**UNITED
      STATES**


**SECURITIES
        AND EXCHANGE COMMISSION**
 **Washington,
        D.C. 20549**
 **FORM
        10-Q**
  **(Mark
                  One)****x**
                **Quarterly
                    Report Pursuant To Section 13 Or 15(d) Of The****Securities
                    Exchange Act Of 1934****For
                    the quarterly period ended March 31, 2006****or****o**
                **Transition
                    Report Pursuant To Section 13 Or 15(d) Of The****Securities
                    Exchange Act Of 1934****For
                    the transition period from _______________ to
                    _______________**
 **Commission
        File Number: 0-23317**


GENE
        LOGIC INC.
 
 (Exact
        name of registrant as specified in its charter)
  
 **Delaware**
                    (State
                        or other jurisdiction of
                        incorporation
                          or organization)
                **06-1411336**(I.R.S.
                      Employer
                      Identification
                        No.)**610
                        Professional Drive**
                      **Gaithersburg,
                        Maryland 20879**
                      (Address
                        of principal executive offices)
                      **(301)
                        987-1700**
                      (Registrant’s
                        phone number, including area
                        code)
 
 Indicate
        by check mark whether the registrant (1) has filed all reports required to
        be
        filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
        the
        preceding 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 **x** **** NO ****o
 
 Indicate
        by check mark whether the registrant is a large accelerated filer, an
        accelerated filer, or a non-accelerated filer. See definition of “accelerated
        filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.
 
 Large
        accelerated filer  o  Accelerated
        filer **x**  Non-accelerated
        filer
o
 
 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
        number
        of shares outstanding of the Registrant’s Common Stock, $.01 par value, was
        31,809,631 as of April 30, 2006.
 
 **GENE
        LOGIC INC.**
  **TABLE
        OF CONTENTS**
 **PART
                    I**
                **FINANCIAL
                    INFORMATION**
  Item
                    1.
                Financial
                    Statements
                3
  Consolidated
                  Condensed Balance Sheets at March 31, 2006
                  and December 31, 2005
                3Consolidated
                  Condensed Statements of Operations for the
                  Three Months Ended March 31, 2006 and 2005
                4Consolidated
                  Condensed Statements of Cash Flows for the
                  Three Months Ended March 31, 2006 and 2005
                5Notes
                  to Consolidated Condensed Financial
                  Statements
                6
 Item
                      2.
                  Management’s
                        Discussion and Analysis of Results of
                        Operations and Financial Condition
                  12Item
                      3.
                  Quantitative
                        and Qualitative Disclosure about Market
                        Risk
                  18Item
                      4.
                  Controls
                        and Procedures
                  19
 **PART
                    II**
                **OTHER
                    INFORMATION**
  Item
                    1.
                Legal
                    Proceedings
                19Item
                    1A.
                Risk
                    Factors
                19Item
                    2.
                Unregistered
                    Sales of Equity Securities and Use of
                    Proceeds
                19Item
                    3.
                Defaults
                    Upon Senior Securities
                19Item
                    4.
                Submission
                    of Matters to a Vote of Security
                    Holders
                20Item
                    5.
                Other
                    Information
                20Item
                    6.
                Exhibits
                20Signatures
                
                21
  2
 **PART
        I****FINANCIAL
        INFORMATION**
 
 **Item
        1.****Financial
        Statements**
 **GENE
        LOGIC INC.**
 
 **CONSOLIDATED
        CONDENSED BALANCE SHEETS**
 **(in
        thousands, except share data)**
  **March
                  31,**
              
              **December
                  31,****2006**
              
              **2005****(Unaudited)****ASSETS**Current
                  assets:Cash
                  and cash equivalents
              
              $
              28,393
              
              $
              43,946Marketable
                  securities available-for-sale
              
              
              35,515
              
              
              38,179Accounts
                  receivable, net of allowance of $709 as of March 31, 2006 and December
                  31,
                  2005
              
              
              6,090
              
              
              3,544Unbilled
                  services
              
              
              5,375
              
              
              7,779Inventory,
                  net
              
              
              3,809
              
              
              3,117Prepaid
                  expenses
              
              
              3,320
              
              
              2,403Other
                  current assets
              
              
              1,296
              
              
              961Total
                  current assets
              
              
              83,798
              
              
              99,929Property
                  and equipment, net
              
              
              30,349
              
              
              30,682Long-term
                  investments
              
              
              2,964
              
              
              3,239Goodwill
              
              
              12,913
              
              
              12,913Other
                  intangibles, net
              
              
              12,196
              
              
              13,399Other
                  assets
              
              
              946
              
              
              557Total
                  assets
              
              $
              143,166
              
              $
              160,719**LIABILITIES
                  AND STOCKHOLDERS' EQUITY**Current
                  liabilities:Accounts
                  payable
              
              $
              5,390
              
              $
              5,630Accrued
                  compensation and employee benefits
              
              
              4,611
              
              
              6,702Other
                  accrued expenses
              
              
              4,194
              
              
              4,269Current
                  portion of capital lease obligations
              
              
              137
              
              
              144Current
                  portion of long-term debt
              
              
              497
              
              
              497Acquired
                  technologies payable
              
              
              3,500
              
              
              3,492Deferred
                  revenue
              
              
              8,208
              
              
              11,595Total
                  current liabilities
              
              
              26,537
              
              
              32,329Capital
                  lease obligations, net of current portion
              
              
              30
              
              
              57Long-term
                  debt, net of current portion
              
              
              115
              
              
              127Deferred
                  rent
              
              
              3,055
              
              
              3,350Total
                  liabilities
              
              
              29,737
              
              
              35,863Commitments
                  and contingencies
              
              
              –
              
              
              –Stockholders'
                  equity:Preferred
                  stock, $.01 par value; 10,000,000 shares authorized; and no shares
                  issued
                  andoutstanding
                  as of March 31, 2006 and December 31, 2005
              
              
              –
              
              
              –Common
                  stock, $.01 par value; 60,000,000 shares authorized; 31,805,069
                  and
                  31,771,835 sharesissued
                  and outstanding as of March 31, 2006 and December 31, 2005,
                  respectively
              
              
              318
              
              
              318Additional
                  paid-in-capital
              
              
              386,029
              
              
              385,586Accumulated
                  other comprehensive loss
              
              
              (151
              )
              
              (78
              )Accumulated
                  deficit
              
              
              (272,767
              )
              
              (260,970
              )Total
                  stockholders' equity
              
              
              113,429
              
              
              124,856Total
                  liabilities and stockholders' equity
              
              $
              143,166
              
              $
              160,719
 
 See
        accompanying notes.
 3
  **GENE
        LOGIC INC.**
 
 **CONSOLIDATED
        CONDENSED STATEMENTS OF
        OPERATIONS**
 **(in
        thousands, except per share data)**
 **(Unaudited)**
 **March
                    31,****2006**
                
                **2005**Revenue:Genomics
                    services
                
                $
                8,748
                
                $
                13,239Preclinical
                    services
                
                
                4,034
                
                
                6,434Drug
                    repositioning services
                
                
                20
                
                
                67Total
                    revenue
                
                
                12,802
                
                
                19,740Expenses
                    (1):Cost
                    of preclinical services
                
                
                6,408
                
                
                7,190Database
                    production
                
                
                7,733
                
                
                8,182Research
                    and development
                
                
                2,440
                
                
                1,461Selling,
                    general and administrative
                
                
                8,519
                
                
                7,533Total
                    expenses
                
                
                25,100
                
                
                24,366Loss
                    from operations
                
                
                (12,298
                )
                
                (4,626
                )Interest
                    (income), net
                
                
                (773
                )
                
                (500
                )Other
                    (income) expense
                
                
                (3
                )
                
                (25
                )Write-down
                    of equity investment
                
                
                275
                
                
                –Net
                    loss
                
                $
                (11,797
                )
                $
                (4,101
                )Basic
                    and diluted net loss per share
                
                $
                (0.37
                )
                $
                (0.13
                )Shares
                    used in computing basic and dilutednet
                    loss per share
                
                
                31,788
                
                
                31,708(1)
                    Line items include non-cash stock compensation expense as follows
                    (see
                    Note 2):Cost
                    of preclinical services
                
                $
                58
                
                $
                –Database
                    production
                
                
                58
                
                
                –Research
                    and development
                
                
                36
                
                
                –Selling,
                    general and administrative
                
                
                163
                
                
                –Total
                    non-cash stock compensation expense
                
                $
                315
                
                $
                –
 See
        accompanying notes.
 4
  **GENE
        LOGIC INC.**
 
 **CONSOLIDATED
        CONDENSED STATEMENTS OF CASH FLOWS**
 **(in
        thousands)**
 **(Unaudited)**
 **Three
                      Months Ended****March
                      31,****2006**
                  
                  **2005**Cash
                      flows from operating activities:Net
                      loss
                  
                  $
                  (11,797
                  )
                  $
                  (4,101
                  )Adjustments
                      to reconcile net loss to net cash flows from operating
                      activities:Depreciation
                      and amortization
                  
                  
                  3,583
                  
                  
                  3,914Write-down
                      of equity investment
                  
                  
                  275
                  
                  
                  –Non-cash
                      stock compensation expense
                  
                  
                  315
                  
                  
                  –Gain
                      on sale of marketable securities available-for-sale
                  
                  
                  (31
                  )
                  
                  –Loss
                      on abandonment of patents
                  
                  
                  23
                  
                  
                  –Laboratory
                      facility impairment
                  
                  
                  476
                  
                  
                  –Accrued
                      interest relating to acquired technologies payable
                  
                  
                  8
                  
                  
                  35Changes
                      in operating assets and liabilities:Accounts
                      receivable and unbilled services
                  
                  
                  (142
                  )
                  
                  1,147Inventory
                  
                  
                  (692
                  )
                  
                  (1,663
                  )Prepaids
                      and other assets
                  
                  
                  (1,641
                  )
                  
                  307Accounts
                      payable
                  
                  
                  (240
                  )
                  
                  148Accrued
                      expenses and deferred rent
                  
                  
                  (2,520
                  )
                  
                  270Deferred
                      revenue
                  
                  
                  (3,387
                  )
                  
                  991Net
                      cash flows from operating activities
                  
                  
                  (15,770
                  )
                  
                  1,048Cash
                      flows from investing activities:Purchases
                      of property and equipment
                  
                  
                  (1,846
                  )
                  
                  (5,615
                  )Purchases
                      of licenses and patent costs
                  
                  
                  (228
                  )
                  
                  (190
                  )Software
                      development costs
                  
                  
                  (275
                  )
                  
                  (406
                  )Database
                      upgrade costs
                  
                  
                  (138
                  )
                  
                  (154
                  )Purchase
                      of marketable securities available-for-sale
                  
                  
                  (10,068
                  )
                  
                  –Proceeds
                      from sale and maturity of marketable securities
                      available-for-sale
                  
                  
                  12,690
                  
                  
                  16,632Net
                      cash flows from investing activities
                  
                  
                  135
                  
                  
                  10,267Cash
                      flows from financing activities:Proceeds
                      from issuance of common stock to employees
                  
                  
                  128
                  
                  
                  186Repayments
                      of capital lease obligations and equipment loan
                  
                  
                  (46
                  )
                  
                  (43
                  )Net
                      cash flows from financing activities
                  
                  
                  82
                  
                  
                  143Net
                      increase (decrease) in cash and cash equivalents
                  
                  
                  (15,553
                  )
                  
                  11,458Cash
                      and cash equivalents, beginning of period
                  
                  
                  43,946
                  
                  
                  53,237Cash
                      and cash equivalents, end of period
                  
                  $
                  28,393
                  
                  $
                  64,695Supplemental
                      disclosure:Interest
                      paid
                  
                  $
                  6
                  
                  $
                  10
 See
        accompanying notes.
 5
 
 **GENE
        LOGIC INC.**
 
 **Notes
        to Consolidated Condensed Financial
        Statements**
 **March
        31, 2006**
 **(in
        thousands, except share and per share data)**
 **(Unaudited)**
 
 **Note
        1 — Organization and summary of significant accounting
        policies**
 
 *Description
        of Business*
 
 Gene
        Logic
        Inc., including its wholly owned subsidiaries, Gene Logic Laboratories Inc.
        (formerly TherImmune Research Corporation), Gene Logic Ltd. (United Kingdom
        subsidiary) and Gene Logic K.K. (Japan subsidiary), (collectively “Gene Logic”
or the “Company”), provides drug discovery and development services and
        solutions to pharmaceutical and biotechnology companies worldwide and United
        States Government agencies. The Company’s services are organized into three
        business segments: genomics and toxicogenomics services (“Genomics Division”),
        preclinical contract research services (“Preclinical Division”) and drug
        repositioning services (“Drug Repositioning Division”).
 
 The
        Genomics Division consists of proprietary gene expression and toxicogenomics
        databases, toxicogenomics services, software tools, microarray data generation
        and analysis and other professional services and solutions. These services
        are
        designed to help customers discover and prioritize drug targets, identify
        biomarkers, predict toxicity and understand the mechanism of toxicity and
        obtain
        insights into the efficacy of specific compounds. The Preclinical Division
        consists of *in
        vivo* (in life)
        research studies and related laboratory services to help customers assess
        the
        safety and pharmacologic effects of candidate compounds for the purpose of
        gaining regulatory approval to proceed with human trials. The Drug Repositioning
        Division, which resulted from the acquisition of certain technologies in
        2004
        that continue to be developed, consists of an integrated multi-technology
        platform used to assist customers in (i) identifying alternative indications
        for
        failed, stalled or deprioritized drug candidates, and in the future, potentially
        assist customers in (ii) expanding indications for currently marketed drugs;
        and
        (iii) prioritizing and identifying indications for compounds entering
        preclinical development.
 
 *Basis
        of Presentation*
 
 The
        accompanying unaudited consolidated condensed financial statements have been
        prepared in accordance with U.S. Generally Accepted Accounting Principles
        (“GAAP”) for interim financial information and the instructions to Form 10-Q and
        Article 10 of Regulation S-X. The consolidated condensed balance sheet as
        of
        March 31, 2006, consolidated condensed statements of operations for the three
        months ended March 31, 2006 and 2005 and the consolidated condensed statements
        of cash flows for the three months ended March 31, 2006 and 2005 are unaudited,
        but include all adjustments (consisting of normal recurring adjustments)
        that
        the Company considers necessary for a fair presentation of the financial
        position, operating results and cash flows, respectively, for the periods
        presented. Although the Company believes that the disclosures in these financial
        statements are adequate to make the information presented not misleading,
        certain information and footnote information normally included in financial
        statements prepared in accordance with GAAP have been condensed or omitted
        pursuant to the rules and regulations of the United States Securities and
        Exchange Commission (“SEC”). All material intercompany accounts and transactions
        have been eliminated in consolidation.
 
 Results
        for any interim period are not necessarily indicative of results for any
        future
        interim period or for the entire year. The accompanying unaudited consolidated
        condensed financial statements should be read in conjunction with the
        consolidated financial statements and notes thereto included in the Company’s
        Annual Report on Form 10-K for the year ended December 31, 2005.
 
 *Use
        of
        Estimates*
 
 The
        preparation of financial statements in conformity with GAAP 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 financial statements and the reported amounts of revenue and expenses
        during
        the reporting period. Actual results could differ from those
        estimates.
 
 6
  *Inventory*
 
 Inventory
        is stated at the lower of cost or market. Cost for microarrays and laboratory
        reagents is determined using the first-in, first-out method and cost for
        tissue
        samples is determined using the average cost method. All inventory is reviewed
        for impairment and appropriate reserves are recorded. All inventory is
        classified as raw materials. The following table sets forth information on
        the
        composition of the Company’s inventory as of the indicated periods:
 
 **March
                    31,**
                
                **December
                    31,****2006**
                
                **2005**Microarrays
                
                $
                3,100
                
                $
                2,199Laboratory
                    reagents
                
                
                521
                
                
                324Tissue
                    samples
                
                
                1,855
                
                
                2,2485,476
                
                
                4,771Less:
                    tissue sample reserves
                
                
                (1,667
                )
                
                (1,654
                )Inventory,
                    net
                
                $
                3,809
                
                $
                3,117
  *Comprehensive
        Loss*
 
 The
        Company accounts for comprehensive loss as prescribed by Statement of Financial
        Accounting Standards No. 130, “Reporting Comprehensive Income”. Comprehensive
        income (loss) is the total net income (loss) plus all changes in equity during
        the period except those changes resulting from investment by and distribution
        to
        owners. Total comprehensive loss, which includes unrealized gains or losses
        in
        the Company’s marketable securities available-for-sale, was $11,870 and $4,085
        for the three months ended March 31, 2006 and 2005, respectively.
 
 *New
        Accounting Pronouncements*
 
 Effective
        January 1, 2006, the Company adopted the fair value recognition provisions
        of
        Statement of Financial Accounting Standards (“SFAS”) No. 123 (revised 2004),
“Share-Based Payment” ** (“SFAS
        123R”), using the modified prospective transition method and therefore has not
        restated results for prior periods. Under this transition method, stock-based
        compensation expense for the first quarter of 2006 includes compensation
        expense
        for all stock-based compensation awards granted prior to, but not yet vested
        as
        of, January 1, 2006, based on the grant date fair value estimated in accordance
        with the original provision of SFAS No. 123, “Accounting for Stock-Based
        Compensation” ** (“SFAS
        123”). Stock-based compensation expense for all stock-based compensation awards
        granted after January 1, 2006 is based on the grant date fair value estimated
        in
        accordance with the provisions of SFAS 123R. For the first three months of
        2006,
        stock-based compensation awards consisted of options awarded under the 1997
        Equity Incentive Plan and the 1997 Non-Employee Directors’ Stock Option Plan.
        The Company recognizes these compensation costs on a straight-line basis
        over
        the requisite service period of the award, which is generally the option
        vesting
        period and typically occurs ratably over periods ranging from two to four
        years.
        Prior to the adoption of SFAS 123R, the Company recognized stock-based
        compensation expense in accordance with Accounting Principles Board (“APB”)
        Opinion No. 25, “Accounting for Stock Issued to Employees” (“APB 25”). In March
        2005, the Securities and Exchange Commission (the “SEC”) issued Staff Accounting
        Bulletin No. 107 (“SAB 107”) regarding the SEC’s interpretation of SFAS 123R and
        the valuation of share-based payments for public companies. The Company has
        applied the provisions of SAB 107 in its adoption of SFAS 123R. See Note
        2 to
        the Consolidated Condensed Financial Statements for a further discussion
        on
        stock-based compensation.
 
 The
        Company’s results of operations for the first quarter of 2006 were impacted by
        the recognition of $315 in non-cash expense related to the fair value of
        the
        Company's stock-based compensation awards. Based on outstanding share-based
        awards as of December 31, 2005, the Company estimates that non-cash stock
        compensation expense in 2006 will be approximately $700 to reflect the continued
        vesting of outstanding stock option grants that remain unvested as of December
        31, 2005. The impact of stock compensation expense in periods after the
        Company’s adoption will be dependent on the number and type of share-based
        payments issued to employees and non-employee directors and this estimate
        does
        not include the impact of other possible stock-based awards to be made during
        the balance of 2006.
 
 In
        November 2005, the Financial Accounting Standards Board issued FASB Staff
        Position No. 115-1, “The Meaning of Other-Than-Temporary Impairment and Its
        Application to Certain Investments” (“FSP FAS 115-1”). FSP FAS 115-1 addresses
        the determination as to when an investment is considered impaired, whether
        that
        impairment is other than temporary and the measurement of an impairment loss.
        FSP FAS 115-1, which is effective for reporting periods after December 31,
        2005,
        also includes accounting considerations subsequent to the recognition of
        an
        other-than-temporary impairment and requires certain disclosures about
        unrealized losses that have not been recognized as other-than-temporary
        impairments. The adoption of FSP FAS 115-1 had no material impact on the
        Company’s financial position, results of operations or cash flows.
  7
  **Note
        2 — Stock-based compensation**
  At
        March
        31, 2006, the Company has the following stock-based compensation plans: 1997
        Equity Incentive Plan (the “Stock Plan”), 1997 Non-Employee Directors’ Stock
        Option Plan (the “Directors’ Plan”) and Employee Stock Purchase Plan (the
“ESPP”).
 
 *Stock
        Plan*
 
 The
        Company has a Stock Plan, under which the Compensation Committee (the
“Committee”) of the Company’s Board of Directors, at its discretion, can grant
        stock options to employees, certain employee directors and consultants of
        the
        Company and related corporations. The Stock Plan currently authorizes the
        grant
        of stock options for up to 10,600,000 shares of Common Stock. The stock options
        granted under the Stock Plan expire at the earlier of termination or the
        date
        specified by the Committee at the date of grant, but not more than ten years
        from such grant date. As noted later, the Stock Plan has been amended, subject
        to the pending approval of the Stockholders in June 2006, to allow the issuance
        of restricted stock awards.
 
 *Directors’
        Plan*
 
 The
        Company has a Directors’ Plan to provide for granting of stock options to
        purchase up to 900,000 shares of Common Stock to non-employee directors of
        the
        Company. Stock options are to be granted at the fair market value of the
        Common
        Stock at the grant date. The stock options granted under the Directors’ Plan
        expire ten years from such grant date.
 
 *ESPP*
 
 The
        Company has an ESPP that currently allows for an aggregate of 1,250,000 shares
        of Common Stock to be purchased. The ESPP allowed employees to purchase shares
        of Common Stock of the Company at each purchase date, through payroll deductions
        of up to a maximum of 15% of their combined salary and bonus, at 85% of the
        lesser of the market price of the shares at the time of purchase or the market
        price on the beginning date of an offering (or, if later, the date during
        the
        offering when the employee was first eligible to participate), with a limit
        of
        600 shares per purchaser per purchase date. The ESPP was suspended effective
        February 1, 2005.
 
 Prior
        to
        January 1, 2006, the Company accounted for these plans under the recognition
        and
        measurement provisions of APB 25. Accordingly, the Company recognized
        compensation expense, if any, only to the extent that the fair value of the
        underlying stock on the date of grant exceeded the exercise or acquisition
        price
        of the stock or stock-based award. Any resulting compensation expense was
        recognized ratably over the associated service period, which was generally
        the
        option vesting period. No stock-based compensation expense was recognized
        in the
        Consolidated Condensed Statement of Operations for the three months ended
        March
        31, 2005, as all stock options granted by the Company have been granted with
        an
        exercise price equal to the fair value on the grant date and the ESPP was
        considered non-compensatory under APB 25.
 
 Effective
        January 1, 2006, the Company adopted the fair value recognition provisions
        of
        SFAS 123R, using the modified prospective transition method and therefore
        has
        not restated results for prior periods. Under this transition method,
        stock-based compensation expense for the first quarter of 2006 included
        compensation expense for all stock-based compensation awards granted prior
        to,
        but not yet vested as of, January 1, 2006 based on the grant date fair value
        estimated in accordance with the original provisions of SFAS 123, and
        stock-based compensation expense for all share-based payment awards granted
        after January 1, 2006 based on the grant date fair value estimated in accordance
        with the provisions of SFAS 123R.
  As
        a
        result of adopting SFAS 123R, the Company’s net loss in the Consolidated
        Condensed Financial Statements for the three months ended March 31, 2006
        was
        $315 higher than if the Company had continued to account for stock-based
        compensation under APB 25. The impact on basic and diluted net loss per share
        for the three months ended March 31, 2006 was $0.01 per share.
 
 8
  Prior
        to
        January 1, 2006, the Company provided pro forma disclosure amounts in accordance
        with SFAS No. 148 “Accounting for Stock-Based Compensation—Transition and
        Disclosure”, as if the fair value method defined by SFAS 123R had been applied
        to its stock-based compensation. To facilitate quarter-to-quarter comparisons,
        the following table illustrates the effect on net loss and net loss per share
        as
        if the Company had applied the fair value recognition provisions of SFAS
        123R to
        stock-based compensation for the indicated period:
  **March
                    31,****2005**Net
                    loss, as reported
                
                $
                (4,101
                )Add:
                    Stock-based compensation expense includedin
                    reported net loss
                
                
                –Deduct:
                    Stock-based compensation expense determinedunder
                    fair value-based method for all awards
                
                
                (615
                )Pro
                    forma net loss
                
                $
                (4,716
                )Basic
                    and diluted net loss per share:As
                    reported
                
                $
                (0.13
                )Pro
                    forma
                
                $
                (0.15
                )
 
 In
        connection with the Company ’ s
        adoption
        of SFAS 123R
        requiring expensing of stock-based compensation and
        a
        study of its overall compensation practices, the Company concluded that it
        would
        be advisable in the future to have the ability to issue restricted stock
        awards
        in lieu of, or in addition to, stock option awards. Consequently, the Board has amended and restated the Stock Plan, subject
        to the
        pending approval by the Stockholders in June 2006, to allow the issuance
        of a
        certain number of shares of Common Stock in the form of restricted stock
        awards.
        The Stock Plan, as in effect prior to the amendment, permitted
        only the grant of stock options. The proposed amendment would permit the
        issuance of restricted stock in addition to stock options, but would not
        change
        the total number of shares as to which equity awards may be issued under
        the Stock
        Plan. The amendment
        makes certain other changes, including among other things:
 
 ·
            eliminates
                awards to consultants after June 1, 2006, ·
            enables
                the Compensation Committee to structure awards to be
                performance-based, ·
            eliminates
                option repricing except (i) in connection with a change in capitalization
                of the Company or (ii) with stockholder approval,
                and ·
            extends
                the term of the Stock Plan. 
 The
        Company determined the fair value of each option grant on the date of grant
        using the Black-Scholes option pricing model for the indicated periods, with
        the
        following assumptions:
 **Three
                    Months Ended****March
                    31,****2006**
                
                **2005**Weighted
                    average fair value of grants
                
                
                $1.35
                
                
                $1.28Expected
                    volatility
                
                
                52%
                
                
                53%Risk-free
                    interest rate
                
                
                4.49%
                
                
                3.41%
                    to 3.93%Expected
                    lives
                
                
                3
                    years
                
                
                3
                    yearsDividend
                    rate
                
                
                0%
                
                
                0%
  9
  The
          following is a summary of option activity for the three months ended March
          31,
          2006:
 **Outstanding
                      Options****Weighted****Average****Weighted**
                  
                  **Remaining**
                  
                  **Aggregate****Average**
                  
                  **Contractual**
                  
                  **Intrinsic****Shares**
                  
                  **Exercise
                      Price**
                  
                  **Life
                      (Years)**
                  
                  **Value****Outstanding
                      at January 1, 2006**
                  
                  
                  5,515,504
                  
                  $
                  6.86Options
                      granted
                  
                  
                  21,500
                  
                  $
                  3.47Options
                      exercised
                  
                  
                  (33,234
                  )
                  $
                  3.84Options
                      cancelled
                  
                  
                  (201,243
                  )
                  $
                  6.05**Outstanding
                      at March 31, 2006**
                  
                  
                  5,302,527
                  
                  $
                  6.89
                  
                  
                  5.7
                  
                  $
                  2,383**Vested
                      and expected to vest at March 31, 2006**
                  
                  
                  5,036,083
                  
                  $
                  7.05
                  
                  
                  5.6
                  
                  $
                  2,166**Exercisable
                      at March 31, 2006**
                  
                  
                  4,517,119
                  
                  $
                  7.42
                  
                  
                  5.2
                  
                  $
                  1,706




The
        aggregate intrinsic value in the table above represents the total intrinsic
        value (the difference between the Company’s closing stock price on the last
        trading day of the first quarter of 2006 and the exercise price, multiplied
        by
        the number of in-the-money options) that would have been received by the
        option
        holders had all option holders exercised their options on March 31, 2006.
        This
        amount is subject to change based on changes to the fair market value of
        the
        Company’s Common Stock. Total intrinsic value of options exercised for the three
        months ended March 31, 2006 was not material.
  As
        of
        March 31, 2006, $719 of
        total
        unrecognized compensation cost related to stock options is expected to be
        recognized over a weighted-average period of 2.1 years .
        This
        estimate does not include the impact of other possible stock-based awards
        to be
        made during the balance of 2006.
 
 Cash
        received from option exercises for the three months ended March 31, 2006
        was
        $128.
 
 **Note
        3 — Segment information**
 
 The
        Company’s operations are organized into three business segments: Genomics
        Division, Preclinical Division and Drug Repositioning Division, all of which
        are
        more fully described in Note 1.
 
 The
        following table presents revenue and operating income (loss) for each of
        these
        segments. Management uses these measures to evaluate segment performance.
        To
        arrive at operating income (loss) for each segment, management has included
        all
        direct costs for providing the segment’s services and an allocation for
        corporate overhead on a consistent and reasonable basis. Management has excluded
        interest (income) expense, other (income) expense and write-down of equity
        investment, and could also exclude certain unusual or corporate-related costs
        in
        the future. In addition, while the Company’s Consolidated Condensed Statements
        of Operations include adjustments to reflect the elimination of inter-segment
        transactions, individual segments may include these types of transactions.
        Management does not believe these transactions are material and believes
        that
        their inclusion would not impact either management’s or shareholders’
understanding of the operations of the segments. For purpose of clarity,
        revenue
        is reported net of inter-segment transactions. The Company does not identify
        or
        allocate, nor does management evaluate, assets by segment.
  10




The
        following table sets forth information on reportable segments for the indicated
        periods:
  **Three
                    Months Ended****March
                    31,****2006**
                
                **2005****Genomics
                    services**Revenue
                
                $
                8,748
                
                $
                13,239Operating
                    income (loss) (1)
                
                
                (3,805
                )
                
                833Depreciation
                    and amortization expense
                
                
                2,472
                
                
                2,809**Preclinical
                    services**Revenue
                
                $
                4,034
                
                $
                6,434Operating
                    income (loss) (1)
                
                
                (4,969
                )
                
                (3,002
                )Depreciation
                    and amortization expense
                
                
                826
                
                
                987**Drug
                    repositioning services**Revenue
                
                $
                20
                
                $
                67Operating
                    income (loss) (1)
                
                
                (3,524
                )
                
                (2,457
                )Depreciation
                    and amortization expense
                
                
                285
                
                
                118




(1)
        Includes non-cash stock compensation expenses of $115, $110 and $90 **** for
        the
        three months ended March 31, 2006 for Genomics services, Preclinical services
        and Drug repositioning services, respectively.
 
 A
        reconciliation of segment operating income (loss) to net loss for the indicated
        periods is as follows:


**Three
                  Months Ended****March
                  31,****2006**
              
              **2005****Segment
                  operating income (loss)**Genomics
                  services
              
              $
              (3,805
              )
              $
              833Preclinical
                  services
              
              
              (4,969
              )
              
              (3,002
              )Drug
                  repositioning services
              
              
              (3,524
              )
              
              (2,457
              )Loss
                  from operations
              
              
              (12,298
              )
              
              (4,626
              )Interest
                  (income), net
              
              
              (773
              )
              
              (500
              )Other
                  (income) expense
              
              
              (3
              )
              
              (25
              )Write-down
                  of equity investment
              
              
              275
              
              
              -Net
                  loss
              
              $
              (11,797
              )
              $
              (4,101
              )
  During
          the
          three months ended March 31, 2006, one Genomics Division customer accounted
          for
          10% or more of the Company’s revenue (18.4%). During the three months ended
          March 31, 2005, one Genomics Division customer accounted for 10% or more
          of the
          Company’s revenue (13.0%). The following table sets forth information on the
          composition of the Company’s total revenue by geographic region:
 **Geographic
                      Region****North**
                    **America**
                  
                  **Europe**
                  
                  **Pacific**
                    **Rim**For
                      the three months ended:March
                      31, 2006
                  
                  
                  73%
                  
                  
                  11%
                  
                  
                  16%March
                      31, 2005
                  
                  
                  54%
                  
                  
                  11%
                  
                  
                  35%
  11




**Item
        2.****Management’s
        Discussion and Analysis of Results of Operations and Financial
        Condition**
 
 *This* *Quarterly
        Report on Form 10-Q (“Form 10-Q”) contains forward-looking statements regarding
        future events and the future results of Gene Logic Inc. (“Gene Logic”) that are
        based on current expectations, estimates, forecasts and projections about
        the
        industries in which Gene Logic operates and the beliefs and assumptions of
        the
        management of Gene Logic. Words such as “expects,” “anticipates,” “targets,”
“goals,” “projects,” “intends,” “plans,” “believes,” “seeks,” “estimates,”
variations of such words, and similar expressions are intended to identify
        such
        forward-looking statements. These forward-looking statements are only
        predictions and are subject to risks, uncertainties and assumptions that
        are
        difficult to predict. Therefore, actual results may differ materially and
        adversely from those expressed in any forward-looking statements. Factors
        that
        might cause or contribute to such differences include those discussed in
        the
        Company’s Annual Report on Form 10-K for the year ended December 31, 2005 under
        the section entitled “Risk Factors”. Gene Logic undertakes no obligation to
        revise or update publicly any forward-looking statements to reflect any change
        in management’s expectations with regard thereto or any change in events,
        conditions, or circumstances on which any such statements are
        based.*
 
 Unless
        the
        context otherwise requires, references in this Form 10-Q to “Gene Logic,” “Gene
        Logic Laboratories Inc.,” “Gene Logic Ltd.,” “Gene Logic K.K.,” the “Company,”
“we,” “us,” and “our” refer to Gene Logic Inc. and its wholly owned
        subsidiaries. Gene Logic®, GeneExpress®, BioExpress®, ToxExpress®, ASCENTA® and
        Genesis Enterprise System® are registered trademarks of Gene Logic. Drug
        Repositioning and SelectionTM, SCIANTISTM, ToxScreenTM, ToxShieldTM, ToxEdgeTM,
        ToxPlusTM and Phase R SM are
        trademarks of Gene Logic.
 
 **Overview**
 
 We
        conduct
        our operations through three business segments:
  ·
                **Genomics
                    Division**:
                    we
                    sell subscriptions and, increasingly, perpetual licenses to our
                    proprietary gene expression and toxicogenomics databases, and
                    provide
                    toxicogenomics services, software tools, microarray data generation
                    and
                    analysis and other professional services and solutions to customers
                    worldwide to help in their drug research and
                    development.
 ·
                **Preclinical
                    Division**:
                    we
                    provide*in
                    vivo*(in
                    life) studies and related laboratory services to enable customers
                    primarily in the United States to assess the safety and pharmacologic
                    effects of candidate compounds for the purpose of seeking FDA
                    approval to
                    initiate human trials.
 ·
                **Drug
                    Repositioning Division**:
                    we
                    have partnerships with customers to identify alternative indications
                    for
                    their failed, stalled or deprioritized drug candidates through
                    the
                    application of an integrated multi-technology platform, with
                    the goal of
                    returning such candidates to the drug development
                    pipeline.
 
 Historically,
          we have derived a majority of our Genomics Division revenue from licenses
          to our
          databases. Typically, subscriptions to large databases are multi-year
          agreements, and subscriptions to our smaller databases or a subset of a
          database
          are largely annual agreements. Pricing for these subscriptions varies based
          on
          the nature of the database, including the proposed extent of use, scope
          of
          installation, requirements for customization, any content requirements
          and
          whether we provide any custom analysis or data management services. Generally,
          the fees for these subscriptions are payable ratably over the life of the
          agreement for multi-year agreements and ratably or up-front for shorter
          term
          agreements. We also grant perpetual licenses to some customers for a fee,
          payable typically upon delivery of the data or software, for certain data
          from
          our BioExpress and ToxExpress System databases, as well as to certain of
          our
          software tools. In some cases, a single contract or related contracts may
          cover
          a combination of services and solutions. Contracts with our customers other
          than
          our Japanese customers are dollar-denominated. Beginning in 2005, contracts
          with
          our Japanese customers have been denominated in Japanese Yen. Generally,
          our
          Genomics Division contracts may be terminated in the event of breach by
          either
          party not cured within any applicable cure period.
 
 Our
          strategy is to transition our Genomics Division from a business that generates
          a
          majority of its revenue from subscription revenue from a limited number
          of large
          customers, to one that generates multiple sources of revenue from a growing
          and
          broadening list of offerings and customers. As a result of this strategy,
          we are
          expanding our customer base and broadening our offerings to derive an increasing
          percentage of our Genomics Division revenue from a combination of toxicogenomics
          services, software tools, microarray data generation and analysis services,
          perpetual licenses and other professional services and solutions, with
          pricing
          and payment terms that vary depending on the service or solution being
          provided.
          We expect this strategy to generate long-term revenue growth. However,
          in the
          shorter term, results may be variable from period-to-period and year-over-year,
          as evidenced by the results of the first quarter of 2006. This variability
          results from the need to replace lost subscription revenue, the fact that
          contracts may vary significantly in size, that revenue from each contract
          may be
          recognized over varying periods and that opportunities we may have anticipated
          from time to time may fail to materialize or be deferred.
 
 We
          continually invest in new database content. In addition, from time to time
          our
          databases may require upgrades as new versions of microarrays are made
          available. We also periodically develop and provide new versions of our
          various
          software tools. In 2005, we completed an upgrade of our BioExpress System
          database and various versions of our software tools. In 2006, we expect
          to
          upgrade our ToxExpress System database and to have it substantially completed
          by
          year-end, as well as provide further versions of our software
          tools.
  12




Our
        Preclinical Division revenue is primarily from fixed price contracts, under
        which we benefit only if our costs are equal to or lower than anticipated.
        For
        most fixed price contracts, a portion of the contract price is due at the
        time
        the study starts, with the balance payable upon the achievement of various
        milestones over the study’s duration. We also receive some revenue from cost
        plus contracts with United States Government agencies, under which we are
        reimbursed for our budgeted costs, subject to periodic audit, and receive
        a
        fixed fee. Costs under cost plus contracts are reimbursed monthly, along
        with a
        pro rata portion of the fixed fee. Contracts may range in duration from a
        few
        weeks to several years. Most of our Preclinical Division contracts may be
        terminated by the customer at any time, subject to payment to us of certain
        costs and, in some instances, a portion of our profit or fixed fee, or a
        cancellation fee.
 
 The
        success of the Preclinical Division is dependent on our capacity and on our
        achieving optimal use of that capacity. In 2005, we completed our most recent
        capacity expansion. We have also taken steps to improve the operation of
        this
        division. In addition, we invested in improving and expanding our sales team,
        reduced the size of our workforce and took various steps to improve and
        emphasize the quality of our services. During the three months ended March
        31,
        2006, we incurred costs of $0.5 million associated with the reduction of
        excess
        capacity. We continue to work to improve the results for this
        business.
 
 Our
        Drug
        Repositioning Division resulted from our acquisition of certain technology
        from
        Millennium Pharmaceuticals, Inc. (“Millennium”) in 2004. We have invested, and
        continue to invest, significant amounts in the development of the Drug
        Repositioning technologies and of the Drug Repositioning Division. Revenue
        from
        our Drug Repositioning Division has not been significant.
 
 In
        addition to our agreements with Millennium and with another pharmaceutical
        partner, we have established partnerships to reposition drug candidates for
        Pfizer, Inc., F. Hoffmann-La Roche, Ltd. and one of its affiliates
        (collectively, “Roche”) and, most recently, N.V. Organon. Under these
        agreements, we do not generally derive up-front revenue, other than the up-front
        fees paid to us by Millennium related to our assessment of a single drug
        candidate. Each partner has agreed to make available a stated number of failed,
        stalled or deprioritized drug candidates during the term of the applicable
        agreement. Under terms of the agreements with Millennium, Pfizer and Roche,
        we
        will conduct the initial evaluation on those drug candidates using our
        integrated multi-technology platform, at our expense, and will inform our
        partner of any possible new indications we identify. In some instances, our
        partners have the option to elect to have us conduct mutually agreed upon
        animal
        model validation studies based on our hypothesis, which may be partially
        or
        entirely at our expense. Validated drug candidates would then be returned
        to a
        partner’s pipeline at its sole election. We would be entitled to receive
        milestone payments if a drug candidate is returned to the partner’s development
        pipeline and, if the drug candidate begins commercial sales, we would be
        entitled to royalties and, in one instance milestone payments, based on actual
        sales. If a partner declined a drug candidate for an indication we had found,
        we
        could in some cases acquire the rights to develop the drug candidate for
        the
        particular indication either directly or indirectly.
 
 Under
        terms of our agreement with Organon, we will seek new therapeutic uses for
        Organon’s drug candidates. Unlike previous agreements, we and Organon will
        become equal owners of drug candidates for which potential new therapeutic
        utility is discovered using our drug repositioning platform. In addition,
        we and
        Organon will decide how to proceed with each drug candidate, including
        development, commercialization and funding. We and Organon may determine
        to
        conduct such development, commercialization and funding directly, through
        licensing, through a buy-out of either party’s interest or through other
        strategies.
 
 We
        do not
        expect to receive significant revenue under any of our drug repositioning
        agreements in 2006.
 
 We
        have
        incurred operating losses in each year since our inception, including losses
        of
        $48.3 million in 2005, $28.5 million in 2004 and $24.8 million in 2003. At
        March
        31, 2006, we had an accumulated deficit of $272.8 million. Our losses have
        resulted principally from costs incurred in the development, marketing and
        sale
        of services from our Genomics and Preclinical Divisions, development of the
        Drug
        Repositioning Division, the impairment of our Preclinical Division goodwill
        and
        acquisitions of research and development. These costs have exceeded our revenue
        and we expect to incur additional operating losses in the future.
 
 **Results
        of Operations**
 
 *Three
        Months Ended March 31, 2006 and 2005*
 
 **Total
        Revenue.** Total
        revenue decreased to $12.8 million for the three months ended March 31, 2006
        as
        compared to $19.7 million for the same period in 2005. During each of the
        three
        months ended March 31, 2006 and 2005, two separate Genomics Division customers
        accounted for greater than 10% of our total revenue. Our top four customers
        accounted for approximately 38% and 31% of our total revenue for the three
        months ended March 31, 2006 and 2005, respectively. During the three months
        ended March 31, 2006 and 2005, 16% and 35% of our total revenue, respectively,
        was from customers in the Pacific Rim, and 11% and 11% of our total revenue,
        respectively, was from customers in Europe. The decline in revenue from
        customers in the Pacific Rim reflects the impact of agreements for Genomics
        services that were terminated, renegotiated at reduced service levels or
        transitioned into perpetual licenses in 2005. As
        we
        expand our business development efforts in other geographic regions, we
        anticipate that a decreasing percentage of our total revenue will be derived
        from our Japanese customers.
  13




***Genomics
        Services Revenue.*** Revenue
        from our Genomics services, the majority of which consists of fees from
        subscription agreements to our BioExpress and ToxExpress System databases,
        was
        $8.7 million for the three months ended March 31, 2006, a decrease of $4.5
        million, or 34%, from $13.2 million for the same period in 2005. The decrease
        reflects the absence of $5.3 million in subscription fees from agreements
        that
        have expired and reduced revenue of $1.7 million from certain agreements
        with
        existing customers renegotiated at reduced service levels, partially offset
        by
        $1.8 million in additional fees from customers to whom we granted perpetual
        licenses to certain data and/or software and higher revenue of $0.6 million
        from
        increased microarray data generation and analysis services in 2006.
 
 In
        2006,
        long-term subscription agreements with five customers will expire by their
        terms
        and two agreements allow for early termination at the customer’s election. These
        agreements accounted for 20% of our total 2005 revenue and 28% of our 2005
        Genomics services revenue. As to the two agreements that are subject to early
        termination at the customer’s election, one customer has given us notice of its
        election to terminate its agreement early and one customer elected to continue
        its agreement. As to the remaining five agreements, two agreements have expired
        by their terms and one was terminated by mutual agreement. Two of these
        customers purchased perpetual licenses to data and software in connection
        with
        their respective terminations. Negotiations are either underway or will commence
        during the year for the remaining two agreements. There is no assurance that
        the
        remaining agreements scheduled to expire will be extended or that any agreements
        resulting from our discussions with such customers will be on terms comparable
        to, or as favorable to us as, the existing subscription agreements.
 
 For
        2006,
        we anticipate the percentage of revenue derived from our microarray data
        generation and analysis services and sales of perpetual licenses to
        increase.
 
 ***Preclinical
        Services Revenue.*** Revenue
        from our Preclinical services, which consist of fees from preclinical safety
        and
        pharmacology studies and related laboratory services, was $4.0 million for
        the
        three months ended March 31, 2006, a decrease of $2.4 million, or 37%, from
        $6.4
        million for the same period in 2005. The decrease is primarily attributable
        to a
        decline in both the number and size of studies conducted in the three months
        ended March 31, 2006. We expect a decline in revenue for the first half of
        2006,
        followed by improvements for the remainder of 2006.
 
 **Cost
        of Preclinical Services Revenue.** Cost of
        Preclinical services revenue, which consists of direct and indirect costs
        related to conducting preclinical safety and pharmacology studies and related
        laboratory services, including direct and indirect labor, study materials
        and
        facility costs and depreciation, decreased to $6.4 million for the three
        months
        ended March 31, 2006 from $7.2 million for the same period in 2005. Our gross
        margins were negative 59% for the three months ended March 31, 2006 compared
        to
        negative 12% in the same period in 2005. The decrease in gross margins for
        the
        first quarter of 2006 resulted from continued higher facility, labor and
        support
        costs associated with our underutilization of existing study capacity and
        includes $0.5 million of expenses we incurred associated with the reduction
        of
        excess capacity. We expect negative gross margins to continue for the first
        half
        of 2006, but expect gradual improvements in the second half of 2006, reflecting
        increased capacity utilization resulting from increasing revenue.
 
 **Database
        Production Expense.** Database
        production expenses, which consist primarily of costs related to the acquisition
        and processing of tissues and overhead expenses needed to generate the content
        of the BioExpress and ToxExpress System databases and costs to provide
        microarray data generation and analysis services, decreased to $7.7 million
        for
        the three months ended March 31, 2006 from $8.2 million for the same period
        in
        2005.  The
        decrease consisted primarily of a $0.5 million reduction in database content
        generation expenses, including lower costs for agreements with third parties.
        For 2006, we expect database production expenses to increase due to an increase
        in costs associated with our growing microarray data generation and analysis
        services.
 
 **Research
        and Development Expense.** Research
        and development expenses, which consist primarily of costs associated with
        the
        ongoing development of our drug repositioning technologies, increased to
        $2.4
        million for the three months ended March 31, 2006 from $1.5 million for the
        same
        period in 2005. The increase was primarily a result of development efforts
        related to our drug repositioning technologies and evaluation of customer
        supplied drug candidates under the terms of our drug repositioning partnerships.
        For 2006, we expect research and development expenses to increase modestly,
        as
        we continue to develop our drug repositioning technologies.
 
 **Selling,
        General and Administrative Expense.** Selling,
        general and administrative expenses, which consist primarily of sales,
        marketing, accounting, legal, human resources and other general corporate
        expenses, increased to $8.5 million for the three months ended March 31,
        2006
        from $7.5 million for the same period in 2005. The increase is largely due
        to an
        increase in personnel costs of $0.4 million, the recovery of a $0.2 million
        receivable previously recorded as a bad debt expense in 2005 and $0.2 million
        in
        non-cash compensation expense as a result of the impact of the Statement
        of
        Financial Accounting Standards No. 123 (revised 2004), “Share-Based Payment”
(“SFAS 123R”). For 2006, we expect selling, general and administrative expenses
        to increase due to increased sales and marketing activities for all our
        businesses, including increases in the number of employees and planned costs
        under our 2006 annual employee incentive compensation plan and increased
        non-cash compensation expenses related to expensing stock-based awards under
        SFAS 123R that we adopted January 1, 2006.
  14


**Write-down
        of Equity Investment.** In
        connection with our investment in MetriGenix, we had entered into a subscription
        agreement granting MetriGenix a license to use our BioExpress System and
        had
        been issued a warrant to enable us to maintain our 15% equity ownership in
        MetriGenix, which would terminate upon termination of the subscription
        agreement. In March 2006, we terminated the subscription agreement by mutual
        agreement and the warrant was therefore terminated. As a result, we recorded
        a
        $0.3 million write-down of the fair value of this warrant during the three
        months ended March 31, 2006. At March 31, 2006, the remaining book value
        of our
        investment in MetriGenix was $3.0 million.
 
 **Net
        Interest Income.** Net
        interest income increased to $0.8 million for the three months ended March
        31,
        2006 from $0.5 million for the same period in 2005, due to increases in our
        rates of return on investments, partially offset by a decline in the balance
        of
        our cash and cash equivalents and marketable securities
        available-for-sale.
 
 **Liquidity
        and Capital Resources**
 
 From
        inception through March 31, 2006, we have financed our operations and
        acquisitions through the issuance and sale of equity securities and payments
        from customers. As of March 31, 2006, we had approximately $63.9 million
        in
        cash, cash equivalents and marketable securities available-for-sale, compared
        to
        $82.1 million as of December 31, 2005.
 
 Net
        cash
        from operating activities decreased to a negative $15.8 million for the three
        months ended March 31, 2006 from a positive $1.0 million for the same period
        in
        2005, primarily due to our increased net loss for the three months ended
        March
        31, 2006 and the timing of customer payments for our services and payments
        under
        our compensation and retention plans. We anticipate that the amount of cash
        used
        during the first quarter of 2006 is higher and not representative of the
        amount
        of cash we expect to use in each of the remaining quarters of 2006.
 
 During
        the
        three months ended March 31, 2006 and 2005, our investing activities consisted
        primarily of purchases, sales and maturities of available-for-sale securities,
        capital expenditures and software development and database upgrade costs.
        Capital expenditures for the three months ended March 31, 2006 and 2005 were
        $1.8 million and $5.6 million, respectively. The decrease in capital
        expenditures was primarily due to the completion in 2005 of our Preclinical
        Division capacity and other facility renovations. For the remainder of 2006,
        we
        expect to incur capital expenditures for additional equipment purchases of
        no
        greater than $5 million.
 
 We
        have
        capitalized software development costs of $0.3 million and $0.4 million for
        the
        three months ended March 31, 2006 and 2005, respectively. These costs relate
        to
        ongoing efforts to enhance the software platform of our BioExpress and
        ToxExpress System databases. Software development costs are expected to continue
        in 2006 as a result of ongoing efforts to further enhance the software platform
        of our BioExpress and ToxExpress System databases. In 2006, we currently
        plan to
        incur database upgrade costs of approximately $3.5 million, as we enhance
        the content of our ToxExpress System database using microarrays from
        Affymetrix.
 
 Our
        financing activities, other than the repayment of capital lease obligations
        and
        an equipment loan, have primarily consisted of the exercise of stock options
        and
        participation in our Employee Stock Purchase Plan ("ESPP"). The ESPP was
        suspended after the January 2005 purchase.
 
 In
        July
        2004, we purchased and licensed certain drug repositioning technologies and
        hired a research team from Millennium Pharmaceuticals, Inc. (“Millennium”). We
        contractually agreed to spend at least $8.5 million to develop and commercialize
        these technologies over the first eighteen months following the purchase.
        In
        addition, we had a further obligation to invest up to an additional $6.0
        million
        through July 2006. As of March 31, 2006, we have met both of these commitments.
        As part of the consideration, we also agreed to pay $3.5 million in cash
        or
        stock, at our election, to Millennium in the first half of 2006. As of the
        date
        of this Form 10-Q, the form of consideration has not been
        determined.
 
 To
        generate our gene expression data, we use Affymetrix microarrays,
        instrumentation and software. Under the terms of our current supply and license
        agreement, we agreed to purchase a minimum of $7.5 million in products and
        services from Affymetrix in 2006. As of March 31, 2006, we have purchased
        $2.7
        million in products and services related to this commitment.
 
 Specific
        future financial commitments as of March 31, 2006 are set forth in the following
        table:


**Total**
              
              **Within
                    9**
                  **Months**
              
              **2007
                  & 2008**
              
              **2009
                  & 2010**
              
              **Beyond
                  2010**Capital
                  lease obligations
              
              $
              178
              
              $
              117
              
              $
              61
              
              $
              -
              
              $
              -Long-term
                  debt
              
              
              627
              
              
              491
              
              
              109
              
              
              27
              
              
              -Acquired
                  technologies payable
              
              
              3,500
              
              
              3,500
              
              
              -
              
              
              -
              
              
              -Payment
                  obligations to Affymetrix
              
              
              4,796
              
              
              4,796
              
              
              -
              
              
              -
              
              
              -Operating
                  leases
              
              
              24,945
              
              
              4,685
              
              
              10,456
              
              
              6,786
              
              
              3,018Total
              
              $
              34,046
              
              $
              13,589
              
              $
              10,626
              
              $
              6,813
              
              $
              3,018
  15
  We
          believe
          that existing cash, cash equivalents and marketable securities
          available-for-sale and anticipated payments from customers will be sufficient
          to
          support our operations for the foreseeable future. These estimates are
          forward-looking statements that involve risks and uncertainties. Our actual
          future capital requirements and the adequacy of our available funds will
          depend
          on many factors, including those discussed under “Risk Factors” in our Annual
          Report on Form 10-K for the year ended December 31, 2005.
 
 **Critical
          Accounting Policies**
 
 Our
          consolidated condensed financial statements are prepared in accordance
          with
          accounting principles generally accepted in the United States, which require
          management to make estimates and assumptions that affect the reported amounts
          of
          assets and liabilities at the date of the financial statements and the
          reported
          amounts of revenue and expenses during the reporting period. Actual results
          could differ from these estimates. The following discussion highlights
          what we
          believe to be the critical accounting policies and judgments made in the
          preparation of these consolidated financial statements.
 
 ***Revenue
          Recognition***
 
 Revenue
          is
          recognized in accordance with the SEC’s Staff Accounting Bulletin No. 104,
“Revenue Recognition” (“SAB 104”). SAB 104 requires that four basic criteria be
          met before revenue can be recognized: 1) persuasive evidence of an arrangement
          exists; 2) delivery has occurred or services rendered; 3) the fee is fixed
          and
          determinable; and 4) collectability is reasonably assured. As to 1), our
          business practices require that our services be performed pursuant to contracts
          with our customers. As to 2), we recognize revenue when services are rendered
          to
          our customers. Determination of 3) and 4) are based on management’s judgments
          regarding the fixed nature of our arrangements, taking into account termination
          provisions and the collectability of fees under our arrangements. In addition,
          management reviews costs billed under our government contracts to ensure
          compliance with governmental regulations and cost and profit estimates
          on
          uncompleted contracts. Should changes in conditions cause management to
          determine these criteria are not met for certain future arrangements, that
          any
          billed costs under our government contracts are not allowed or that cost
          or
          profit estimates change resulting in losses under such contracts, revenue
          recognized for any reporting period would be adjusted and could be adversely
          affected.
 
 In
          accordance with Emerging Issues Task Force Issue No. 00-21, “Revenue
          Arrangements with Multiple Deliverables”, revenue recognized for any
          multiple-element contract is allocated to each element of the arrangement
          based
          on the relative fair value of the element. The determination of fair value
          of
          each element is based on our analysis of objective evidence from comparable
          sales of the individual element. If we are unable to determine evidence
          of fair
          value for any undelivered element of the arrangement, revenue for the
          arrangement is deferred and recognized using the revenue recognition method
          appropriate to the predominant undelivered element.
 
 **Genomics
          Services Revenue.** The
          majority of Genomics services revenue consists of fees earned under subscription
          agreements for all or parts of our gene expression databases, the BioExpress
          System and ToxExpress System, which are typically for a specific multi-year
          term. We have also granted to some customers perpetual licenses to certain
          data
          from our BioExpress and ToxExpress System databases and software. In addition,
          we derive a smaller but growing percentage of revenue from providing other
          services, including various toxicogenomics reports, microarray data generation
          and analysis and other professional services and subscriptions to smaller
          solutions. Revenue from subscription agreements is recognized ratably over
          the
          period during which the customer has access to the databases. Certain
          subscription agreements have included a right of early termination (which,
          in
          some instances, is subject to conditions) by the customer, without penalty,
          on a
          specified date prior to the normal expiration of the term. If any agreement
          has
          a right of early termination, revenue is recognized ratably over the
          subscription term up to the possible date of early termination, based on
          subscription fees earned under the agreement through the possible date
          of early
          termination. If such early termination does not occur, the balance of the
          subscription fees earned under the agreement is recognized as revenue ratably
          over the remaining term of the agreement. Revenue from perpetual licenses
          to
          data and software for which the Company is not obligated to provide continuing
          support or services is recognized when the data and/or software has been
          delivered. Revenue from perpetual licenses for which the Company is obligated
          to
          provide continuing support or services is recognized during the period
          such
          support or services are provided. Revenue from other services is recognized
          when
          the services are performed. Our agreements generally provide for termination
          in
          the event of a breach of the agreement by either party or a bankruptcy
          or
          insolvency of either party.
 
 During
          2005, we entered into several contractual arrangements with multiple
          deliverables, such as licenses to access our BioExpress and ToxExpress
          System
          databases and microarray data generation and analysis and other professional
          services. For some of these arrangements, we were unable to determine
          objectively and reliably the fair value of individual undelivered elements,
          and
          in such arrangements, we recognize all revenue using the revenue recognition
          method appropriate to the predominant undelivered element. We also defer
          the
          direct and incremental expenses associated with the delivery of services
          for
          which revenue has been deferred and recognize these expenses as we recognize
          the
          related revenue. The timing of revenue recognition associated with agreements
          we
          enter into in future periods may also be dependent on our ability to objectively
          and reliably determine the fair value of deliverables included in those
          agreements.
  16


**Preclinical
      Services Revenue** .
      Preclinical services revenue is primarily derived from fixed price contracts
      with pharmaceutical and biotechnology companies. In addition, we derive revenue
      from cost plus contracts with United States Government agencies. Revenue is
      recognized on fixed price contracts as services are performed, based primarily
      upon the percentage of hours worked (including subcontractor hours) compared
      to
      the total estimated hours for the contract. We believe that hours worked is
      the
      best measure of proportional performance under fixed price contracts. Revenue
      is
      recognized on cost plus contracts on the basis of the direct costs incurred
      plus
      allowable indirect costs and an allocable portion of the fee earned. Billings
      under government contracts are based on provisional billing rates which permit
      recovery of fringe benefits, overhead and general and administrative expenses
      not exceeding certain limits. These indirect expense rates are subject to review
      by the United States Government on an annual basis. When the final determination
      of the allowable rates for any year has been made, billings may be adjusted
      accordingly. Cost and profit estimates are reviewed periodically as the work
      progresses, and adjustments, if needed, are reflected in the period in which
      the
      estimates are revised. Provisions for estimated losses on uncompleted contracts
      are made in the period in which such losses are determined.





***Goodwill
      and Other Intangible Assets Impairment***





In
      2003,
      we recorded goodwill of $43.0 million as a result of the acquisition of
      TherImmune Research Corporation, now renamed Gene Logic Laboratories Inc. In
      addition, we’ve previously recorded value for goodwill and other intangible
      assets, including licenses to technologies or data, patent costs and software
      development and database upgrade costs. The determination of whether or not
      these other intangible assets are impaired involves significant judgment,
      including the following: (i) our licenses and internally developed intellectual
      property may not provide valid and economical competitive advantage; and (ii)
      services may become obsolete before we recover the costs incurred in connection
      with their development.





Under
      Statement of Financial Accounting Standards No. 142, “Goodwill and Other
      Intangible Assets”, we are required to perform an annual impairment test of our
      goodwill and periodic reviews of our other intangible assets. In addition,
      we
      are required to test for impairment at any point we have an indication that
      impairment may exist. We have elected to perform our annual impairment test
      of
      goodwill as of October 1. The goodwill impairment test that we have historically
      selected consisted of a ten-year discounted cash flow analysis, including the
      determination of a terminal value, and required management to make various
      judgments and assumptions, including revenue growth rates and discount rates,
      which management believed to be reasonable. Our annual impairment test as of
      October 1, 2004 did not indicate an impairment of our goodwill.





During
      September 2005, we determined in conjunction with our annual strategic planning
      process and as part of our annual testing of goodwill, that the carrying value
      of the goodwill that resulted from the April 1, 2003 acquisition of TherImmune
      (now Gene Logic Laboratories Inc., our Preclinical Division) was likely
      impaired, due to lower than expected performance, including lower than
      anticipated revenue and declining gross margins. To assist in the process of
      determining goodwill impairment loss, we obtained an appraisal from an
      independent valuation firm. The estimated fair value of our Preclinical Division
      declined in 2005, as compared to 2004, primarily due to changes in the
      assumptions of likely future net cash flows from this business. As a result
      of
      our review, we recorded a non-cash expense of $32.8 million in 2005 representing
      the implied impairment of goodwill of our Preclinical Division.





No
      impairment existed in the carrying value of goodwill of our Genomics
      Division.





Our
      assessment of the fair value of our Genomics Division and Preclinical Division
      is dependent on subjective estimates we make of inherently uncertain future
      net
      cash flows over extended periods. Accordingly, our estimates for future periods
      of net cash flows may change as market conditions and circumstances dictate.
      Future impairment tests of our goodwill may result in additional impairment
      charges based on these changing estimates.





***Accounts
      Receivable and Unbilled Services***





Our
      ability to collect outstanding receivables and unbilled services from our
      customers is critical to our operating performance and cash flows. Typically,
      arrangements with our customers require that the payments for our services
      be
      made in advance, based upon the achievement of milestones or in accordance
      with
      predetermined payment schedules. We have an allowance for doubtful accounts
      based on our estimate of accounts receivable that are at risk of collection.
      If
      the financial condition of our customers were to deteriorate, resulting in
      an
      impairment of their ability to make payments, an increase in the allowance
      for
      doubtful accounts may be required.





***Inventory***





We
      maintain an inventory of tissue samples collected from various commercial and
      academic sites that are used to expand the content of our databases. We assess
      the quality and supply of samples in excess of our current requirements in
      determining appropriate reserves. Our methods for calculating these reserves
      are
      based both on historical performance and management estimates. Inventory
      reserves are reviewed for adjustment on an ongoing basis. Changes in tissue
      quality and/or our requirements for their use could potentially cause
      adjustments to these reserves in future periods.




17


***Equity
        Investments***
 
 Following
        the write-down of $0.3 million in the first quarter of 2006, we hold an equity
        investment in one company (MetriGenix) with a remaining book value of $3.0
        million as of March 31, 2006. We record an investment impairment charge when
        it
        is believed that an investment has experienced a decline in value that is
        other
        than temporary. Future adverse changes in market conditions or poor operating
        results of the underlying investee could result in our inability to recover
        the
        carrying value of this investment that may not be reflected in such an
        investment’s current carrying value, thereby possibly requiring an impairment
        charge in the future.
 
 **Recently
        Issued Accounting Pronouncements**
 
 Effective
        January 1, 2006, we adopted the fair value recognition provisions of Statement
        of Financial Accounting Standards No. 123 (revised 2004), “Share-Based Payment”
(“SFAS 123R”), using the modified prospective transition method, and therefore
        have not restated results for prior periods. Under this method, we recognize
        compensation expense for all share-based payments granted after January 1,
        2006
        and for those that were granted prior to, but have not yet vested as of,
        January
        1, 2006, in accordance with SFAS 123R. For the first three months of 2006,
        stock-based compensation awards consisted of options awarded under the 1997
        Equity Incentive Plan and the 1997 Non-Employee Directors’ Stock Option Plan.
        Under the fair value recognition provisions of SFAS 123R, we recognize
        stock-based compensation net of an estimated forfeiture rate and recognize
        the
        compensation cost for those shares expected to vest on a straight-line basis
        over the requisite service period of the award. Prior to SFAS 123R adoption,
        we
        accounted for share-based payments under Accounting Principles Board Opinion
        No.
        25, “Accounting for Stock Issued to Employees” and accordingly, were required to
        recognize compensation expense only to the extent that the fair value of
        the
        underlying stock on the date of grant exceeded the exercise or acquisition
        price
        of the stock or stock-based award. Since stock options granted by us in the
        last
        several years have been granted with an exercise price equal to the fair
        value
        on the grant date, we did not recognize any expense for such options prior
        to
        our adoption of SFAS 123R.
 
 Our
        results of operations for the first quarter of 2006 were impacted by the
        recognition of $0.3 million in non-cash expense related to the fair value
        of our
        stock-based compensation awards. Based on outstanding share-based payments
        as of
        January 1, 2006, we estimate that non-cash stock compensation expense in
        2006
        will be approximately $0.7 million to reflect the continued vesting of
        outstanding stock option grants that remain unvested as of January 1, 2006.
        The
        impact of stock compensation expense in periods after our adoption will be
        dependent on the number and type of share-based payments issued to employees
        and
        non-employee directors and this estimate does not include the impact of other
        possible stock-based awards to be made during the balance of 2006.
 
 In
        November 2005, the Financial Accounting Standards Board issued FASB Staff
        Position No. 115-1, “The Meaning of Other-Than-Temporary Impairment and Its
        Application to Certain Investments” (“FSP FAS 115-1”). FSP FAS 115-1 addresses
        the determination as to when an investment is considered impaired, whether
        that
        impairment is other than temporary and the measurement of an impairment loss.
        FSP FAS 115-1, which is effective for reporting periods after December 31,
        2005,
        also includes accounting considerations subsequent to the recognition of
        an
        other-than-temporary impairment and requires certain disclosures about
        unrealized losses that have not been recognized as other-than-temporary
        impairments. The adoption of FSP FAS 115-1 had no material impact on our
        financial position, results of operations or cash flows.
 
 **Item
        3.****Quantitative
        and Qualitative Disclosure about Market Risk**
 
 We
        have
        exposure to financial market risks, including changes in interest rates.
        At
        March 31, 2006, we had cash and cash equivalents of $28.4 million and marketable
        securities available-for-sale of an additional $35.5 million. We invest our
        excess cash primarily in money market funds, obligations of the United States
        Government and its agencies and marketable debt securities of companies with
        strong credit ratings. These instruments have maturities of twenty-four months
        or less when purchased. We do not utilize derivative financial instruments,
        derivative commodity instruments or other market risk sensitive instruments,
        positions or transactions in any material fashion. Accordingly, we believe
        that,
        while the instruments we hold are subject to changes in the financial standing
        of the issuer of such securities, we are not subject to any material risks
        arising from changes in foreign currency exchange rates, commodity prices,
        equity prices or other market changes that affect market risk sensitive
        instruments. Based on our cash and cash equivalents and marketable securities
        available-for-sale balances at March 31, 2006, a hypothetical 100 basis point
        adverse movement in interest rates would have resulted in an increase in
        the net
        loss of approximately $0.2 million for the three months ended March 31, 2006.
        Actual changes in rates may differ from the hypothetical assumptions used
        in
        computing this exposure.
 
 Since
        the
        beginning of 2005 and as a result of changing our distribution arrangements
        in
        Japan, we have been subject to risk from changes in foreign exchange rates
        relating to revenue from our Japanese customers, as such agreements are now
        denominated in Japanese Yen. Such changes could result in foreign currency
        exchange gains or losses. Revenue derived from the Pacific Rim as a percentage
        of total revenue was 16% for the three months ended March 31, 2006, and was
        primarily derived from our customers in Japan. Exchange rate fluctuations
        between the United States dollar and the currencies of these countries could
        result in positive or negative fluctuations in the amounts relating to revenue
        reported in our consolidated condensed financial statements. A hypothetical
        10%
        adverse change in average foreign currency movements would have resulted
        in an
        increase in the net loss of approximately 0.2 million for the three months
        ended
        March 31, 2006. There can be no assurance that losses related to this currency
        risk will not occur.
  18


**Item****4.****Controls
      and Procedures**





**Evaluation
      of Disclosure Controls and Procedures**





As
      of
      March 31, 2006, under the supervision and with the participation of our
      management, including the Chief Executive Officer (“CEO”) and Chief Financial
      Officer (“CFO”), an evaluation was performed of the effectiveness of the design
      and operation of our “disclosure controls and procedures” (“Disclosure
      Controls”). These are controls and procedures designed to reasonably assure that
      information required to be disclosed in our reports filed under the Exchange
      Act, such as this Form 10-Q, is recorded, processed, summarized and reported
      within the time periods specified in the rules and forms of the United States
      Securities and Exchange Commission (“SEC”). Disclosure Controls are also
      designed to reasonably assure that such information is accumulated and
      communicated to our management, including the CEO and CFO as appropriate, to
      allow timely decisions regarding required disclosure. Based on that evaluation,
      our CEO and CFO have concluded that, as of March 31, 2006, our disclosure
      controls and procedures were effective to provide reasonable assurance that
      information required to be disclosed in our Exchange Act reports is recorded,
      processed, summarized and reported within the time periods specified by the
      SEC,
      and that material information relating to us is made known to management,
      including the CEO and CFO, particularly during the period when our periodic
      reports are being prepared.





Our
      management, including the CEO and CFO, does not expect that our Disclosure
      Controls or our internal control over financial reporting will prevent or detect
      all error and all fraud. A control system, no matter how well designed and
      operated, can provide only reasonable, not absolute, assurance that the control
      system’s objectives will be met. The design of a control system must reflect the
      fact that there are resource constraints, and the benefits of controls must
      be
      considered relative to their costs. Further, because of the inherent limitations
      in all control systems, no evaluation of controls can provide absolute assurance
      that misstatements due to error or fraud will not occur or that all control
      issues and instances of fraud, if any, within the Company have been detected.
      These inherent limitations include the realities that judgments in
      decision-making can be faulty and that breakdowns can occur because of simple
      error or mistake. Controls can also be circumvented by the individual acts
      of
      some persons, by collusion of two or more people, or by management override
      of
      the controls. The design of any system of controls is based, in part, on certain
      assumptions about the likelihood of future events and there can be no assurance
      that any design will succeed in achieving its stated goals under all potential
      future conditions. Projections of any evaluation of the effectiveness of
      controls to future periods are subject to risks. Over time, controls may become
      inadequate because of changes in conditions or deterioration in the degree
      of
      compliance with policies or procedures.





**Changes
      in Internal Control Over Financial Reporting**





There
      were
      no changes in our internal controls over financial reporting during the first
      quarter of 2006 that materially affected or are reasonably likely to materially
      affect our internal controls over financial reporting.




**PART
                  II**
              **OTHER
                  INFORMATION**
  **Item
                  1.**
              **Legal
                  Proceedings**We
                  are not currently a party to any material legal
                  proceedings.**Item
                  1A.**
              **Risk
                  Factors**There
                  are no material changes in Risk Factors previously reported in
                  our Annual
                  Report on Form 10-K for the year ended December 31,
                  2005.**Item
                  2.**
              **Unregistered
                  Sales of Equity Securities and Use of Proceeds**None.**Item
                  3.**
              **Defaults
                  Upon Senior Securities**None.
  19
  **Item
                  4.**
              **Submission
                  of Matters to a Vote of Security Holders**None.**Item
                  5.**
              **Other
                  Information**None.**Item
                  6.**
              **Exhibits**
  10.50
              Service
                  Provider Agreement, effective January 1, 2006, between Registrant
                  and
                  Affymetrix, Inc. (1)31
              Certifications
                  pursuant to Rule 13a-14(a)/15d-14(a).32
              Certifications
                  pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section
                  906 of
                  the Sarbanes-Oxley Act of
                  2002.
 
 *(1)**Confidential
                  treatment has been requested with respect to certain portions of
                  this
                  exhibit. Omitted portions have been filed separately with the
                  SEC.*
 
 20




**SIGNATURES**
  Pursuant
        to the requirements of the Securities Exchange Act of 1934, the registrant
        has
        duly caused this report to be signed on its behalf by the undersigned thereunto
        duly authorized.
   **GENE
                    LOGIC INC.**Date:May
                      10, 2006
                  By:/s/
                      Philip L. Rohrer,
                      Jr.Philip
                      L. Rohrer, Jr.Chief
                      Financial Officer(*Principal
                      Financial and Accounting Officer**)*
  21