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|----------------------------------
|UNITED STATES                     
|SECURITIES AND EXCHANGE COMMISSION
|Washington, D.C. 20549            
|                                  
|                                  
|FORM 10-KSB/A                     
|(Amendment No. 1)                 

|  |                                                                                     
|- | ------------------------------------------------------------------------------------
|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 | TRANSITION REPORT
  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 October 31, 2006,
the Registrant had 21,035,141 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                                                                                         | 27   | 
|Item 3.    | Legal
  Proceedings                                                                                                 | 28   | 
|Item 4.    | Submission
  of Matters to a Vote of Security Holders                                                               | 28   | 
|           |                                                                                                                     |      | 
|PART II    |                                                                                                                     |      | 
|           |                                                                                                                     |      | 
|Item 5.    | Market
  for Common Equity, Related Stockholder Matters and Small Business Issuer
  Purchases of Equity Securities  | 28   | 
|Item 6.    | Managements
  Discussion and Analysis or Plan of Operation                                                         | 30   | 
|Item 7.    | Financial
  Statements                                                                                              | 44   | 
|Item 8.    | Changes
  and Disagreements with Accountants on Accounting And Financial Disclosure                                 | 44   | 
|Item 8A.   | Controls
  and Procedures                                                                                           | 45   | 
|Item 8B.   | Other
  Information                                                                                                 | 45   | 
|           |                                                                                                                     |      | 
|PART III   |                                                                                                                     |      | 
|           |                                                                                                                     |      | 
|Item 9.    | Directors,
  Executive Officers, Promoters and Control Persons; Compliance With Section
  16(a) of the Exchange Act | 46   | 
|Item 10.   | Executive
  Compensation                                                                                            | 49   | 
|Item 11.   | Security
  Ownership of Certain Beneficial Owners and Management and Related Stockholder
  Matters                  | 56   | 
|Item
  12. | Certain
  Relationships and Related Transactions                                                                    | 59   | 
|           |                                                                                                                     |      | 
|Item 13.   | Exhibits                                                                                                            | 61   | 
|Item 14.   | Principal
  Accountant Fees and Services                                                                            | 64   | 
|           |                                                                                                                     |      | 
|SIGNATURES | 65                                                                                                                  |     

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EXPLANATORY NOTE

We are filing this Form 10-KSB/A (Amendment No. 1) in response to the
SECs comments on the filing of our Amendment No. 1 to Form 10-SB, which are
applicable to this filing. Changes made throughout include updates to certain
financial and other information contained in our original filing.

PART I

FORWARD-LOOKING
STATEMENTS

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

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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, a
world leader in swine breeding. 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. These
non-exclusive DNA testing service contracts are made in the ordinary course of
business and contain standard fee-per-test terms with contracts being renewable
every three years by mutual consent of the parties. Additionally, these
agreements detail DNA sample submission format, specifications for data
analysis and delivery, and proper archiving of samples after analysis.

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, Tyson
Poultry, Inc., or Tyson, and Pilgrims Pride Corporation, or Pilgrims Pride, and
have formed a joint venture with Willmar Poultry Company, Inc., or Willmar, the
worlds largest supplier of day old poults, for the development of Myostatin
applications in turkeys. We have granted an exclusive license to Wyeth for the
human therapeutic application of our GDF technology including Myostatin, under
which Wyeth has completed Phase II clinical trials to evaluate a
Myostatin-based product as a therapeutic for 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. After Dr. Lee published a paper on Myostatin in 1997, we began to
explore business opportunities to use the Myostatin technology for human and
agricultural applications. In 1999, we licensed to Wyeth human therapeutic
applications of our GDF technology in exchange for which Wyeth assigned 2.7
million shares of our Series A Preferred Stock and 900,000 shares of our Series
B Preferred Stock (95% of their total holdings) to us, as well as our receiving
the right to future milestone and royalty payments. We accounted for the stock
assignment as a repurchase and subsequently cancelled those shares. Between
2000 and 2002, we granted options to license our Myostatin technology to the
top two U.S. chicken producers, Tyson and Pilgrims Pride, and entered into a
joint venture with a leading supplier of turkeys, Willmar, to commercialize
Myostatin in the North American chicken and turkey markets.

Our
business activities in the area of animal genomics commenced in February 2002,
when we acquired some of the animal-related assets of the Celera Genomics Group
of Applera Corporation, or Celera, and licensed Celeras chicken, swine and
cattle genome databases for agricultural use within

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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
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 U.S.
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                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       

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| |  |                                                                                                                                     
| |  | ------------------------------------------------------------------------------------------------------------------------------------
| |  | 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 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 System, 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

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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.

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 mid-2007. 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 up to 40,000 animals. The initial samples were
collected exclusively from Cargills own feedlots. Cargills alliance
partners, leading feedlot operators that supply Cargills processing
facilities, have also participated in the study. As of the end of November 2006,
we have tested approximately 28,000 animals 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
System 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
System, 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
System with
a leading chicken breeder. These opportunities include the possibility of
entering into a commercial relationship similar to our swine and cattle
agreements. If we enter into an agreement with a chicken breeder, we expect it
to be exclusive.

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. Lastly, we

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anticipate that we will use
our highly informative SNPs as part of a gene discovery program. To that end,
we have entered into a license agreement with Genetic Technologies Limited, or
GTG, for the rights to utilize U.S. patent #5,612,179 and #5,851,762, for the
duration of their patent life, in our research and commercialization effort.
Under the terms of this agreement, we have paid GTG a license issue fee and are
contractually obligated to pay license annuity fees for applications in
livestock, aquaculture and companion animals.

Current
Animal Genomic Products and Services

We
are currently providing genotyping services to the livestock (cattle) 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. For the cattle industry, we have entered into a license agreement with
Marshfield Clinic, or Marshfield, for the rights to U.S. patent #5,075,217 for
the duration of the patent life, to be used in cattle parentage testing. For
this right, we pay to Marshfield/Linkage a quarterly fee.

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 nine months ended
September 30, 2006, revenues from sales of these products and services were
approximately $2,225,000 and $1,593,000, 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.

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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.

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.

We
anticipate that we will lower the annual license fees owed related to the technology
acquired during the BioStar acquisition as we will be terminating the Vido
Technology License Agreement between the University of Saskatchewan and
MetaMorphix International, our wholly-owned subsidiary. The technology had been
assigned to us in 2000. We do not envision that we will utilize the Adjuvant
technology claims within U.S. patent #5,951,988 or its related patent family in
order to immunize livestock. Currently, we are obligated to pay minimum royalty
fees of $200,000 CAD, or approximately $176,000 USD.

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

7

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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.

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 a 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.

8

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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. We are not obligated to pay a royalty
on any swine collaboration entered into after February 28, 2006. 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. No such notice has been served by either party. The agreement may also be terminated in the event of a bankruptcy
or insolvency event of one of the parties. We are currently past-due with
respect to minimum royalty payments due to Celera.

We
are currently past-due with respect to minimum royalty payments due to Celera,
however, it is our intention to pay any past due amounts and avoid a default,
as soon as sufficient funding is secured. At September 30, 2006, the total
amount due to Celera was $6,138,156, of which $2,544,980 is past-due or payable
within 12 months and the remaining $3,593,176 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 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 up to 40,000 animals, which began in
late 2005. It is expected to be completed in mid-2007. 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

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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 mid-2007, 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
System 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 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

10

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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, the Collaboration Agreement
stipulates that failure to achieve certain payment and performance milestones
may cause termination of the licenses granted to us in the Agreement. We have
met the required development milestone which required that a minimum of $2.5
million be spent over the five year period beginning on January 27, 1999 and
ending on January 27, 2004. However, we are currently in arrears at September
30, 2006 with respect to $310,000 of patent fees and $755,000 of maintenance
fees and research funding which would permit Johns Hopkins to provide us with a
60-day notice-and-cure letter (after which 60-day period, Johns Hopkins would
have the right to terminate the license and other rights granted by Johns
Hopkins to MetaMorphix). No such notice has been served upon us by Johns
Hopkins. 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.

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.

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

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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

On
July 28, 2000, we entered into a Letters of Intent and Limited License
Agreement with Tyson Poultry, Inc., or Tyson, and on November 10, 2000, we
entered into a substantially similar Letter of Intent and Limited License and
Option Agreement with Pilgrims Pride Corporation, or Pilgrims Pride. The
parties have entered into the aforementioned agreements to facilitate the
testing of Myostatin blocker technology in broiler chicken production and to
facilitate negotiating the terms of the proposed long-term license agreements.
On October 10, 2000, MetaMorphix and Pilgrims Pride entered into a Letter of
Intent Regarding Limited License in the Republic of Mexico.

These
agreements include an option to license Myostatin technology for use by Tyson
in U.S. chicken production and for use by Pilgrims Pride in chicken production
in both the U.S. and Mexico on predefined terms upon the successful completion
of large-scale trials by the poultry producers. 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 30% 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 nine months ended September 30, 2005 and 2006, we spent $3,638,012 and
$2,077,662, 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 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.

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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
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:

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| |   |                                                                                                                                                
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------
| |  | 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.

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.

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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.

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

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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, 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                                                                                                                                                       

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| |  |                                                                                                                                                                                           
| |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | 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.

Employees

As
of September 30, 2006, we had a total of 35 employees: 25 in Davis, California
and 10 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.

17

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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 WELL AS THE OTHER INFORMATION IN THIS FORM 10-KSB/A (AMENDMENT
NO. 1) 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.

18

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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 30,
2006, we had approximately $1.2 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.                                                                                                                                                                     

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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
September 30, 2006, we had approximately $39,128,000 of outstanding
indebtedness in the form of short-term and long-term promissory notes. Of such
amount, $4,426,000 principal amount is past due. 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
September 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
September 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 September
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 prescribed conditions for maintaining the license. The failure to maintain
an exclusive license to the

20

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genomic
sequencing technology would negatively impact our ability to commercialize any
products or services based on this platform technology.

Due to
past-due minimum royalty payments we have been unable to make, we are currently
in breach of the Celera Licensing Agreement, which could result in Celera
exercising their option to terminate the contract, which would revoke the use
of the technology and reduce our expected future revenue and cash flows.

At
September 30, 2006, we were past due in paying minimum royalties to Celera in
the amount of $2,038,800. Celera has the right under the agreement to terminate
our rights to the technology, which includes the world-wide license to
certain cattle, swine and poultry database products; single nucleotide
polymorphism, or SNP, maps, and software. If we were to lose our rights to this
technology, we would be unable to complete our product commercialization
strategy, thereby reducing the amount of expected revenue and cash flows.

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

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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 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.

Due to
past-due patent and research fees we have been unable to pay to Johns Hopkins,
we are currently in breach of the Amended and Restated Collaboration Agreement
with The Johns Hopkins University School of Medicine and Genetics Institute,
Inc. (now a division of Wyeth), which could result in Johns Hopkins exercising
their option to terminate the contract, which would revoke the use of the
technology and reduce our expected future revenue and cash flows.

At
September 30, 2006, we were past due in paying patent fees to Johns Hopkins in
the amount of $310,000 and research funding in the amount of $755,000. Johns
Hopkins has the right under the Amended and Restated Collaboration Agreement to
terminate our rights to the growth and differentiation technology. If we
were to lose our rights to this technology, we would be unable to complete our
product commercialization strategy, thereby reducing the amount of expected
revenue and cash flows.

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

22

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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.

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

23

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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.

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 36 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

24

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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.

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:

25

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| |   |                                                
| | - | -----------------------------------------------
| |  | 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.

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 and a subsequent comment letter dated November 13, 2006 are reflected in
this Form 10-KSB/A (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.

26

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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.

|        |                        
|------- | -----------------------
|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 April 30, 2012.
|                                                                                |  |                                                                              |  |                        |  |                                   |  |                              
|MMI Genomics, Inc.
  1756 Picasso Avenue
  Davis, CA 95616                      |  | Genomics Research and Operations                                             |  | 12,104                 |  | $265,878                          |  | Lease expires May 31, 2007.  

27

---



|        |                  
|------- | -----------------
|ITEM 3. | LEGAL PROCEEDINGS

On
June 20, 2005, the Company became aware of a lawsuit and claim against us from
Regions Bank for $731,000. Samuel R. Dunlap, a former Company director, who is
now in bankruptcy, pledged a $731,000 Promissory Note made by us to Mr. Dunlap
as security for a $5.0 million loan from Regions Bank. Regions Bank has sued us
for payment of this Note. The amount that is owed is in dispute (due to offsets
made at Mr. Dunlaps direction prior to the bankruptcy). We also contend that
the conditions precedent to the maturity of the loan have not occurred. We note
that our December 31, 2005 consolidated condensed financial statements reflect
principal of $625,498 being owed as of such date (reflecting the offsets).
Regions Bank asserts that we (in the operation of our securities transfer
function) and our legal counsel enabled Mr. Dunlap to pledge one of his several
Warrants to another creditor in breach of an already existing Commercial Pledge
Agreement between the Bank and Mr. Dunlap. We will indemnify and hold harmless our
legal counsel, who is also the Secretary of the Company, in this matter.

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

|          |                                                      
|--------- | -----------------------------------------------------
|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 September 30, 2006, we have warrants outstanding to purchase 9,986,251
shares of our common stock, options outstanding to purchase 9,049,461 shares of
our common stock, and convertible notes which may be converted into 8,703,999
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
September 30, 2006, 20,369,718 out of 21,035,141 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

28

---



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 September 30, 2006, 21,035,141 shares of common stock were issued and
outstanding and held by approximately 550 holders of record.

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                                                                                                 |  |  |  | 1,620,138 |  | 
|Equity compensation plans not approved by security
  holders (1)(2) |  | 2,968,573                                                                               |  |                                                                       |   | 3.60                                                                                                 |  |  |  | 81,427    |  | 
|                                                                    |  |                                                                                         |  |                                                                       |   |                                                                                                      |  |  |  |           |  | 
|Total                                                               |  | 9,348,435                                                                               |  |                                                                       | $ | 3.68                                                                                                 |  |  |  | 1,701,565 |  | 
|                                                                    |  |                                                                                         |  |                                                                       |   |                                                                                                      |  |  |  |           |  | 



---

|    |                                                                                                                                               
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------
|(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.

29

---



|        |                                                            
|------- | -----------------------------------------------------------
|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/A (Amendment No. 1). 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/A (Amendment No. 1), 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, a
world leader in swine breeding. 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

30

---



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 September 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.

31

---



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
allocate the consideration to each of the deliverables (i.e. milestones) on a
contract though an analysis of costs incurred as they related to specific steps
with a work plan. This treatment is in accordance with Staff Accounting
Bulletin No. 104, Revenue Recognition, Selected Revenue Recognition Issues 
Section 3: Delivery and Performance, as the costs incurred coincide with proportionate
performance of the services.

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 September 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.

32

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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.

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.

33

---



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 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, $3.15 at March 31, 2006, and $3.25 at June 30, 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.

34

---



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 |  | $ |          | 
|                                                                                                 
|Capital
  lease obligations  for equipment                                                       |  |                          | 198,569    |                      |   | 42,390     |  |           | 84,780    |                     |   | 46,635     |  |   | 24,764    | 
|                                                                                                 
|Employment
  related obligations (1)                                                              |  |                          | 5,221,743  |                      |   | 5,221,743  |  |           |          |                     |   |           |  |   |          | 
|                                                                                                 
|Interest
  obligations  on promissory notes                                                      |  |                          | 3,472,477  |                      |   | 2,284,145  |  |           |          |                     |   | 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                                                                                             |  | $                        | 47,973,352 |                      | $ | 14,612,483 |  | $         | 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.

35

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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.

36

---



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.

37

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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.

38

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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 September 30, 2006, we expensed an aggregate
of $33.5 million, including stock-based compensation expenses of $3.2 million,
on research and development.

39

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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 September 30, 2006, we expensed an aggregate of $55.3
million, including stock-based compensation expenses of $16.7 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 $1,309,731 and $1,881,145
for the nine months ended September 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 $507,733 and $818,820
for the nine months ended September 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.

40

---



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 September 30, 2006 and December 31, 2005, we had a working
capital deficit of $25,175,441 and $24,767,525, respectively, which deficit has
since increased. At September 30, 2006, we had approximately $1.2 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.

41

---



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.

42

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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.

Income Taxes

The
Company is in the process of amending its federal and state tax returns from
2002, and preparing federal and state tax returns for the calendar years 2003,
2004 and 2005. These tax returns are currently delinquent as a result of the
timing of  audits and tax compliance work due to unavailable financing, but given the level of
losses incurred for those periods, no taxes or interest will be due. The
Company may incur late filing penalties which management expects to be minimal.

Off-Balance Sheet Arrangements

We
have no off-balance sheet arrangements.

43

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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/A (Amendment No. 1), and the following are attached hereto beginning on
Page F-1, which follows page 60:

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.

44

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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.

45

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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 September 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) |  | 56  |  | 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.            |  | 52  |  | 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)  |  | 62  |  | Director and
  Co-Chairman of the Board of Directors                            
|                                          |  |     |  |                                                                                 
|Howard L.
  Minigh (3) (4) (5) (7)        |  | 58  |  | 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.

46

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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.

47

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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
Buckner
has 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. Meyer
has 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

48

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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 Chief        |  | 2004          |  | $                   | 421,912 |                 | $ | 152,000                                    |  |  | 1,101,444 |  | 
|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 September 30, 2006.                                                                                                           

49

---



|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(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
  OptionsGranted |  | % 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.

|                       |  |                                 |                  |             |  |                                                                                  |  |                                                                            |  |               |           |  |   |   | 
|---------------------- |  | ------------------------------- | ---------------- | ----------- |  | -------------------------------------------------------------------------------- |  | -------------------------------------------------------------------------- |  | ------------- | --------- |  | - | - | 
|                       |  |                                 |                  |             |  | Number of
  Securities
  Underlying
  Unexercised Options at
  December 31, 2005 |  | Value of
  Unexercised
  in-the-Money
  Options at
  December 31, 2005 (1) | 
|                       |  | Shares
  Acquired on
  Exercise |                  |             |  |                                                                                  | 
|                       |  |                                 | Value
  Realized |             |  |                                                                                  |  |                                                                            |  |               |           | 
|Name                   |  |                                 |                  | 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.

50

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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;                                                                    

51

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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

52

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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 the Form 10-SB filed on May 2, 2005. 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.

53

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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 September 30, 2006, options to purchase an aggregate of 5,935,888 shares
were outstanding under the Employees Plan.

54

---



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 September 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                                                 

55

---



| |   |                                                                                    
| | - | -----------------------------------------------------------------------------------
| |  | 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.

|           |                                                                                                    
|---------- | ---------------------------------------------------------------------------------------------------
|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 BeneficiallyOwned (2) |  | Percentage
  of Shares
  Beneficially Owned (3) |     | Percentage ofVotingPower (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)(21)                 |  | 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                      |  |                                                 | *   |                              |  | *   |   | 

56

---



|                                                                                               |  |           |  |       |  |      
|---------------------------------------------------------------------------------------------- |  | --------- |  | ----- |  | -----
|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 Street
  Boulder, CO 80301                       |  | 1,598,063 |  | 7.5%  |  | 4.3% 
|                                                                                               |  |           |  |       |  |      
|Paul Moore (15)
  269 Market Square
  Lake Forest, IL 60045                                    |  | 1,549,402 |  | 7.4%  |  | 4.2% 
|                                                                                               |  |           |  |       |  |      
|Theodore Swindells (16)
  11400 S.E. 8th Street, Suite 420
  Bellevue, WA 98004                |  | 1,203,139 |  | 5.7%  |  | 3.2% 
|                                                                                               |  |           |  |       |  |      
|Biostar, Inc. (17)
  Suite 860 Saskatoon Square
  410 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 7
  Norwalk, CT 06856-5435                              |  | 2,000,001 |  | 8.7%  |  | 5.4% 
|                                                                                               |  |           |  |       |  |      
|Kevin F. Flynn (20)
  120 N. LaSalle Street, Suite 3300
  Chicago, 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

57

---



|     |                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|---- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|     | 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
  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                                                                                                                                                                                                                                                              

58

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|     |                                                                                                                                                                                                                                                                                                            
|---- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|     | Stock. Mr. Gerald R. Forsythe has voting and
  dispositive control over the shares held by New Frontiers Capital LLC.                                                                                                                                                                                      
|     |                                                                                                                                                                                                                                                                                                            
|(19) | Represents shares issuable upon conversion of
  457,143 shares of Series E Convertible Preferred Stock. 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 Stock, and 130,000 shares
  underlying convertible debt. Represents shares held directly and by family
  members.
|     |                                                                                                                                                                                                                                                                                                            
|(21) | Mr. Buckner resigned from our board of directors on October 12,
2006.                                                                                                                                                                                                                                      

|         |                                                 
|-------- | ------------------------------------------------
|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
September 30, 2006, we had $600,000 due on these loans, with $28,329 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 September 30, 2006, we had $300,000 due on these loans, with
$56,959 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 September 30, 2006, we had $70,000 due on these
loans, with $16,477 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 September 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 September 30, 2006 and

59

---



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.

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 September 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
September 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.

60

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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

---



|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|-- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|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. We allocate the
  consideration to each of the deliverables (i.e. milestones) on a contract
  though an analysis of costs incurred as they related to specific steps

F-9

---



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | with
  a Work Plan This treatment is in accordance with Staff Accounting Bulletin
  No. 104, Revenue
  Recognition, Selected Revenue Recognition Issues  Section 3: Delivery and Performance,as
  the costs incurred coincide with proportionate performance of the services.                                                                                                                                                                                                                                                                            
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| | 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  | %    |  | 39.9 | %
|Customer B |  |                                                      | 31.5 | %    |  | 4.5  | %
|Customer C |  |                                                      | 11.8 | %    |  | 16.9 | %
|           |  |                                                      |      |      |  |      |  
|           |  |                                                      |      |      |  |      |  
|Total      |  |                                                      | 50.7 | %    |  | 61.3 | %
|           |  |                                                      |      |      |  |      |  

F-10

---



| |                                                                                                                                                                                                                                                                                                                                                                                                                                     
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 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. The Company has three customers within its Animal Genomics
  segment which comprise a significant percentage of total revenue. Revenue
  percentage by customer is as follows:

|           |  |                                                              |      |      |  |      |   |  |      |  
|---------- |  | ------------------------------------------------------------ | ---- | ---- |  | ---- | - |  | ---- | -
|           |  | Percentage
  of Total Revenue for the yearended December 31, |     
|           |  | 2005                                                         |      | 2004 |  | 2003 |  
|           |  |                                                              |      |      |  |      |  
|           |  |                                                              |      |      |  |      |   |  |      |  
|Customer 1 |  |                                                              | 0.0  | %    |  | 55.2 | % |  | 76.8 | %
|Customer 2 |  |                                                              | 38.1 | %    |  | 16.8 | % |  | 12.0 | %
|Customer 3 |  |                                                              | 11.1 | %    |  | 3.0  | % |  | 0.0  | %
|           |  |                                                              |      |      |  |      |   |  |      |  
|           |  |                                                              |      |      |  |      |   |  |      |  
|Total      |  |                                                              | 49.2 | %    |  | 77.0 | % |  | 88.8 | %
|           |  |                                                              |      |      |  |      |   |  |      |  

| |                                                                                                                                                                                                                                                                                                                                    
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 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                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        

F-11

---



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 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 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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 

F-12

---



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

F-13

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|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|-- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   | 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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|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

F-14

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| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 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 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, Tyson Poultry,
  Inc. and Pilgrims Pride Corporation. Additionally, the Company executed a
  similar agreement with Pilgrims Pride Corporation 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                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           

F-15

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| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 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 royalty payments on a quarterly basis. We are obligated to make quarterly payments
  of $37,500 CAD. (which will increase to $50,000 CAD 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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     

F-16

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|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|-- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   | 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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|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:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           

F-17

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| |                                                                                                                                                                                                                                                                                                                                                                                                                           |                                                                                                                                                                                                                                                            
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (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.                                                                                                                                                                                                                                                                              
| |                                                                                                                                                                                                                                                                                                                                                                                                                           |                                                                                                                                                                                                                                                            
| | 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           |            | 2004 |  
| |                                        |  |                |            |      |  
| |                                        |  |                |            |      |   |            |  
| | Office
  equipment                     |  | $              | 1,219,938  |      | $ | 1,207,404  |  
| | Production
  equipment                 |  |                | 1,814,799  |      |   | 1,221,825  |  
| | Office
  equipment under capital lease |  |                | 213,224    |      |   | 213,224    |  
| | Laboratory
  equipment                 |  |                |           |      |   | 337,089    |  
| | Leasehold
  improvements               |  |                | 129,062    |      |   | 158,464    |  
| |                                        |  |                |            |      |   |            |  
| |                                        |  |                |            |      |   |            |  
| |                                        |  |                | 3,377,023  |      |   | 3,138,006  |  
| | Less:
  Accumulated depreciation       |  |                | (1,300,367 | )    |   | (1,056,337 | )
| |                                        |  |                |            |      |   |            |  
| |                                        |  |                |            |      |   |            |  
| | Total                                  |  | $              | 2,076,656  |      | $ | 2,081,669  |  
| |                                        |  |                |            |      |   |            |  

|   |                                                                                                                                                                                                                                                                                         
|-- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   | 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   |   | $ | 3,953,000   |  
| | Accrued liabilities                       |  |                | 1,501,000   |      |   | 1,568,000   |   |   | 1,095,000   |  
| | Net operating loss                        |  |                | 46,584,000  |      |   | 37,033,000  |   |   | 22,393,000  |  
| | Intangible assets                         |  |                | 9,662,000   |      |   | 10,181,000  |   |   | 6,441,000   |  
| | Capital loss                              |  |                | 195,000     |      |   | 195,000     |   |   | 195,000     |  
| | Foreign tax credit                        |  |                | 860,000     |      |   | 841,000     |   |   | 646,000     |  
| |                                           |  |                |             |      |   |             |   |   |             |  
| |                                           |  |                | 65,608,000  |      |   | 55,293,000  |   |   | 34,723,000  |  
| |                                           |  |                |             |      |   |             |   |   |             |  
| | Deferred tax
  liabilities:               |  |                |             |      |   |             |   |   |             |  
| | Depreciation                              |  |                | (309,000    | )    |   | (238,000    | ) |   | (179,000    | )
| |                                           |  |                |             |      |   |             |   |   |             |  
| |                                           |  |                | (309,000    | )    |   | (238,000    | ) |   | (179,000    | )
| |                                           |  |                |             |      |   |             |   |   |             |  
| | Net deferred
  tax asset before allowance |  |                | 65,299,000  |      |   | 55,055,000  |   |   | 34,544,000  |  
| | Valuation allowance                       |  |                | (65,299,000 | )    |   | (55,055,000 | ) |   | (34,544,000 | )
| |                                           |  |                |             |      |   |             |   |   |             |  
| | 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.                                                                             
|
| | The Company is
in the process of amending its federal and state tax returns from 2002, and
preparing federal and state tax returns for the calendar years 2003, 2004 and
2005. These tax returns are currently delinquent, but given the level of losses
incurred for those periods, no taxes or interest will be due. The Company may
incur late filing penalties which management expects to be minimal.

F-23

---



|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|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
  Leases |         | Operating
  Leases |   | Sublease
  Income |  | Royalty
  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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | 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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | On June 20,
  2005, the Company became aware of a lawsuit and claim against us from Regions
  Bank for $731,000. Samuel R. Dunlap, a former Company director, who is now in
  bankruptcy, pledged a $731,000 Promissory Note made by us to Mr. Dunlap as
  security for a $5.0 million loan from Regions Bank. Regions Bank has sued us
  for payment of this Note. The amount that is owed is in dispute (due to
  offsets made at Mr. Dunlaps direction prior to the bankruptcy). We also
  contend that the conditions precedent to the maturity of the loan have not
  occurred. We note that our December 31, 2005 consolidated condensed financial
  statements reflect principal of $625,498 being owed as of such date
  (reflecting the offsets). Regions Bank asserts that we (in the

F-24

---



|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    | operation of our securities transfer function) and
  our legal counsel enabled Mr. Dunlap to pledge one of his several Warrants to
  another creditor in breach of an already existing Commercial Pledge Agreement
  between the Bank and Mr. Dunlap. We will indemnify and hold harmless our
  legal counsel, who is also the Secretary of the Company, in this matter.                                                                                                                                                                                                                                                                                                                                                                      
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|    | In addition, during 2005, we settled and dismissed
  four lawsuits for a total cost of $105,640. There are no such cases presently
  pending 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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|13. | DEBT                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|    | The table below summarizes the short-term debt
  activity and year-end balances for 2005 and 2004:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            

| |                                                             |  |                                  |          |                                  |   |            |  
| | ----------------------------------------------------------- |  | -------------------------------- | -------- | -------------------------------- | - | ---------- | -
| | SHORT-TERM NOTES PAYABLE                                    |  | Year ended
  December 31,
  2005 |          | Year ended
  December 31,
  2004 |  
| |                                                             |  |                                  |          |                                  |  
| |                                                             |  |                                  |          |                                  |   |            |  
| | 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    |  
| |                                                             |  |                                  |          |                                  |   |            |  

F-25

---



| |                                  |  |                                  |            |                                  |   |            |  
| | -------------------------------- |  | -------------------------------- | ---------- | -------------------------------- | - | ---------- | -
| | SHORT-TERM NOTES PAYABLE         |  | Year ended
  December 31,
  2005 |            | Year ended
  December 31,
  2004 |  
| |                                  |  |                                  |            |                                  |  
| |                                  |  |                                  |            |                                  |   |            |  
| | 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%.                                                                                                                                                                                
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| | As of September 30, 2006,
  these notes are past due. The original due dates for these notes range from
  November 30, 2003 to April 2006. There are no amended terms or penalties to
  these past due notes as a result of the default. The Company intends to repay
  or roll-over these notes as soon as practicable.                                                                                                                                                                                                                                                                                                         
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| | 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 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%. 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%.                                                                                                                                                                         
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| | As of September 30, 2006,
  these notes are past due. The original due dates for these notes range from
  September 2001 to April 2006. There are no amended terms or penalties to
  these past due                                                                                                                                                                                                                                                                                                                                                                                                                              

F-26

---



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | notes as a result of the default.
  The Company intends to repay or roll-over these notes as soon as practicable.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | 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 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

F-27

---



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | 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 Mr. Peter Meyer, our Co-Chairman, of $500,000 and Mr. Clifton
  Baile, a member of our board of directors, of $60,000.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              

F-28

---



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The loans bear interest at 12%. The Company had
  outstanding amounts due on the loan from Mr. Meyer of $250,000 at December
  31, 2005 and 2004. The Company repaid $250,000 plus accrued interest to Mr.
  Meyer and $30,000 plus accrued interest to Mr. Baile in November 2003. The
  Company repaid $30,000 plus accrued interest to Mr. Baile 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.
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| | In February and March 2005, Peter Meyer, our
  Co-Chairman, made unsecured, 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
  December 31, 2005, we had $300,000 due on these loans.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| | 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 unsecured, 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
  December 31, 2005, we had $70,000 due on these loans.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| | During the period of February through March 2002 we
  received unsecured 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 December 31, 2005 and 2004.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                

F-29

---



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

|                                                                                  |  |                                  |            |                                  |   |            |  
|--------------------------------------------------------------------------------- |  | -------------------------------- | ---------- | -------------------------------- | - | ---------- | -
|LONG-TERM NOTES PAYABLE                                                           |  | Year ended
  December 31,
  2005 |            | Year ended
  December 31,
  2004 |  
|                                                                                  |  |                                  |            |                                  |  
|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-30

---



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 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-31

---



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 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-32

---



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 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-33

---



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 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-34

---



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 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-35

---



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |                                                                                                                                                                                                                                                                                                           
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             | 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-36

---



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 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-37

---



| |                                                                                                                                                                    
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 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-38

---



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 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-39

---



| |                                                                                                                                                                    
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 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-40

---



|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|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-41

---



|                                               |  |                                                             |             |                                     |   |                                         |   |       |            |   |   |             |  
|---------------------------------------------- |  | ----------------------------------------------------------- | ----------- | ----------------------------------- | - | --------------------------------------- | - | ----- | ---------- | - | - | ----------- | -
|                                               |  | Segment
  Information                                       |            
|                                               |  |                                                             |            
|                                               |  |                                                             |            
|                                               |  | 2005                                                        |            
|                                               |  |                                                             |            
|                                               |  | Corporate/Growth
  and Differentiation
  Factors - Maryland |             | Animal 
  Genomics  
   California |   | Immunopharm
  aceuticals 
  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-42

---



|                                                       |  |                                                             |             |                                    |   |                                     |   |       |            |   |   |             |  
|------------------------------------------------------ |  | ----------------------------------------------------------- | ----------- | ---------------------------------- | - | ----------------------------------- | - | ----- | ---------- | - | - | ----------- | -
|                                                       |  | 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-43

---



|                                                         |  |                                                             |             |                                    |   |                                     |   |       |            |   |   |             |  
|-------------------------------------------------------- |  | ----------------------------------------------------------- | ----------- | ---------------------------------- | - | ----------------------------------- | - | ----- | ---------- | - | - | ----------- | -
|                                                         |  | Segment
  Information                                       |            
|                                                         |  |                                                             |            
|                                                         |  |                                                             |            
|                                                         |  | 2003                                                        |            
|                                                         |  |                                                             |            
|                                                         |  | Corporate/Growth
  and Differentiation
  Factors - Maryland |             | Animal 
  Genomics 
   California |   | Immunopharma
  ceuticals -
  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-44

---



|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|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-45

---



|    |                                                                                                                                                                                                                                                                                                                                                                                                                        
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|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-46

---



|                                                                                               |  |                             |             |                            |   |                                 |   |                                |            |   |   |             |  
|---------------------------------------------------------------------------------------------- |  | --------------------------- | ----------- | -------------------------- | - | ------------------------------- | - | ------------------------------ | ---------- | - | - | ----------- | -
|                                                                                               |  | 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-47

---



|    |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|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-48

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|         |         
|-------- | --------
|ITEM 13. | EXHIBITS

|        |  |                                                                                                                                                                                                                                                                                                                         
|------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Section |  | Document Name                                                                                                                                                                                                                                                                                                           
|        |  |                                                                                                                                                                                                                                                                                                                         
|        |  |                                                                                                                                                                                                                                                                                                                         
|3.1*    |  | Certificate of Incorporation of MetaMorphix, Inc.,
  as amended.                                                                                                                                                                                                                                                        
|        |  |                                                                                                                                                                                                                                                                                                                         
|3.2*    |  | Amended and 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.                                                                 

61

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|         |  |                                                                                                                                                                                                                                                                         
|-------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Section  |  | Document Name                                                                                                                                                                                                                                                           
|         |  |                                                                                                                                                                                                                                                                         
|         |  |                                                                                                                                                                                                                                                                         
|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)                                                 

62

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|         |  |                                                                                                                                                                                                                                                                                    
|-------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Section  |  | Document Name                                                                                                                                                                                                                                                                      
|         |  |                                                                                                                                                                                                                                                                                    
|         |  |                                                                                                                                                                                                                                                                                    
|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)                                                              
|         |  |                                                                                                                                                                                                                                                                                    
|10.33*** |  | Form of Promissory Note issued in 2005 under the 10%
  Secured Convertible Promissory Notes.                                                                                                                                                                                       
|         |  |                                                                                                                                                                                                                                                                                    
|10.34*** |  | Letter of Intent and Limited License Agreement by
  and between Tyson Poultry, Inc. and MetaMorphix, Inc., dated July 28, 2000
  (Confidential treatment has been requested with respect to certain portions
  of this agreement)                                                  
|         |  |                                                                                                                                                                                                                                                                                    
|10.35*** |  | Letter of Intent, Limited License and Option
  Agreement by and between Pilgrims Pride Corporation and MetaMorphix, Inc.,
  dated November 10, 2000 (Confidential treatment has been requested with
  respect to certain portions of this agreement)                              
|         |  |                                                                                                                                                                                                                                                                                    
|10.36*** |  | Letter of Intent Regarding Grant of Limited License
  in the Republic of Mexico by and between Pilgrims Pride Corporation and
  MetaMorphix, Inc., dated October 10, 2000                                                                                                         
|         |  |                                                                                                                                                                                                                                                                                    
|10.37*** |  | Marshfield Clinic/Linkage Genetics Inc. License
  Agreement by and between Marshfield Clinic and Linkage Genetics Inc.,
  Effective Date of January 1, 1996 (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.

*** - These exhibits were filed with the Form 10-SB/A (Amendment
No. 2) on December 15, 2006.

63

---



|         |                                         
|-------- | ----------------------------------------
|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 auditor, or subsequently approve non-audit
services in those circumstances where a subsequent approval is necessary and
permissible.

64

---



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: December 15, 2006 | /s/ Edwin Quattlebaum                
|                        |                                       | 
|                        | Edwin Quattlebaum                    
|                        | Chief Executive Officer and President

65

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