated as of
   October 18, 2004                                                                                                                                                                                                                    
|         |  |                                                                                                                                                                                                                                                                                                                                   
|10.8*    |  | Lease
   Agreement by and between Columbia Acquisition, LLC and MetaMorphix, Inc.
   dated December 17, 2001                                                                                                                                                                                                                      
|         |  |                                                                                                                                                                                                                                                                                                                                   
|10.9*    |  | Consent to
   Sublease by and between Columbia Acquisition, LLC and MetaMorphix, Inc.
   dated as of November 23, 2004;                                                                                                                                                                                                           
|         |  |                                                                                                                                                                                                                                                                                                                                   
|10.10*   |  | Sublease by
   and between MetaMorphix and Chesapeake PERL, Inc. dated as of November 23,
   2004.                                                                                                                                                                                                                                
|         |  |                                                                                                                                                                                                                                                                                                                                   
|10.11*   |  | First
   Amendment of Lease and Extension of Term Agreement by and between MMI
   Genomics, Inc. and Haussler Office Park, L.P. dated as of July 31, 2002                                                                                                                                                                         
|         |  |                                                                                                                                                                                                                                                                                                                                   
|10.13*   |  | Livestock
   Database License Agreement entered into as of February 28, 2002 (the
   Livestock Database License Agreement) by and between PE Corporation (NY)
   through the Celera Genomics Group and MetaMorphix, Inc. (Confidential
   treatment has been requested with respect to certain portions of this
   agreement)***
|         |  |                                                                                                                                                                                                                                                                                                                                   
|10.14*   |  | Amendment
   No. 1 to the Livestock Database License Agreement and Subscription Agreement
   made as of June 17, 2003 by and between Applera Corporation (successor to
   its wholly-owned subsidiary PE Corporation (NY) through the Celera Genomics
   Group) and MetaMorphix, Inc.                                             
|         |  |                                                                                                                                                                                                                                                                                                                                   
|10.15*   |  | Amendment
   No. 2 to the Livestock Database License Agreement dated as of August 29,
   2003 by and between Applera Corporation (successor to its wholly-owned
   subsidiary PE Corporation (NY) through the Celera Genomics Group) and
   MetaMorphix, Inc.                                                                     

60

---



|        |  |                                                                                                                                                                                                                                                                                   
|------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|10.16*  |  | Amendment
   No. 3 to the Livestock Database License Agreement dated as of September 8,
   2003 by and between Applera Corporation (successor to its wholly-owned
   subsidiary PE Corporation (NY) through the Celera Genomics Group) and
   MetaMorphix, Inc.                   
|        |  |                                                                                                                                                                                                                                                                                   
|10.17*  |  | Amendment
   No. 4 to the Livestock Database License Agreement dated as of October 1,
   2003 by and between Applera Corporation (successor to its wholly-owned
   subsidiary PE Corporation (NY) through the Celera Genomics Group) and
   MetaMorphix, Inc.                     
|        |  |                                                                                                                                                                                                                                                                                   
|10.18*  |  | Amendment
   No. 5 to the Livestock Database License Agreement dated as of October 1,
   2003 by and between Applera Corporation (successor to its wholly-owned
   subsidiary PE Corporation (NY) through the Celera Genomics Group) and
   MetaMorphix, Inc.                     
|        |  |                                                                                                                                                                                                                                                                                   
|10.19*  |  | Shareholders
   Agreement dated as of February 29, 2002 by and among MetaMorphix, Inc. and
   the shareholders listed therein.                                                                                                                                                    
|        |  |                                                                                                                                                                                                                                                                                   
|10.20** |  | Swine
   Improvement Agreement effective June 1, 2004 by and between Monsanto Company
   and MetaMorphix, Inc. (Confidential treatment has been requested with
   respect to certain portions of this agreement)***                                                               
|        |  |                                                                                                                                                                                                                                                                                   
|10.21** |  | Joint
   Development and Joint Marketing Agreement entered into as of May 6, 2002 by
   and between MetaMorphix, Inc., Excel Corporation and Cargill Inc.
   (Confidential treatment has been requested with respect to certain portions
   of this agreement)***                 
|        |  |                                                                                                                                                                                                                                                                                   
|10.22** |  | Cross-License
   Agreement entered into as of October 14, 2002 by and between Wyeth by and
   through Genetics Institute, L.L.C. and MetaMorphix, Inc. (Confidential
   treatment has been requested with respect to certain portions of this
   agreement) ***                   
|        |  |                                                                                                                                                                                                                                                                                   
|10.23** |  | Amended and
   Restated Collaboration Agreement dated as of January 26, 1999 by and among
   Genetics Institute, Inc., The Johns Hopkins University and MetaMorphix, Inc.
   (Confidential treatment has been requested with respect to certain portions
   of this agreement) ***
|        |  |                                                                                                                                                                                                                                                                                   
|10.24*  |  | Promissory
   Note of February 9, 1998 of MetaMorphix, Inc., as Maker, payable to Genetics
   Institute, Inc. (the Promissory Note).                                                                                                                                            
|        |  |                                                                                                                                                                                                                                                                                   
|10.25*  |  | First
   Allonge to the Promissory Note of August 18, 1998 of MetaMorphix, Inc., as
   Maker, payable to Genetics Institute, Inc.                                                                                                                                                 
|        |  |                                                                                                                                                                                                                                                                                   
|10.26*  |  | Second
   Allonge to the Promissory Note of October 30, 1998 of MetaMorphix, Inc., as
   Maker, payable to Genetics Institute, Inc.                                                                                                                                              
|        |  |                                                                                                                                                                                                                                                                                   
|10.27*  |  | Third
   Allonge to the Promissory Note of January 26, 1999 of MetaMorphix, Inc., as
   Maker, payable to Genetics Institute, Inc.                                                                                                                                                
|        |  |                                                                                                                                                                                                                                                                                   
|10.28*  |  | Fourth
   Allonge to the Promissory Note of April 28, 2005 of MetaMorphix, Inc., as
   Maker, payable to Genetics Institute, Inc.                                                                                                                                                 
|        |  |                                                                                                                                                                                                                                                                                   
|10.29*  |  | Security
   Agreement dated as of April 28, 2005 by and between Genetics Institute, LLC
   and MetaMorphix, Inc.                                                                                                                                                                  
|        |  |                                                                                                                                                                                                                                                                                   
|10.30** |  | Limited
   Liability Company Agreement of Willmar/MetaMorphix Turkey Joint Venture, LLC
   dated as of September 4, 2002 (Confidential treatment has been requested
   with respect to certain portions of this agreement) ***                                                    

61

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|        |  |                                                                                                                                                                                                                                                                                              
|------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|10.31** |  | Agreement
   dated as of August 2000, between The University of Saskatchewan as
   represented by the Veterinary Infectious Disease Organization and
   MetaMorphix International, Inc. (Confidential treatment has been requested
   with respect to certain portions of this agreement) ***
|        |  |                                                                                                                                                                                                                                                                                              
|10.32*  |  | License
   Agreement, effective as of September 17, 2004 between Genetic Technologies
   Limited and MetaMorphix, Inc. (Confidential treatment has been requested
   with respect to certain portions of this agreement) ***                                                                 
|        |  |                                                                                                                                                                                                                                                                                              
|14.1*   |  | Code of
   Ethics                                                                                                                                                                                                                                                                            
|        |  |                                                                                                                                                                                                                                                                                              
|21.1*   |  | Subsidiaries
   of MetaMorphix, Inc.                                                                                                                                                                                                                                                         
|        |  |                                                                                                                                                                                                                                                                                              
|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                                                                                                                                                                                                                                      

* - These
exhibits were filed with the Form 10-SB on May 2, 2005.

** - These
exhibits were filed with the Form 10-SB Amendment No. 1 on October 3, 2006.

|         |  |                                       
|-------- |  | --------------------------------------
|ITEM 14. |  | PRINCIPAL ACCOUNTANT FEES AND SERVICES

The following table presents
the aggregate fees billed for the audit services performed by Deloitte &
Touche LLP, the member firms of Deloitte Touche Tohmatsu, and their respective affiliates (collectively, the Deloitte entities) during the 2005 and 2004 fiscal years.

|           |  |      |         |      |   |         | 
|---------- |  | ---- | ------- | ---- | - | ------- | 
|           |  | 2005 |         | 2004 |  
|           |  |      |         |      |  
|Audit Fees |  | $    | 275,000 |      | $ | 651,308 | 
|Tax Fees   |  |      | 7,500   |      |   | 0       | 

Audit
Fees. Audit Fees
relate to professional services rendered in connection with the audit of our
annual financial statements, quarterly review of financial statements included
in our 10-QSB, and audit services provided in connection with other statutory
and regulatory filings. Audit fees for 2004 represent fees for the audits of fiscal years 2003 and 2004 combined.

Tax
Fees.Tax Fees
include professional services related to tax compliance, tax advice and tax
planning, including the preparation of federal and state tax returns.

The
Audit Committee pre-approved all of the services provided by the Deloitte entities for fiscal years 2005 and 2004. Pursuant to the Audit Committee
Charter, the Audit Committee must pre-approve audit and non-audit services to
be provided to us by the independent registered public accounting firm, or subsequently approve non-audit
services in those circumstances where a subsequent approval is necessary and
permissible.

62

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SIGNATURES

In accordance
with Section 13 or 15(d) of the Exchange Act, the registrant caused this report
to be signed on its behalf by the undersigned, thereunto duly authorized.

|                        |                                         | 
|----------------------- | --------------------------------------- | 
|                        | METAMORPHIX,
  INC.                     | 
|                        |                                         | 
|Date:
  October 3, 2006 |                                         | 
|                        | /s/ Edwin
  Quattlebaum                 | 
|                        |                                         | 
|                        | Edwin Quattlebaum                       | 
|                        | Chief
  Executive Officer and President

In accordance
with the Exchange Act, this report has been signed below by the following
persons on behalf of the registrant and in the capacities and on the dates
indicated.

|                                                                                                            |  |                  
|----------------------------------------------------------------------------------------------------------- |  | -----------------
|/s/ Edwin
  Quattlebaum                                                                                     |  | October 3,
  2006
|                                                                                                            |  |                  
|Edwin
  Quattlebaum                                                                                         |  |                  
|Director,
  Co-Chairman of the Board, Chief Executive Officer and President (Principal
  Executive Officer)
|                                                                                                           
|/s/ Thomas
  P. Russo                                                                                       |  | October 3,
  2006
|                                                                                                            |  |                  
|Thomas P.
  Russo                                                                                           |  |                  
|Executive
  Vice President, Treasurer and Chief Financial Officer (Principal Financial
  Officer)          
|                                                                                                           
|/s/ Clifton
  Baile                                                                                         |  | October 3,
  2006
|                                                                                                            |  |                  
|Clifton
  Baile                                                                                             |  |                  
|Director                                                                                                    |  |                  
|                                                                                                            |  |                  
|                                                                                                            |  |                  
|                                                                                                            |  |                  
|John R. Block                                                                                               |  |                  
|Director                                                                                                    |  |                  
|                                                                                                            |  |                  
|                                                                                                            |  |                  
|                                                                                                            |  |                  
|William Buckner                                                                                             |  |                  
|Director                                                                                                    |  |                  
|                                                                                                            |  |                  
|/s/ Victor M. Casini                                                                                        |  | October 3, 2006  
|                                                                                                            |  |                  
|Victor M. Casini                                                                                            |  |                  
|Director                                                                                                    |  |                  
|                                                                                                            |  |                  
|/s/ Peter
  Drake                                                                                           |  | October 3,
  2006
|                                                                                                            |  |                  
|Peter Drake                                                                                                 |  |                  
|Director                                                                                                    |  |                  
|                                                                                                            |  |                  
|/s/ Peter A.
  Meyer                                                                                        |  | October 3,
  2006
|                                                                                                            |  |                  
|Peter A.
  Meyer                                                                                            |  |                  
|Director and
  Co-Chairman of the Board                                                                     | 
|                                                                                                            | 
|/s/ Howard
  L. Minigh                                                                                      |  | October 3,
  2006
|                                                                                                            |  |                  
|Howard L.
  Minigh                                                                                          |  |                  
|Director                                                                                                    |  |                  

63

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