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UNITED
  STATES
  SECURITIES AND EXCHANGE COMMISSION
  Washington, D.C. 20549

FORM
  10-Q

|(Mark
      One)
|----------------
|                
|þ               
|                
|                
|                
|o               

Commission File Number: 0-23317

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GENE
  LOGIC INC.(Exact name of registrant as specified in its charter)

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|Delaware                                                       |  |  | 06-1411336                          
|-------------------------------------------------------------- |  |  | ------------------------------------
|(State or other jurisdiction of
incorporation or organization) |  |  | (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)

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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 þNO o

Indicate
by  check  mark  whether  the  registrant  is a  shell  company (as defined in Rule 12b-2
of the Exchange Act). YES oNO þ

Indicate by check mark whether the  registrant  is an  accelerated
filer (as defined in Rule 12b-2 of the Exchange Act). YESþNO o

The  number of  shares  outstanding  of the  Registrants
Common  Stock,  $.01 par value,  was  31,771,741 as of October
31, 2005.

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GENE
  LOGIC INC.

TABLE
  OF CONTENTS

|PART
      I                                                                                                   |  | FINANCIAL
      INFORMATION                                                                 |  |    | 
|-------------------------------------------------------------------------------------------------------------- |  | ------------------------------------------------------------------------------------------- |  | -- | 
|                                                                                                               |  |                                                                                             |  |    | 
|Item
      1.                                                                                                  |  | Financial
      Statements                                                                  |  | 3  | 
|                                                                                                               |  |                                                                                             | 
|Consolidated Balance Sheets at September 30, 2005 and
         December 31, 2004                               |  | 3                                                                                           | 
|Consolidated Statements of Operations for the Three and
         Nine Months Ended September 30, 2005 and 2004 |  | 4                                                                                           | 
|Consolidated Statements of Cash Flows for the Nine
         Months Ended September 30, 2005 and 2004           |  | 5                                                                                           | 
|Notes
      to Consolidated Financial Statements                                                               |  | 6                                                                                           | 
|                                                                                                               |  |                                                                                             |  |    | 
|Item
      2.                                                                                                  |  | Managements
      Discussion and Analysis of Results of Operations and Financial Condition |  | 11 | 
|                                                                                                               |  |                                                                                             |  |    | 
|Item
      3.                                                                                                  |  | Quantitative
      and Qualitative Disclosure about Market Risk                             |  | 18 | 
|                                                                                                               |  |                                                                                             |  |    | 
|Item
      4.                                                                                                  |  | Controls
      and Procedures                                                               |  | 18 | 
|                                                                                                               |  |                                                                                             | 
|PART
      II                                                                                                  |  | OTHER
      INFORMATION                                                                     | 
|                                                                                                               |  |                                                                                             |  |    | 
|Item
      1.                                                                                                  |  | Legal
      Proceedings                                                                     |  | 19 | 
|                                                                                                               |  |                                                                                             |  |    | 
|Item
      2.                                                                                                  |  | Changes
      in Securities and Use of Proceeds                                             |  | 19 | 
|                                                                                                               |  |                                                                                             |  |    | 
|Item
      3.                                                                                                  |  | Defaults
      Upon Senior Securities                                                       |  | 19 | 
|                                                                                                               |  |                                                                                             |  |    | 
|Item
      4.                                                                                                  |  | Submission
      of Matters to a Vote of Security Holders                                   |  | 19 | 
|                                                                                                               |  |                                                                                             |  |    | 
|Item
      5.                                                                                                  |  | Other
      Information                                                                     |  | 19 | 
|                                                                                                               |  |                                                                                             |  |    | 
|Item
      6.                                                                                                  |  | Exhibits
      and Reports on Form 8-K                                                      |  | 20 | 
|                                                                                                               |  |                                                                                             |  |    | 
|Signatures                                                                                                     |  |                                                                                             |  | 21 | 

2.

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PART I
FINANCIAL INFORMATION

Item 1.
Financial Statements

GENE LOGIC
INC.

CONSOLIDATED
BALANCE SHEETS (in thousands, except share data)

|                                                                                             |  |  | September 30,
  2005 |          | December 31,
  2004 |  
|-------------------------------------------------------------------------------------------- |  |  | -------------------- | -------- | ------------------- | -
|                                                                                             |  |  |                      |          |                     |  
|                                                                                             |  |  | (Unaudited)          |          |                     |  
|ASSETS                                                                                       |  |  |                      |          |                     |  
|Current assets:                                                                              |  | 
|Cash and cash equivalents                                                                    |  |  | $                    | 56,454   |                     | $
|Marketable securities available-for-sale                                                     |  |  |                      | 34,856   |                     |  
|Accounts receivable, net of allowance of $739 and $436 as of September 30, 2005 and          |  | 
|December 31, 2004, respectively                                                              |  |  |                      | 3,511    |                     |  
|Unbilled services                                                                            |  |  |                      | 5,610    |                     |  
|Inventory, net                                                                               |  |  |                      | 4,273    |                     |  
|Prepaid expenses                                                                             |  |  |                      | 3,059    |                     |  
|Other current assets                                                                         |  |  |                      | 1,171    |                     |  
|                                                                                             |  |  |                      |          |                     |  
|Total current assets                                                                         |  |  |                      | 108,934  |                     |  
|Property and equipment, net                                                                  |  |  |                      | 30,482   |                     |  
|Long-term investments                                                                        |  |  |                      | 3,239    |                     |  
|Goodwill                                                                                     |  |  |                      | 12,913   |                     |  
|Intangibles, net                                                                             |  |  |                      | 12,941   |                     |  
|Other assets                                                                                 |  |  |                      | 54       |                     |  
|                                                                                             |  |  |                      |          |                     |  
|Total assets                                                                                 |  |  | $                    | 168,563  |                     | $
|                                                                                             |  |  |                      |          |                     |  
|LIABILITIES AND STOCKHOLDERS' EQUITY                                                         |  | 
|Current liabilities:                                                                         |  | 
|Accounts payable                                                                             |  |  | $                    | 5,641    |                     | $
|Accrued compensation and employee benefits                                                   |  |  |                      | 6,664    |                     |  
|Other accrued expenses                                                                       |  |  |                      | 4,627    |                     |  
|Current portion of capital lease obligations                                                 |  |  |                      | 145      |                     |  
|Current portion of long-term debt                                                            |  |  |                      | 496      |                     |  
|Current portion of acquired technologies payable                                             |  |  |                      | 3,455    |                     |  
|Deferred revenue                                                                             |  |  |                      | 15,840   |                     |  
|                                                                                             |  |  |                      |          |                     |  
|Total current liabilities                                                                    |  |  |                      | 36,868   |                     |  
|Deferred revenue                                                                             |  |  |                      | 1,375    |                     |  
|Capital lease obligations, net of current portion                                            |  |  |                      | 94       |                     |  
|Long-term debt, net of current portion                                                       |  |  |                      | 139      |                     |  
|Acquired technologies payable                                                                |  |  |                      | --       |                     |  
|Other noncurrent liabilities                                                                 |  |  |                      | 3,535    |                     |  
|                                                                                             |  |  |                      |          |                     |  
|Total liabilities                                                                            |  |  |                      | 42,011   |                     |  
|                                                                                             |  |  |                      |          |                     |  
|Commitments and contingencies                                                                |  |  |                      | --       |                     |  
|Stockholders' equity:                                                                        |  | 
|Preferred stock, $.01 par value; 10,000,000 shares authorized; and no shares issued and      |  | 
|outstanding as of September 30, 2005 and December 31, 2004                                   |  |  |                      | --       |                     |  
|Common stock, $.01 par value; 60,000,000 shares authorized; 31,764,971 and 31,654,413 shares |  | 
|issued and outstanding as of September 30, 2005 and December 31, 2004, respectively          |  |  |                      | 318      |                     |  
|Additional paid-in-capital                                                                   |  |  |                      | 385,560  |                     |  
|Accumulated other comprehensive loss                                                         |  |  |                      | (469     | )                   |  
|Accumulated deficit                                                                          |  |  |                      | (258,857 | )                   |  
|                                                                                             |  |  |                      |          |                     |  
|Total stockholders' equity                                                                   |  |  |                      | 126,552  |                     |  
|                                                                                             |  |  |                      |          |                     |  
|Total liabilities and stockholders' equity                                                   |  |  | $                    | 168,563  |                     | $
|                                                                                             |  |  |                      |          |                     |  

See
accompanying notes.

3.

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GENE LOGIC
INC.

CONSOLIDATED
STATEMENTS OF OPERATIONS (in thousands, except per share data) (Unaudited)

|                                            |  |  | Three Months Ended
  September 30, |         | Nine Months Ended
  September 30, |  
|------------------------------------------- |  |  | ---------------------------------- | ------- | --------------------------------- | -
|                                            |  |  |                                    |         |                                   |  
|                                            |  |  | 2005                               |         | 2004                              |  
|                                            |  |  |                                    |         |                                   |  
|Revenue:                                    |  |  |                                    |         |                                   |  
|Genomics and toxicogenomics services        |  |  | $                                  | 11,719  |                                   | $
|Non-clinical services                       |  |  |                                    | 5,257   |                                   |  
|Drug repositioning and selection services   |  |  |                                    | 102     |                                   |  
|                                            |  |  |                                    |         |                                   |  
|Total revenue                               |  |  |                                    | 17,078  |                                   |  
|Expenses:                                   |  | 
|Cost of non-clinical services               |  |  |                                    | 7,174   |                                   |  
|Database production                         |  |  |                                    | 7,340   |                                   |  
|Research and development                    |  |  |                                    | 1,818   |                                   |  
|Selling, general and administrative         |  |  |                                    | 8,292   |                                   |  
|Purchased research and development          |  |  |                                    | --      |                                   |  
|Goodwill impairment                         |  |  |                                    | 32,794  |                                   |  
|                                            |  |  |                                    |         |                                   |  
|Total expenses                              |  |  |                                    | 57,418  |                                   |  
|                                            |  |  |                                    |         |                                   |  
|Loss from operations                        |  |  |                                    | (40,340 | )                                 |  
|Interest (income), net                      |  |  |                                    | (727    | )                                 |  
|Other (income) expense                      |  |  |                                    | (133    | )                                 |  
|                                            |  |  |                                    |         |                                   |  
|Net loss before income (credit) tax expense |  |  |                                    | (39,480 | )                                 |  
|Income tax (credit) expense                 |  |  |                                    | --      |                                   |  
|                                            |  |  |                                    |         |                                   |  
|Net loss                                    |  |  | $                                  | (39,480 | )                                 | $
|                                            |  |  |                                    |         |                                   |  
|Basic and diluted net loss per share        |  |  | $                                  | (1.24   | )                                 | $
|                                            |  |  |                                    |         |                                   |  
|Shares used in computing basic and diluted  |  | 
|net loss per share                          |  |  |                                    | 31,756  |                                   |  
|                                            |  |  |                                    |         |                                   |  

See
accompanying notes.

4.

---



GENE LOGIC
INC.

CONSOLIDATED
STATEMENTS OF CASH FLOWS(in thousands)
(Unaudited)

|                                                                                     |  |  | Nine Months Ended
  September 30, |        
|------------------------------------------------------------------------------------ |  |  | --------------------------------- | -------
|                                                                                     |  |  |                                   |        
|                                                                                     |  |  | 2005                              |        
|                                                                                     |  |  |                                   |        
|Cash flows from operating activities:                                                |  |  |                                   |        
|Net loss                                                                             |  |  | $                                 | (46,191
|Adjustments to reconcile net loss to net cash flows from operating activities:       |  | 
|Depreciation and amortization                                                        |  |  |                                   | 10,756 
|Goodwill impairment                                                                  |  |  |                                   | 32,794 
|Non-cash purchased research and development                                          |  |  |                                   | --     
|Loss on abandonment of patents                                                       |  |  |                                   | 18     
|Loss on disposal of property and equipment                                           |  |  |                                   | 59     
|Changes in operating assets and liabilities:                                         |  | 
|Accounts receivable and unbilled services                                            |  |  |                                   | 2,238  
|Inventory                                                                            |  |  |                                   | (2,590 
|Prepaids and other assets                                                            |  |  |                                   | 165    
|Accounts payable                                                                     |  |  |                                   | 385    
|Accrued expenses and other noncurrent liabilities                                    |  |  |                                   | 3,567  
|Accrued interest relating to acquired technologies payable                           |  |  |                                   | 108    
|Deferred revenue                                                                     |  |  |                                   | 3,832  
|                                                                                     |  |  |                                   |        
|Net cash flows from operating activities                                             |  |  |                                   | 5,141  
|                                                                                     |  |  |                                   |        
|Cash flows from investing activities:                                                |  | 
|Purchases of property and equipment                                                  |  |  |                                   | (12,474
|Purchases of licenses and patent costs                                               |  |  |                                   | (603   
|Software development costs                                                           |  |  |                                   | (1,530 
|Database upgrade costs                                                               |  |  |                                   | (2,920 
|Purchase of marketable securities available-for-sale                                 |  |  |                                   | (24,163
|Proceeds from sale and maturity of marketable securities available-for-sale          |  |  |                                   | 39,652 
|                                                                                     |  |  |                                   |        
|Net cash flows from investing activities                                             |  |  |                                   | (2,038 
|                                                                                     |  |  |                                   |        
|Cash flows from financing activities:                                                |  | 
|Proceeds from issuance of common stock to employees                                  |  |  |                                   | 248    
|Repayments of capital lease obligations and equipment loan                           |  |  |                                   | (134   
|                                                                                     |  |  |                                   |        
|Net cash flows from financing activities                                             |  |  |                                   | 114    
|                                                                                     |  |  |                                   |        
|Net increase (decrease) in cash and cash equivalents                                 |  |  |                                   | 3,217  
|                                                                                     |  |  |                                   |        
|Cash and cash equivalents, beginning of period                                       |  |  |                                   | 53,237 
|                                                                                     |  |  |                                   |        
|Cash and cash equivalents, end of period                                             |  |  | $                                 | 56,454 
|                                                                                     |  |  |                                   |        
|Supplemental disclosure:                                                             |  | 
|Taxes paid                                                                           |  |  | $                                 | --     
|                                                                                     |  |  |                                   |        
|Interest paid                                                                        |  |  | $                                 | 27     
|                                                                                     |  |  |                                   |        
|Non-cash transactions:                                                               |  | 
|Reclassification of long-term investment to marketable securities available-for-sale |  |  | $                                 | 581    
|                                                                                     |  |  |                                   |        

See
accompanying notes.

5.

---



GENE LOGIC
INC.

Notes to
Consolidated Financial Statements September 30, 2005 (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  to
pharmaceutical  and  biotechnology  companies  worldwide and U.S. Government  entities,
to assist  in  the  development  of  therapeutic  compounds  in  a  more  timely,
efficient and  cost-effective  manner.  From April 1,  2003  to  December  31,  2004,
the  Companys  services  were  organized  into  two  business  segments:  genomics
and  toxicogenomics  services  (Genomics  Services)  and  preclinical
contract  research  services  (renamed  Non-clinical  Services).  Beginning
in  2005,  the  Company  added  a  third  business  segment:  drug  repositioning  and
selection services (DRS Business).

The Genomics
Services business consists of proprietary reference gene expression and
toxicogenomics databases, software tools, various toxicogenomics reports, data
generation and other professional services and solutions. These services are
designed to help customers discover and prioritize drug targets, identify
biomarkers and predict toxicity and obtain insights into efficacy of specific
compounds. The Non-clinical Services business consists of  in vivo 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 DRS Business, which resulted from the
acquisition of certain technologies in 2004 that continue to be developed, consists
of services to assist customers in (i) identifying alternative indications for
failed, stalled or deprioritized compounds; (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 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  balance  sheet as of September  30, 2005,
consolidated  statements  of  operations  for the three and nine months ended  September
30,  2005 and 2004 and the  consolidated  statements  of cash flows  for the nine  months
ended  September  30,  2005 and 2004 are  unaudited,  but include all adjustments
(consisting of normal  recurring  adjustments) which 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 U.S.  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
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, 2004.

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.

Reclassifications

Certain
reclassifications  have  been  made  to  the  prior  periods  financial  statements
and  segment  information  to  conform to the current period presentation.

6.

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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:

|                             |  |  | September 30,
2005 |        | December 31, 
2004 |  
|---------------------------- |  |  | ------------------ | ------ | ------------------ | -
|                             |  |  |                    |        |                    |  
|Microarrays                  |  |  | $                  | 2,560  |                    | $
|Laboratory reagents          |  |  |                    | 620    |                    |  
|Tissue samples               |  |  |                    | 2,771  |                    |  
|                             |  |  |                    |        |                    |  
|                             |  |  |                    | 5,951  |                    |  
|Less: tissue sample reserves |  |  |                    | (1,678 | )                  |  
|                             |  |  |                    |        |                    |  
|Inventory, net               |  |  | $                  | 4,273  |                    | $
|                             |  |  |                    |        |                    |  

Foreign
Currency Transactions

Foreign
currency  transaction  gains and losses are  included  in the  Consolidated  Statements
of  Operations.  During  the  three  and nine  months  ended  September  30,  2005,
foreign  currency gains totaled $133 and $560, respectively.

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  owners  and  distribution
to  owners.  Total  comprehensive  loss,  which  includes  unrealized  gains  or  losses
in  the  Companys  marketable  securities  available-for-sale,  was  $39,887  and
$14,585  for the three  months ended  September 30, 2005 and 2004,  respectively,  and
$46,524 and $24,676 for the nine months  ended  September  30,  2005 and 2004,
respectively.

Stock-Based
Compensation Plans

At  September
30,  2005,  the Company  has three  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).  The  Company  accounts  for  these  plans  under the
recognition  and  measurement  principles  of  Accounting  Principles  Board  Opinion
No.  25,  Accounting  for  Stock  Issued  to  Employees (APB  25),
and  related  interpretations.  Under  APB  25,  compensation  expense  for  grants that
are  compensatory  are  recorded  over the vesting  period  only  to  the  extent  that
the  fair  value  of  the  underlying  stock on the date of grant  exceeds  the  exercise
or  acquisition  price  of the  stock  or  stock-based  award.  Stock  options  granted
under the  Companys  Stock  Plan and  Directors Plan are considered
compensatory  and are granted  with an  exercise  price  equal to the fair value on the
grant  date.  Common  stock  issued  under  the  ESPP  is  considered  non-compensatory
under APB 25 and is  purchased 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,  as defined  under the plan (or, if later,  the date  during the offering  when
the  employee was first  eligible to  participate).  In  2005,  purchases  under  the
ESPP  were  suspended  after the January 31,  2005  purchase,  as a result  of the
Companys  pending  adoption of Statement of Financial  Accounting  Standards
(SFAS)  No.  123(R),  Share-Based  Payment.

7.

---



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  Statement  of  Financial
Accounting  Standards  No. 123,  Accounting  for  Stock-Based  Compensation,
to stock-based  employee  compensation for the  indicated periods:rds  No. 123,  Accounting
for  Stock-Based  Compensation,  to stock-based  employee  compensation for the
indicated periods:

|                                                             |  |  | Three Months Ended
  September 30, |         | Nine Months Ended
  September 30, |  
|------------------------------------------------------------ |  |  | ---------------------------------- | ------- | --------------------------------- | -
|                                                             |  |  |                                    |         |                                   |  
|                                                             |  |  | 2005                               |         | 2004                              |  
|                                                             |  |  |                                    |         |                                   |  
|Net loss, as reported                                        |  |  | $                                  | (39,480 | )                                 | $
|Add: Stock-based employee compensation expense included      |  | 
|in reported net loss                                         |  |  |                                    | --      |                                   |  
|Deduct: Stock-based employee compensation expense determined |  | 
|under fair value-based method for all awards                 |  |  |                                    | (434    | )                                 |  
|                                                             |  |  |                                    |         |                                   |  
|Pro forma net loss                                           |  |  | $                                  | (39,914 | )                                 | $
|                                                             |  |  |                                    |         |                                   |  
|Basic and diluted net loss per share:                        |  | 
|As reported                                                  |  |  | $                                  | (1.24   | )                                 | $
|Pro forma                                                    |  |  | $                                  | (1.26   | )                                 | $

New Accounting
Pronouncements

In 2004,  the
Financial  Accounting  Standards  Board  issued  SFAS No. 123(R),  Share-Based
Payment, (SFAS 123(R)) and  in 2005,  the SEC  approved  a new rule
that will  require  an  adoption  date of  January  1, 2006 for the  Company.  The new
statement will require all  share-based  payments to employees  to be recognized in the
financial  statements  based on their  fair  values.  Currently,  the  Company  accounts
for  its  share-based  payments to employees  under the intrinsic  value  method  of
accounting  set  forth  in  Accounting  Principles  Board  Opinion  No.  25,  Accounting
for  Stock  Issued  to  Employees. Additionally,  the  Company  complies  with  the
stock-based employee compensation  disclosure  requirements of  SFAS  No.  148,  Accounting
for  Stock-Based  Compensation-Transition and Disclosure.

SFAS  123(R)
permits  companies  to  adopt  its  requirements  using one of two methods:

- A  modified
prospective method  in  which  compensation  cost is  recognized  beginning  with
the  effective  date  (a)  based on the  requirements  of  SFAS  123(R)  for  all
share-based  payments  granted  after  the  effective  date  and  (b)  based  on  the
requirements  of SFAS  123(R) for all awards  granted  to  employees  prior  to  the
effective  date of SFAS  123(R)  that remain  unvested on the effective date.
- A  modified
retrospective method  which  includes  the  requirements  of  the  modified
prospective  method  described  above,  but  also permits  companies to restate  based on
the  amounts  previously  recognized  under  SFAS  123(R)  for  purposes  of  pro  forma
disclosures  for  either  (a)  all  prior  periods  presented  or  (b)  prior  interim
periods of the year of adoption.

The  Company
plans  to  adopt  SFAS  123(R)  using  the  modified-prospective  method  and has not
yet  completed  its  evaluation  of the  financial  statement  impact of  adoption.  The
effects on stock  compensation  expense in periods  after  adoption  will  be  dependent
on  the  number  and  type  of  share-based  payments  issued  to  employees.  Based  on
anticipated  outstanding  share-based  payments as of December  31,  2005,  the  Company
estimates  that  non-cash  stock  compensation  expense in 2006 will  increase by
approximately  $700  to  $1,000  to  reflect  the  continued  vesting  of  outstanding
stock  option  grants that remain  unvested as of  December 31, 2005.

Note 2  Impairment
of goodwill

The  goodwill
on the  Companys  Consolidated  Balance  Sheet  resulted  from  the  acquisitions
of  TherImmune  Research  Corporation  (TherImmune)  in 2003  and  Oncormed,
Inc.  in  1998 and  represents  the  excess of the  purchase  price over  the fair value
of the net assets acquired.

The Company
adopted the  provisions of Statement of Financial  Accounting  Standards No. 142,  Goodwill
and Other Intangible  Assets (SFAS 142)  effective  January 1, 2002.
Under SFAS  142,  the Company is required to perform an annual  impairment  test of its
goodwill and  periodic  reviews of its  intangible  assets.  In  addition,  the  Company
is  required  to test for  impairment  at any  point in which it has an  indication  that
impairment  may exist.  Based on the initial  impairment  test  performed  as of  January
1, 2002 and the  subsequent  annual  impairment  tests  as  of  October  1,  2004  and
2003,  no  impairment  existed  in  the  carrying  value  of  goodwill.  However,  as
discussed  below, an impairment was identified in  2005.

8.

---



The goodwill
impairment  test  involves a two-step  approach.  Under the first step,  the Company
determines  the fair value  of each  reporting  unit to which  goodwill has been
assigned.  The Company  then  compares  the fair value of each  reporting  unit to its
carrying value,  including  goodwill.  The Company  estimates  the  fair  value  of  each
reporting  unit  by  estimating  the present value of the  reporting  units future
cash  flows.  If the fair value  exceeds the  carrying  value,  no  impairment  loss  is
recognized.  If the  carrying  value  exceeds the fair value,  the  goodwill of the
reporting  unit  is  considered  potentially  impaired  and the second  step is
completed  in order to  measure  the  impairment  loss.  Under  the second  step,  the
Company  calculates  the  implied  fair  value  of  goodwill  by  deducting  the  fair
value  of  all  tangible  and  intangible  net  assets,  including  any  unrecognized
intangible  assets,  of the reporting  unit from  the fair value of the  reporting  unit,
as  determined in the  first  step.  The  Company  then  compares  the  implied  fair
value of goodwill to the carrying  value of  goodwill.  If the  implied  fair  value of
goodwill  is less  than the  carrying  value of goodwill,  the Company  recognizes an
impairment loss  equal to the difference.

During
September 2005, the Company  determined in conjunction  with its  annual  strategic
planning  process  and as part of  its  annual  testing  for  impairment  of  goodwill,
that the  carrying  value of the goodwill  that  resulted from the April  1,  2003
acquisition  of  TherImmune  (now  Gene  Logic  Laboratories  Inc.,  the  Companys
Non-clinical  Services  business)  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,  the
Company  obtained  an  appraisal  from an independent  valuation  firm. As a result  of the  Companys
review,  the  Company  recorded  a  non-cash  expense  of  $32,794  representing  the
implied  impairment  of  goodwill  of  the  Companys Non-clinical Services business. As of September 30, 2005 and subsequent to the impairment, goodwill related to the acquisition
of TherImmune amounted to $10,236.

No  impairment
existed in the  carrying  value of the $2,677 of goodwill of  the Companys Genomics Services
business.

Note 3  Segment
information

Beginning in
2005,  the  Companys  operations  are  organized  into  three  business  segments:
Genomics  Services,  Non-clinical  Services  and DRS  Business,  all of  which  are  more
fully  described  in  Note  1.  From  April  1,  2003 to  December  31,  2004,  the
Company  operated  as two  business  segments:  Genomics  Services and Non-clinical
Services.  The  prior  periods  segment  information  has  been  restated  to
conform to the current period presentation.

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  goodwill
impairment,  purchased  research  and  development  expenses,  interest  (income)
expense, other (income) expense and income tax (credit) expense,  and could also exclude  certain  unusual or
corporate-related  costs  in  the  future.  In  addition,  while  the  Companys
Consolidated  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.
Amortization  and  depreciation  is  allocated  by  segment as  shown below.

The following
table sets forth information on reportable  segments for the indicated periods:

|                                          |  |  | Three Months Ended
  September 30, |        | Nine Months Ended
  September 30, |  
|----------------------------------------- |  |  | ---------------------------------- | ------ | --------------------------------- | -
|                                          |  |  |                                    |        |                                   |  
|                                          |  |  | 2005                               |        | 2004                              |  
|                                          |  |  |                                    |        |                                   |  
|Genomics and Toxicogenomics Services      |  |  |                                    |        |                                   |  
|Revenue                                   |  |  | $                                  | 11,719 |                                   | $
|Operating income (loss)                   |  |  |                                    | 27     |                                   |  
|Depreciation and amortization expense     |  |  |                                    | 2,341  |                                   |  
|Non-clinical Services                     |  | 
|Revenue                                   |  |  | $                                  | 5,257  |                                   | $
|Operating income (loss) (1)               |  |  |                                    | (4,452 | )                                 |  
|Depreciation and amortization expense     |  |  |                                    | 823    |                                   |  
|Drug Repositioning and Selection Services |  | 
|Revenue                                   |  |  | $                                  | 102    |                                   | $
|Operating income (loss) (2)               |  |  |                                    | (3,121 | )                                 |  
|Depreciation and amortization expense     |  |  |                                    | 149    |                                   |  

|(1) |  | Excludes
goodwill impairment expense of $32,794 for the  three and nine months ended September 30,
2005.
|--- |  | --------------------------------------------------------------------------------------------------------

|(2) |  | Excludes
purchased research and development expenses of  $9,083 for the three and nine months ended
September 30,  2004.
|--- |  | ------------------------------------------------------------------------------------------------------------------------

9.

---



A
reconciliation  of segment  operating  income (loss) to net  loss before  income tax (credit)
expense for the  indicated  periods is  as follows:

|                                            |  |  | Three Months Ended
  September 30, |         | Nine Months Ended
  September 30, |  
|------------------------------------------- |  |  | ---------------------------------- | ------- | --------------------------------- | -
|                                            |  |  |                                    |         |                                   |  
|                                            |  |  | 2005                               |         | 2004                              |  
|                                            |  |  |                                    |         |                                   |  
|Segment Operating Income (Loss)             |  |  |                                    |         |                                   |  
|Genomics and toxicogenomics services        |  |  | $                                  | 27      |                                   | $
|Non-clinical services                       |  |  |                                    | (4,452  | )                                 |  
|Drug repositioning and selection services   |  |  |                                    | (3,121  | )                                 |  
|Purchased research and development          |  |  |                                    | --      |                                   |  
|Goodwill impairment                         |  |  |                                    | 32,794  |                                   |  
|                                            |  |  |                                    |         |                                   |  
|                                            |  |  |                                    |         |                                   |  
|Loss from operations                        |  |  |                                    | (40,340 | )                                 |  
|                                            |  |  |                                    |         |                                   |  
|Interest (income), net                      |  |  |                                    | (727    | )                                 |  
|Other (income) expense                      |  |  |                                    | (133    | )                                 |  
|                                            |  |  |                                    |         |                                   |  
|                                            |  |  |                                    |         |                                   |  
|Net loss before income tax (credit) expense |  |  | $                                  | (39,480 | )                                 | $
|                                            |  |  |                                    |         |                                   |  

During the
three and nine months  ended  September  30,  2005,  one  Genomics  Services  customer
accounted  for greater than  10% of the  Companys  total  revenue.  During  the
three and  nine months ended  September 30, 2004,  no customer  accounted  for  10%  or
more  of  the  Companys  total  revenue.  The  following  table sets forth
information on the composition of  the Companys total revenue by geographic region:

|                            |  |  |  | Geographic Region | 
|--------------------------- |  |  |  | ----------------- | 
|                            |  |  |  |                   | 
|                            |  |  |  | North America     | 
|For the three months ended: |  |  |  |                   | 
|September 30, 2005          |  |  |  | 54%               | 
|September 30, 2004          |  |  |  | 54%               | 
|                            |  |  |  |                   | 
|For the nine months ended:  |  |  |  |                   | 
|September 30, 2005          |  |  |  | 52%               | 
|September 30, 2004          |  |  |  | 53%               | 

10.

---



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, 2004 under the section entitled
Risks Related to Our Business and Industry. 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.  GeneExpress®,  BioExpress®,
ToxExpress®,  ASCENTA® and  Genesis  Enterprise  System® are
registered  trademarks of Gene Logic.  ToxShield,  ToxScreen,  SCIANTIS and
Drug  Repositioning  and Selection are trademarks of Gene  Logic.  GeneChip® is
a registered  trademark  of  Affymetrix,  Inc.

OVERVIEW

We provide
drug  discovery  and  development  services to the  pharmaceutical  and  biotechnology
industries,  for  use  throughout  the  drug  development  process.  Our  goal  is to
assist in the  development of therapeutic  compounds in a more  timely, efficient and
cost-effective manner.

Our solutions
consist of:

- Genomics  and
Toxicogenomics  Services  (Genomics  Services):  we  help  customers  to
discover  and  prioritize  drug  targets,  identify  biomarkers  and  predict  toxicity
and obtain  insights  into efficacy  of  specific  compounds  through  the  use  of
proprietary  reference  gene  expression  and  toxicogenomics  databases,  software
tools,  various  toxicogenomics  reports,  data  generation  and other  professional
services and solutions.
- Non-clinical
Services:  we  enable  customers  to  assess  the  safety  and  pharmacologic  effects
of  candidate  compounds  for the purpose  of gaining  regulatory  approval  to
proceed  with human  trials,  through  the  use of in  vivo  research  studies  and
related laboratory services.
- Drug
Repositioning  and  Selection  Services  (DRS  Business):  we  can  assist
customers  in  (i)  identifying  alternative  indications  for customers failed,
stalled  or  deprioritized  compounds;  (ii)  expanding  indications  for  customers currently
marketed  drugs;  and  (iii)  prioritizing  and  identifying  indications  for  customers compounds
entering preclinical development.

Although  we
continue  to receive a large  percentage  of our  Genomics  Services revenue from
subscription  agreements with  pharmaceutical  and  biotechnology  companies for all or
parts  of our BioExpress  System and/or  ToxExpress System databases,  we  have
initiated  a  strategy  to  increase  revenue  by  broadening  our  portfolio  of
genomics  and  toxicogenomics-derived  services and  expanding  our potential  customer
base. As a result,  we derive a small,  but growing,  percentage  of our  revenue  from
providing  other  services,  including  various  toxicogenomics  reports,  data
generation  and other  professional  services and  solutions,  such as our  ASCENTA and
SCIANTIS  Systems.  We have also  granted to some  customers  perpetual  licenses  to
certain  data  from  our  BioExpress and ToxExpress System databases for a fixed fee.

Typically,  our
customers  enter into  multi-year  agreements  for  non-exclusive  access to our larger
databases and annual  or multi-year  agreements  for our other  databases/solutions.
Some of our  subscription  agreements  contain periodic update  requirements  that,  if
not met,  could  result in a reduction  in  license  fees  or  possible  breach  of  the
respective  agreement.  Certain  customers  also  have  an  option,  for  additional
consideration,  upon  expiration  of  their  subscription, to elect to retain and use
certain data.

Pricing for
subscriptions  is generally  dependent  upon such  issues as the solution being  offered,
the extent and type of  use by the  customer,  the  number  of users  at the  customer
site,  the  scope  of  installation  at the  customers  site,  requirements for
customization,  any content  requirements and  whether we  provide  any custom  analysis
or data  management  services.  Contracts under these  subscription  agreements may  be
terminated  by either  party if the other  party  breaches  the  agreement  and  fails
to cure  such  breach  within  any  applicable  cure  period  or in the event of a
bankruptcy  of  either party.  In addition,  certain  subscription  agreements  include a
right  (which,  in some  instances,  is  subject  to  conditions)  of  early  termination
by  a  customer  without  penalty,  on a specified  date prior to the normal  expiration
of the term.  Contracts  with our  customers,  other  than our  Japanese  customers,  are
dollar-denominated.  Contracts with  our  Japanese  customers,  beginning  in  2005,  are
now  denominated  in  Japanese  Yen  and  may  be  subject  to  fluctuations due to
changes in currency exchange rates.

11.

---



For our various
toxicogenomics  reports  and data  generation  and  other  professional  services,  the
scope  of  services  provided  is  based  on  the  customers  needs.  Pricing  for
these  services  is  generally  dependent  upon such issues as  the  number of  samples
or  compounds  analyzed,  the type of  analysis  performed,  the  starting  material
provided by the  customer,  the type and  source of  GeneChip  microarray  used  for  the
services  and  requirements  for  customization.  Generally,  contracts  for such
services may be terminated by  either  party if the other party  breaches the  agreement
and  fails to cure such breach  within any  applicable  cure period  or in the event of a
bankruptcy of either party.

Our
Non-clinical  Services  revenue is primarily  derived from  fixed price  contracts.  In
addition,  we derive  revenue from  cost plus  contracts,  most of which are with U.S.
Government  entities.  Under  fixed price  contracts,  we bear the cost of  overruns,
but  we  benefit  if  the  costs  are  lower  than  anticipated.  Cost plus  contracts
contain  a budget  for the  study  based  on  labor  and  other  cost  estimates.  We
are  reimbursed for our costs within specified  limits,  subject to  periodic  audit,
and  receive a fixed  fee.  If our costs are  lower  than  anticipated,  the  savings
are  realized  by our  customers.  If our costs are  higher  than  estimated,  we are
required to work only up to the maximum  contract  value.  Our  costs  are  subject  to
audit by the  U.S.  Government  and if  such  costs  are  reduced  upon  audit,  we may
have to refund  amounts  paid to us.  Contracts  may range in duration  from a  few weeks
to several  years.  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  milestones  over the studys  duration.  Costs under cost plus  contracts  are
reimbursed  monthly  along  with  a  pro  rata  portion of the fixed fee.  Most of our
Non-clinical  Services  contracts  may be  terminated  by the  customer  at any  time,
subject to payment to us of any direct  costs plus  applicable  indirect  costs  incurred
prior to  termination,  plus direct  and  indirect  costs  incurred  to  terminate  a
study and, in  some  instances,  a portion of our  profit or fixed fee,  or a
cancellation fee.

Prior to 2005,
we did not  derive  any  revenue  from our new  DRS Business,  the  technologies  of
which are currently under  further development.

We have
incurred  operating  losses  in each  year  since our  inception,  including  losses of
$28.5 million in 2004,  $24.8  million in 2003 and $24.1  million in 2002.  At September
30,  2005, we had an  accumulated  deficit of $258.9  million.  Our  losses have resulted
principally  from costs  incurred in the  development,  marketing  and  sale of our
Genomics  Services,  acquisition  of  TherImmune,  development  of  the  DRS
Business, the impairment of goodwill described herein 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 September 30, 2005 and 2004

Total Revenue.
Total revenue was essentially flat at $17.1 million for the three months ended
September 30, 2005 as compared to $17.0 million for the same period in 2004.
During the three months ended September 30, 2005, one Genomics Services
customer accounted for greater than 10% of our total revenue. During the three months
ended September 30, 2004, no customer accounted for greater than 10% of our total
revenue. Five customers accounted for approximately 33% and 34% of our total
revenue for the three months ended September 30, 2005 and 2004, respectively.
During the three months ended September 30, 2005 and 2004, 26% and 33% of our total
revenue, respectively, was from customers in the Pacific Rim, and 20% and 13%
of our total revenue, respectively, was from customers in Europe.

Genomics and
Toxicogenomics Services Revenue. Revenue from our Genomics Services, which consist
primarily of fees from subscription agreements to our BioExpress  and
ToxExpress System databases, was $11.7 million for the three months ended September
30, 2005, a decrease of $0.2 million, or 2%, from $11.9 million for the same period
in 2004. The decrease reflects reduced revenue of $1.4 million from the extensions
of certain agreements at reduced service levels and the absence of $0.6 million in
subscription fees from agreements that have expired, partially offset by $1.4
million in fees from a customer to whom we granted a perpetual license to
certain data to be delivered through 2006. In 2005, subscription agreements for
all or part of our BioExpress System and/or ToxExpress System databases with ten
customers are subject to agreement extension discussions. These customers
accounted for 31% of our total 2004 revenue and 46% of our 2004 Genomics Services
revenue. Since the beginning of 2005, eight of these agreements have been the
subject of renegotiations. Of these, two agreements were renegotiated on terms
similar to the prior agreements and two agreements terminated. Three agreements
were renegotiated at reduced services levels and will result in lower future revenue
than under the prior agreements. One agreement will terminate at the end of
2005 and we granted that customer, for an additional fee of $5.5 million, a
perpetual license to data to be delivered through 2006, of which a portion of the
fee has been recorded as revenue as noted above. Negotiations are either under
way or will commence during the year for the remaining two agreements. There
is no assurance that these remaining agreements will be extended or that any
agreements resulting from these discussions will be on terms comparable to, or as
favorable to us as, the existing subscription agreements.

Revenue for our
Genomics Services for the third quarter of  2005 does not include $2.6 million in
revenue, which was  deferred into future periods, associated with  multiple-element
agreements.  Of this amount, we expect to  record as revenue in the fourth quarter of
2005 at least  $1.4 million, with the remainder to be recorded in future  periods as the remaining
service delivery occurs.  We anticipate entering  into additional multiple-element
agreements in the future,  as we expand our portfolio of service offerings and reduce
our reliance on large, multi-year subscriptions, which may  result in uneven revenue due
to the nature of revenue  recognition associated with multiple-element arrangements.

For 2005,  we
expect  modest  revenue  growth in our  Genomics  Services.

12.

---



Non-clinical
Services Revenue. Revenue from our Non-clinical Services, which consist of fees from
non-clinical safety and pharmacology studies and related laboratory services,
increased slightly to $5.3 million for the three months ended September 30,
2005 compared to $5.1 million for the same period in 2004. Revenue for the third
quarter of 2004 included a credit of $0.6 million issued to a single customer.
We have not realized the benefit of our recent capacity expansion in 2005 and
expect revenue to be less than in 2004.

Cost of
Non-clinical Services Revenue. Cost of Non-clinical Services revenue, which consists
of direct and indirect costs related to conducting non-clinical safety and
pharmacology studies and related laboratory services, including direct and
indirect labor, study materials and facility costs and depreciation, increased
slightly to $7.2 million for the three months ended September 30, 2005 from $6.9
million for the same period in 2004. The increase primarily reflects $0.5
million of increased facility, labor and support charges associated with the
underutilization of our capacity. As a result, our gross margins were negative 36%
for the three months ended September 30, 2005 compared to negative 35% in the same
period in 2004. Gross margins for the third quarter of 2004 reflect a credit of
$0.6 million and a $0.4 million payment issued to a single customer. We expect a
continued decline in our gross margins for the fourth quarter of 2005, resulting
from anticipated reduced 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, decreased
to $7.3 million for the three months ended September 30, 2005 from $10.0 million
for the same period in 2004. The decrease consisted primarily of a $2.5 million
reduction in database content generation expenses, including lower costs for
acquiring tissues and certain agreements with third parties. For 2005, we expect
database production expenses to decrease significantly, reflecting our continuing
efforts to reduce the costs of adding new content to our databases.

Research and
Development Expense. Research and development expenses, which now consist
primarily of costs associated with the ongoing development of our drug
repositioning and selection technologies, increased to $1.8 million for the three
months ended September 30, 2005 from $0.7 million for the same period in 2004.
The increase was primarily a result of development efforts relating to our
drug repositioning and selection technologies, which began in mid-2004. For the
fourth quarter of 2005, we expect research and development expenses to increase
modestly over the third quarter of 2005, as we continue to develop our drug
repositioning and selection technologies (see Liquidity and Capital Resources).

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 $8.3 million for the three months
ended September 30, 2005 from $6.2 million for the same period in 2004. The
increase is largely due to an increase in our investment in our DRS Business
and accrued costs under our employee incentive compensation plan. For 2005, we
expect selling, general and administrative expenses to increase due to increases
in expenses related to efforts to commercialize our DRS Business and accrued
costs under our employee incentive plan.

Purchased
Research and Development. During the three months ended September 30, 2004, we
incurred a one-time expense of $9.1 million from the write-off of purchased
in-process research and development associated with our DRS Business.

Impairment of
Goodwill. During September 2005, we determined in conjunction with our annual
strategic planning process and as part of our annual testing for impairment
of goodwill, that the carrying value of the goodwill that resulted from the
April 1, 2003 acquisition of TherImmune Research Corporation (now Gene Logic
Laboratories Inc., our Non-clinical Services business) 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, we obtained an appraisal from an independent valuation firm. As a result of our review, we recorded a
non-cash expense of $32.8 million representing the implied impairment of goodwill of our
Non-clinical Services business.

Net Interest
Income. Net interest income increased to $0.7 million for the three months ended
September 30, 2005 from $0.4 million for the same period in 2004, due primarily to
increases in our rates of return on investments.

Other Income.
Other income increased to $0.1 million for the three months September 30, 2005
from zero for the same period in 2004, due to foreign currency transaction gains
relating to our subscription agreements with our Japanese customers. As a result
of changing our distribution arrangements in Japan, beginning in 2005 our
agreements with our Japanese customers are now denominated in Japanese Yen.

Income Tax
(Credit) Expense. Income tax expense historically consisted of a 10% withholding
tax on certain payments by our Japanese customers. The withholding tax was
eliminated effective July 1, 2004, as a result of the new tax treaty between the
U.S. and Japan. During the three months ended September 30, 2004, we reversed
$0.8 million of previous accruals made under the old treaty.

13.

---



Nine Months
Ended September 30, 2005 and 2004

Total Revenue.
Total revenue increased $1.1 million, or 2%, to $57.0 million for the nine months
ended September 30, 2005 from $55.9 million for the same period in 2004. During
the nine months ended September 30, 2005, one Genomics Services customer
accounted for greater than 10% of our total revenue. During the nine months
ended September 30, 2004, no customer accounted for 10% or more of our total
revenue. Five customers accounted for approximately 35% and 31% of our total revenue
for the nine months ended September 30, 2005 and 2004, respectively. During the
nine months ended September 30, 2005 and 2004, 29% and 32% of our total revenue,
respectively, was from customers in the Pacific Rim, and 19% and 15% of our total
revenue, respectively, was from customers in Europe.

Genomics and
Toxicogenomics Services Revenue. Revenue from our Genomics Services, which consist
primarily of fees from subscription agreements to our BioExpress and
ToxExpress System databases, was $39.1 million for the nine months ended September
30, 2005, an increase of $0.7 million, or 2%, from $38.4 million for the same
period in 2004. The increase includes $5.6 million in fees from customers
granted perpetual licenses to certain data, $1.0 million in fees reflecting a full
period of revenue from an existing customer in 2005 as compared to 2004 and
$0.7 million in fees for subscriptions primarily from new customers. These
increases were partially offset by reduced revenue of $3.9 million from the
extensions of certain agreements at reduced service levels, the absence of $2.1
million in subscription fees from agreements that expired and $0.8 million in
lower sales for our software and related support services.

Non-clinical
Services Revenue. Revenue from our Non-clinical Services, which consist of fees from
non-clinical safety and pharmacology studies and related laboratory services,
remained unchanged at $17.5 million, reflecting the fact that we have not realized
the benefit of our recent capacity expansion in 2005.

Cost of
Non-clinical Services Revenue. Cost of Non-clinical Services revenue, which consists
of direct and indirect costs related to conducting non-clinical safety and
pharmacology studies and related laboratory services, including direct and
indirect labor, study materials and facility costs and depreciation, increased to
$21.0 million for the nine months ended September 30, 2005 from $19.5 million for
the same period in 2004. The increase primarily reflects $1.9 million in
increased facility, labor and support charges associated with the underutilization
of our capacity. As a result, our gross margins decreased to negative 20% for the
nine months ended September 30, 2005 from negative 12% in the same period in 2004.

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, decreased
to $23.5 million for the nine months ended September 30, 2005 from $32.6 million
for the same period in 2004. The decrease consisted primarily of a $6.2 million
reduction in database content generation expenses, including lower costs for
acquiring tissues and certain agreements with third parties, and a decrease of
$2.6 million in depreciation and amortization expense.

Research and
Development Expense. Research and development expenses, which now consist
primarily of costs associated with our ongoing development of our drug
repositioning and selection technologies, increased to $4.7 million for the nine
months ended September 30, 2005 from $1.4 million for the same period in 2004.
The increase was primarily a result of development efforts relating to our
drug repositioning and selection technologies, which began in mid-2004.

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 $23.6 million for the nine months
ended September 30, 2005 from $18.5 million for the same period in 2004. The
increase is largely due to an increase in our investment in our new DRS Business
and accrued costs under our employee incentive compensation plan.

Purchased
Research and Development. During the nine months ended September 30, 2004, we
incurred a one-time expense of $9.1 million from the write-off of purchased in-process research and development associated with our DRS Business.

Impairment of
Goodwill. As discussed previously under our Results of Operations for the three
months ended September 30, 2005 and 2004, during the nine months ended September
30, 2005, we recorded a non-cash expense of $32.8 million representing the
implied impairment to goodwill of our Non-clinical Services business.

Net Interest
Income. Net interest income increased to $1.8 million for the nine months ended
September 30, 2005 from $1.0 million for the same period in 2004, due primarily to
increases in our rates of return on investments.

Other Income.
Other income increased to $0.6 million for the nine months ended September 30, 2005
from zero for the same period in 2004, due to foreign currency transaction gains
relating to our subscription agreements with our Japanese customers. As a result
of changing our distribution arrangements in Japan, beginning in 2005, agreements
with our Japanese customers are now denominated in Japanese Yen.

Income Tax
(Credit) Expense. Income tax expense historically consisted of a 10% withholding
tax on certain payments by our Japanese customers. The withholding tax was
eliminated effective July 1, 2004, as a result of the new tax treaty between the
U.S. and Japan.

14.

---



LIQUIDITY AND
CAPITAL RESOURCES

From  inception
through  September 30, 2005, we have financed  our  operations  and  acquisitions
through the  issuance  and  sale of equity  securities  and payments  from  customers.
As  of September 30, 2005, we had  approximately  $91.3 million in  cash,  cash
equivalents  and  marketable  securities  available-for-sale,  compared  to  $102.9
million  as  of  December 31, 2004.

Net cash from
operating  activities  increased  to a positive  $5.1  million for the nine  months
ended  September  30, 2005  from a  negative  $0.3  million  for the same  period in
2004,  primarily  due to the timing of customer  payments  (including  prepayments)  for
our  services  and, to a lesser  extent,  an  improvement in operations.

During the nine
months  ended  September  30,  2005 and 2004,  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  nine  months  ended  September  30,  2005 and 2004 were  $12.5
million  and  $2.4  million,  respectively.  The  increase  in  capital  expenditures
was  primarily  due to  costs  to  increase  our  non-clinical  contract  research
capacity and other  facility  renovations.  For the  remainder  of 2005,  we expect to
incur  capital  expenditures  for additional  equipment  purchases of  approximately $2.5
million.

We  have
capitalized  software  development  costs  of  $1.5  million and $2.7 million for the
nine months  ended  September  30,  2005  and  2004,  respectively.  These  costs  relate
to  ongoing  efforts  to  enhance  the  software  platform  of our  BioExpress  and  ToxExpress  System  databases.  The  decrease in software  development  costs was
due to  increased  efforts on software  projects  not  subject to  capitalization  and a
reduction  in  our  software  development  work  force.  Software  development  costs are
being  amortized  over  their  expected  useful  life of three  years.  Software
development  costs  are  expected  to  continue  in 2005,  but at a reduced  rate,  as a
result of ongoing  efforts to further  enhance the  software  platform  of our
BioExpress  and  ToxExpress  System  databases.  In  addition,  in 2005 we  expect
to have  incurred  approximately  $5.5  million  of  database  upgrade  costs,  as we
enhance  the  content of our  BioExpress  System  database using the latest  commercially
available  microarray  platform  from  Affymetrix.  Database  upgrade  costs  are
amortized over their estimated useful life of two years.

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.

In July 2004,
we purchased  certain  technologies and hired an  associated  research  team  from
Millennium  Pharmaceuticals,  Inc.  (Millennium).  We  contractually  agreed
to  spend at  least $8.5 million over the first  eighteen  months  following  the
purchase  to  develop  and  commercialize  these  technologies.  As of  September  30,
2005,  we have  met this  commitment.  In  addition,  subject  to  achieving  certain
performance  milestones  by  the  end of  the  first  eighteen  months,  we may be
required  contractually  to invest up to an  additional  $6.0 million  over the
subsequent  twelve  months  (less amounts  spent in excess of the $8.5 million
commitment  above).  As of  September  30,  2005,  we expect to be subject  to  this
$6.0  million  commitment.  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.

To  generate
our  gene  expression  data,  we use  Affymetrix  microarrays,  instrumentation  and
software.  Under the terms  of  the  supply  and  license  agreement,  we  pay
Affymetrix  annual  subscription  fees for access to their microarrays and  a license to
use their  technology.  We  purchase  microarrays  and related  instrumentation  and
software  and,  beginning in  2005,  pay  royalties  based on a  percentage  of revenue
from  subscription  agreements  to  our  BioExpress  and  ToxExpress  System
databases.  For  2005,  we  agreed  to  purchase a minimum of $9.5  million in products
and  services  from  Affymetrix.  As  of  September  30,  2005,  we  have  purchased
$7.6 million in products  and  services  related to  this  commitment.  Our current
supply and  license  agreement  with  Affymetrix  expires  on  December  31,  2005  and
we are  currently negotiating a follow-on agreement.

Specific
future  financial  commitments  as of September  30,  2005 are set forth in the following
table:

|                                      |  |  | Total |        | Within 3 
Months |   | 2006 & 2007 |  | 2008 & 2009 |        | Beyond 2009 |  
|------------------------------------- |  |  | ----- | ------ | ---------------- | - | ----------- |  | ----------- | ------ | ----------- | -
|                                      |  |  |       |        |                  |   |             |  |             |        |             |  
|Capital lease obligations             |  |  | $     | 259    |                  | $ | 40          |  | $           | 219    |             | $
|Long-term debt                        |  |  |       | 655    |                  |   | 464         |  |             | 109    |             |  
|Technology program funding commitment |  |  |       | 5,759  |                  |   | 2,500       |  |             | 3,259  |             |  
|Acquired technologies payable         |  |  |       | 3,500  |                  |   | --          |  |             | 3,500  |             |  
|Payment obligations to Affymetrix     |  |  |       | 1,994  |                  |   | 1,994       |  |             | --     |             |  
|Operating leases                      |  |  |       | 27,953 |                  |   | 1,524       |  |             | 12,347 |             |  
|                                      |  |  |       |        |                  |   |             |  |             |        |             |  
|Total                                 |  |  | $     | 40,120 |                  | $ | 6,522       |  | $           | 19,434 |             | $
|                                      |  |  |       |        |                  |   |             |  |             |        |             |  

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 Risks Related to  Our Business and
Industry in our Annual  Report on Form 10-K  for the year ended December 31, 2004.

15.

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CRITICAL
ACCOUNTING POLICIES

Our
consolidated  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.

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 and
Toxicogenomics Services Revenue. Genomics Services revenue consists primarily of
fees earned under subscription agreements for all or parts of our gene
expression reference databases, the BioExpress System and ToxExpress System. We
have also granted to some customers perpetual licenses to certain data from our
BioExpress and ToxExpress System databases. In addition, we derive a smaller,
but growing, percentage of revenue from providing other services, including
various toxicogenomics reports, data generation and other professional services
and subscriptions to smaller solutions. Each of the subscription agreements for
our BioExpress and ToxExpress Systems customers is typically for a specific
multi-year term. Revenue from such subscription agreements is recognized ratably
over the period during which the customer has access to the BioExpress System and/or
ToxExpress System databases. Certain subscription agreements include 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 an 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 is recognized when the data has been delivered. 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  data
generation  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 for these
arrangements as the  predominant  final  element  is  delivered.  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.  These  types of arrangements  have increased our deferred  revenue as
of  September  30,  2005.  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.

Non-clinical
Services Revenue. Non-clinical Services revenue is primarily derived from fixed
price contracts with pharmaceutical and biotechnology companies. In addition, we
derive revenue from cost plus contracts with U.S. Government entities. 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 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 U.S. 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.

16.

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GOODWILL AND
INTANGIBLE ASSETS IMPAIRMENT

In 2003,  we
recorded  goodwill  of $43.0  million as a result  of  the  acquisition  of  TherImmune.
In  addition,  weve  previously  recorded  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 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  selected  historically
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  Non-clinical  Services  business) 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,  we  obtained an  appraisal  from an  independent
valuation  firm.  The  estimated  fair  value  of  our  Non-clinical  Services  business
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  representing  the  implied
impairment  of  goodwill  of  our  Non-clinical  Services business.

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

Our  assessment
of fair value of our  Genomics  Services  and  Non-clinical  Services  businesses  is
dependent on subjective  estimates  we make of  inherently  uncertain  future  net cash
flows over  extended  periods.  Accordingly,  our estimates of  future  periods  of the
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.  In the  past, we have  generally  not had a history of  collectability
problems  with our  customers;  however,  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.

EQUITY
INVESTMENTS

We  hold
equity  investments  in  several  companies  whose  businesses  may be  complementary  to
our business.  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  these
investments  that  may  not  be  reflected  in  an  investments  current  carrying
value,  thereby  possibly  requiring an impairment charge in the future.

17.

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RECENTLY ISSUED
ACCOUNTING PRONOUNCEMENTS

In 2004,  the
Financial  Accounting  Standards  Board issued a  revised Statement of Financial
Accounting  Standards (SFAS)  No.  123(R),  Share-Based  Payment, (SFAS
123(R)) and in  2005,  the SEC  approved  a new rule that will  require  us to
adopt the  statement  on January 1,  2006.  The new  statement  will  require  all
share-based  payments to  employees  to be  recognized  in the  financial  statements
based on their fair  values.  Currently,  we account for our  share-based  payments  to
employees  under the  intrinsic  value method of accounting  set forth in  Accounting
Principles  Board  Opinion  No.  25,  Accounting for Stock Issued to Employees. Additionally,
we  comply with the stock-based employee  compensation  disclosure  requirements  of SFAS
No.  148,  Accounting  for  Stock-Based  Compensation-Transition and Disclosure.

SFAS  123(R)
permits  companies  to  adopt  its  requirements  using one of two methods:

- A  modified
prospective method  in  which  compensation  cost is  recognized  beginning  with
the  effective  date  (a)  based on the  requirements  of  SFAS  123(R)  for  all
share-based  payments  granted  after  the  effective  date  and  (b)  based  on  the
requirements  of SFAS  123(R) for all awards  granted  to  employees  prior  to  the
effective  date of SFAS  123(R)  that remain  unvested on the effective date.
- A  modified
retrospective method  which  includes  the  requirements  of  the  modified
prospective  method  described  above,  but  also permits  companies to restate  based on
the  amounts  previously  recognized  under  SFAS  123(R)  for  purposes  of  pro  forma
disclosures  either  (a) all  prior  periods  presented  or (b) prior  interim  periods
of  the year of adoption.

We plan to
adopt SFAS  123(R)  using the  modified-prospective  method  and  have  not yet
completed  our  evaluation  of the  financial  statement  impact  of  adoption.  The
effects  on  stock  compensation  expense in periods after adoption will be  dependent
on the  number  and  type of  share-based  payments  issued  to  employees.  Based  on
anticipated  outstanding  share-based  payments as of  December  31,  2005,  we estimate
that  non-cash  stock  compensation  expense  in  2006  will  increase  by  approximately
$0.7  million to $1.0  million to  reflect the  continued  vesting of  outstanding  stock
option  grants that remain unvested as of December 31, 2005.

Item 3.
Quantitative and Qualitative Disclosure about Market Risk

We  have
limited  exposure  to  financial  market  risks,  including  changes in interest  rates.
At September 30, 2005,  we had  cash  and  cash  equivalents  of  approximately  $56.5
million and  marketable  securities  available-for-sale  of an  additional  $34.9
million.  We  invest  our  excess  cash  primarily  in  money  market  funds,
obligations  of the U.S.  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  September  30,  2005,  a
hypothetical  100 basis  point adverse  movement in interest  rates would have resulted
in an increase in the net loss of  approximately  $0.7 million  for  the  nine  months
ended  September  30,  2005.  Actual  changes  in  rates  may  differ  from  the
hypothetical  assumptions used in computing this exposure.

As a result  of
changing  our  distribution  arrangements  in  Japan,  beginning  in  2005,  we  are
subject  to  risk  from  changes in foreign  exchange  rates  relating to revenue  from
our subscription  agreements with 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 26% and 29% for the  three  and nine months ended  September 30,
2005,  respectively,  and  was primarily  derived from our  customers in Japan.  Exchange
rate  fluctuations  between the U.S. dollar and the currencies  of these  countries
could  result  in  positive  or  negative  fluctuations  in the amounts  relating to
revenue  reported in  our  consolidated  financial  statements.  A hypothetical  10%
adverse change in average  foreign  currency  movements  would  have  resulted  in  an
increase  in  the  net  loss  of  approximately  $1.1  million  for  the  nine  months
ended  September  30,  2005.  There can be no  assurance  that losses  related to this
currency risk will not occur.

Item 4.
Controls and Procedures

EVALUATION OF
DISCLOSURE CONTROLS AND PROCEDURES

As of September
30, 2005, an  evaluation  was performed  under  the  supervision  and  with  the
participation  of  our  management,  including  the Chief  Executive  Officer  (CEO)
and Chief Financial  Officer (CFO),  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 U.S.  Securities  and  Exchange
Commissions  (SECs)  rules  and  forms.  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 September  30,  2005,  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 Gene Logic is made known to  management,
including the CEO  and CFO,  particularly  during  the period  when our  periodic
reports are being prepared.

18.

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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  controls  effectiveness  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 third
quarter  of 2005 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 2. Change
in Securities and Use of Proceeds

None.

Item 3.
Defaults Upon Senior Securities

None.

Item 4.
Submission of Matters to a Vote of Security Holders

None.

Item 5. Other
Information

None.

19.

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Item 6.
Exhibits and Reports on Form 8-K

|A) |  | Exhibits:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|-- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|   |  | 31                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|   |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|   |  | 32                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|   |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|B) |  | Reports
      on Form 8-K:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|   |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|   |  | During the three months ended September
         30, 2005, the Company filed the following reports:                                                                                                                                                                                                                                                                                                                                                                                                                                                
|   |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|   |  | The  Current  Report on Form  8-K,  filed on July 20,
                      2005,  with  respect  to  the  Companys
                      financial  results for the three  months
                      ended June 30, 2005.
        The Current  Report on Form 8-K,  filed on  September
                      23,   2005,    with   respect   to   the
                      Companys   announcement   regarding  an
                      impairment  of the  goodwill  related to
                      its Non-clinical Services business.

20.

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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: | November 9, 2005 | By:                  
|      |                  |                      
|      |                  |                      
|      |                  |                      

21.

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