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**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


**Washington,
      D.C. 20549**





**FORM
      10-Q**





**(Mark
      One)**





x
            **Quarterly
                Report Pursuant To Section 13 Or 15(d) Of The Securities Exchange
                Act Of
                1934**


**For
      the quarterly period ended June 30, 2006**





**OR**





o
            **Transition
                Report Pursuant To Section 13 Or 15(d) Of The Securities Exchange
                Act Of
                1934**


**For
      the transition period from _______________ to
      _______________**








**Commission
      File Number: 0-23317**







GENE
      LOGIC INC.


(Exact
      name of registrant as specified in its charter)




**Delaware**
            **06-1411336**(State
                or other jurisdiction of
            (I.R.S.
                Employerincorporation
                or organization)
            Identification
                No.)





**610
      Professional Drive**


**Gaithersburg,
      Maryland 20879**


(Address
      of principal executive offices)


**(301)
      987-1700**


(Registrant’s
      phone number, including area code)








Indicate
      by check mark whether the registrant (1) has filed all reports required to
      be
      filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
      the
      preceding 12 months (or for such shorter period that the registrant was required
      to file such reports) and (2) has been subject to such filing requirements
      for
      the past 90 days: **** YES
x **** **** NO o ****





Indicate
      by check mark whether the registrant is a large accelerated filer, an
      accelerated filer, or a non-accelerated filer. See definition of “accelerated
      filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.





Large
      accelerated filer o  Accelerated
      filer x   Non-accelerated
      filer o





Indicate
      by check mark whether the registrant is a shell company (as defined in Rule
      12b-2 of the Exchange Act). YES o **** **** NO
x





The
      number
      of shares outstanding of the Registrant’s Common Stock, $.01 par value, was
      31,809,631 as of July 31, 2006.





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        to Table of Contents**





**GENE
      LOGIC INC.**








**TABLE
      OF CONTENTS**




**PART
                I**
            **FINANCIAL
                INFORMATION**Item
                1.
            Financial
                Statements
            3Consolidated
                Condensed Balance Sheets at June 30, 2006 and
                December 31, 2005
            3Consolidated
                Condensed Statements of Operations for the Three
                and Six Months Ended June 30, 2006 and 2005
            4Consolidated
                Condensed Statements of Cash Flows for the Six
                Months Ended June 30, 2006 and 2005
            5Notes
                to Consolidated Condensed Financial
                Statements
            6Item
                2.
            Management’s
                Discussion and Analysis of Results of Operations
                and Financial Condition
            13Item
                3.
            Quantitative
                and Qualitative Disclosure about Market
                Risk
            20Item
                4.
            Controls
                and Procedures
            20**PART
                II**
            **OTHER
                INFORMATION**Item
                1.
            Legal
                Proceedings
            21Item
                1A.
            Risk
                Factors
            21Item
                2.
            Unregistered
                Sales of Equity Securities and Use of
                Proceeds
            22Item
                3.
            Defaults
                Upon Senior Securities
            22Item
                4.
            Submission
                of Matters to a Vote of Security
                Holders
            22Item
                5.
            Other
                Information
            23Item
                6.
            Exhibits
            23Signatures
            
            24




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**PART
      I****FINANCIAL
      INFORMATION**





**Item
      1.****Financial
      Statements**





**GENE
      LOGIC INC.**





**CONSOLIDATED
      CONDENSED BALANCE SHEETS**


**(in
      thousands, except share data)**


**June
                  30,**
              
              **December
                  31,****2006**
              
              **2005****(Unaudited)****ASSETS**Current
                  assets:Cash
                  and cash equivalents
              
              $
              24,824
              
              $
              43,946Marketable
                  securities available-for-sale
              
              
              34,669
              
              
              38,179Accounts
                  receivable, net of allowance of $499 and $709 as of June 30, 2006
                  and
                  December
                  31, 2005, respectively1,822
              
              
              3,544Unbilled
                  services
              
              
              4,827
              
              
              7,779Inventory,
                  net
              
              
              2,830
              
              
              3,117Prepaid
                  expenses
              
              
              3,197
              
              
              2,403Other
                  current assets
              
              
              986
              
              
              961Total
                  current assets
              
              
              73,155
              
              
              99,929Property
                  and equipment, net
              
              
              28,667
              
              
              30,682Long-term
                  investments
              
              
              2,964
              
              
              3,239Goodwill
              
              
              12,913
              
              
              12,913Other
                  intangibles, net
              
              
              11,716
              
              
              13,399Other
                  assets
              
              
              964
              
              
              557Total
                  assets
              
              $
              130,379
              
              $
              160,719**LIABILITIES
                  AND STOCKHOLDERS' EQUITY**Current
                  liabilities:Accounts
                  payable
              
              $
              2,996
              
              $
              5,630Accrued
                  compensation and employee benefits
              
              
              4,504
              
              
              6,702Other
                  accrued expenses
              
              
              3,708
              
              
              4,269Current
                  portion of capital lease obligations
              
              
              132
              
              
              144Current
                  portion of long-term debt
              
              
              498
              
              
              497Acquired
                  technologies payable
              
              
              3,500
              
              
              3,492Deferred
                  revenue
              
              
              9,633
              
              
              11,595Total
                  current liabilities
              
              
              24,971
              
              
              32,329Capital
                  lease obligations, net of current portion
              
              
              —
              
              
              57Long-term
                  debt, net of current portion
              
              
              103
              
              
              127Deferred
                  rent
              
              
              2,938
              
              
              3,350Total
                  liabilities
              
              
              28,012
              
              
              35,863Commitments
                  and contingencies
              
              
              —
              
              
              —Stockholders'
                  equity:Preferred
                  stock, $.01 par value; 10,000,000 shares authorized; and no shares
                  issued
                  and outstanding
                  as of June 30, 2006 and December 31,2005
              
              
              —
              
              
              —Common
                  stock, $.01 par value; 60,000,000 shares authorized; 31,809,631
                  and
                  31,771,835 shares issued and outstanding as of June 30, 2006and
                    December 31, 2005, respectively
              
              
              318
              
              
              318Additional
                  paid-in-capital
              
              
              386,281
              
              
              385,586Accumulated
                  other comprehensive loss
              
              
              (179
              )
              
              (78
              )Accumulated
                  deficit
              
              
              (284,053
              )
              
              (260,970
              )Total
                  stockholders' equity
              
              
              102,367
              
              
              124,856Total
                  liabilities and stockholders' equity
              
              $
              130,379
              
              $
              160,719
 See
      accompanying notes.


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**GENE
      LOGIC INC.**





**CONSOLIDATED
      CONDENSED STATEMENTS OF
      OPERATIONS**


**(in
      thousands, except per share data)**


**(Unaudited)**


**Three
                  Months Ended**
              
              **Six
                  Months Ended****June
                  30,**
              
              **June
                  30,****2006**
              
              **2005**
              
              **2006**
              
              **2005**Revenue:Genomics
                  services
              
              $
              4,683
              
              $
              14,166
              
              $
              13,431
              
              $
              27,405Preclinical
                  services
              
              
              6,600
              
              
              5,820
              
              
              10,634
              
              
              12,254Drug
                  repositioning services
              
              
              9
              
              
              147
              
              
              29
              
              
              214Total
                  revenue
              
              
              11,292
              
              
              20,133
              
              
              24,094
              
              
              39,873Expenses
                  (1):Cost
                  of preclinical services
              
              
              7,172
              
              
              6,618
              
              
              13,580
              
              
              13,808Database
                  production
              
              
              7,566
              
              
              8,021
              
              
              15,299
              
              
              16,203Research
                  and development
              
              
              2,541
              
              
              1,380
              
              
              4,981
              
              
              2,841Selling,
                  general and administrative
              
              
              5,951
              
              
              7,743
              
              
              14,470
              
              
              15,276Total
                  expenses
              
              
              23,230
              
              
              23,762
              
              
              48,330
              
              
              48,128Loss
                  from operations
              
              
              (11,938
              )
              
              (3,629
              )
              
              (24,236
              )
              
              (8,255
              )Interest
                  (income), net
              
              
              (755
              )
              
              (617
              )
              
              (1,528
              )
              
              (1,117
              )Other
                  (income) expense
              
              
              103
              
              
              (402
              )
              
              100
              
              
              (427
              )Write-down
                  of equity investment
              
              
              —
              
              
              —
              
              
              275
              
              
              —Net
                  loss
              
              $
              (11,286
              )
              $
              (2,610
              )
              $
              (23,083
              )
              $
              (6,711
              )Basic
                  and diluted net loss per share
              
              $
              (0.35
              )
              $
              (0.08
              )
              $
              (0.73
              )
              $
              (0.21
              )Shares
                  used in computing basic and dilutednet
                  loss per share
              
              
              31,809
              
              
              31,742
              
              
              31,798
              
              
              31,725(1)
                  Line items include non-cash stock compensation expense as follows
                  (see
                  Note 2):Cost
                  of preclinical services
              
              $
              43
              
              $
              —
              
              $
              101
              
              $
              —Database
                  production
              
              
              43
              
              
              —
              
              
              101
              
              
              —Research
                  and development
              
              
              27
              
              
              —
              
              
              63
              
              
              —Selling,
                  general and administrative
              
              
              122
              
              
              —
              
              
              285
              
              
              —Total
                  non-cash stock compensation expense
              
              $
              235
              
              $
              —
              
              $
              550
              
              $
              —
 See
      accompanying notes.


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**GENE
      LOGIC INC.**





**CONSOLIDATED
      CONDENSED STATEMENTS OF CASH
      FLOWS**


**(in
      thousands)**


**(Unaudited)**


**Six
                  Months Ended****June
                  30,****2006**
              
              **2005**Cash
                  flows from operating activities:Net
                  loss
              
              $
              (23,083
              )
              $
              (6,711
              )Adjustments
                  to reconcile net loss to net cash flows from operating
                  activities:Depreciation
                  and amortization
              
              
              7,200
              
              
              7,443Inventory
                  impairment
              
              
              675
              
              
              —Write-down
                  of equity investment
              
              
              275
              
              
              —Non-cash
                  stock compensation expense
              
              
              550
              
              
              —Gain
                  on sale of marketable securities available-for-sale
              
              
              (31
              )
              
              —Loss
                  on abandonment of patents
              
              
              23
              
              
              18Loss
                  on disposal of property and equipment
              
              
              —
              
              
              50Laboratory
                  facility impairment
              
              
              476
              
              
              —Accrued
                  interest relating to acquired technologies payable
              
              
              8
              
              
              72Changes
                  in operating assets and liabilities:Accounts
                  receivable and unbilled services
              
              
              4,674
              
              
              (2,683
              )Inventory
              
              
              (388
              )
              
              (1,292
              )Prepaids
                  and other assets
              
              
              (1,226
              )
              
              380Accounts
                  payable
              
              
              (2,634
              )
              
              (1,756
              )Accrued
                  expenses and deferred rent
              
              
              (3,230
              )
              
              3,621Deferred
                  revenue
              
              
              (1,962
              )
              
              7,590Net
                  cash flows from operating activities
              
              
              (18,673
              )
              
              6,732Cash
                  flows from investing activities:Purchases
                  of property and equipment
              
              
              (2,002
              )
              
              (9,992
              )Purchases
                  of licenses and patent costs
              
              
              (425
              )
              
              (236
              )Software
                  development costs
              
              
              (628
              )
              
              (889
              )Database
                  upgrade costs
              
              
              (887
              )
              
              (720
              )Purchase
                  of marketable securities available-for-sale
              
              
              (19,275
              )
              
              (5,944
              )Proceeds
                  from sale and maturity of marketable securities
                  available-for-sale
              
              
              22,715
              
              
              26,694Net
                  cash flows from investing activities
              
              
              (502
              )
              
              8,913Cash
                  flows from financing activities:Proceeds
                  from issuance of common stock to employees
              
              
              145
              
              
              187Repayments
                  of capital lease obligations and equipment loan
              
              
              (92
              )
              
              (88
              )Net
                  cash flows from financing activities
              
              
              53
              
              
              99Net
                  increase (decrease) in cash and cash equivalents
              
              
              (19,122
              )
              
              15,744Cash
                  and cash equivalents, beginning of period
              
              
              43,946
              
              
              53,237Cash
                  and cash equivalents, end of period
              
              $
              24,824
              
              $
              68,981Supplemental
                  disclosure:Interest
                  paid
              
              $
              12
              
              $
              19
 See
      accompanying notes.


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**GENE
      LOGIC INC.**





**Notes
      to Consolidated Condensed Financial
      Statements**


**June
      30, 2006**


**(in
      thousands, except share and per share data)**


**(Unaudited)**





**Note
      1 — Organization and summary of significant accounting
      policies**





*Description
      of Business*





Gene
      Logic
      Inc., including its wholly owned subsidiaries, Gene Logic Laboratories Inc.
      (formerly TherImmune Research Corporation), Gene Logic Ltd. (United Kingdom
      subsidiary) and Gene Logic K.K. (Japan subsidiary), (collectively “Gene Logic”
or the “Company”), provides drug discovery and development services and
      solutions to pharmaceutical and biotechnology companies worldwide and United
      States Government agencies. The Company’s services are organized into three
      business segments: genomics and toxicogenomics services (“Genomics Division”),
      preclinical contract research services (“Preclinical Division”) and drug
      repositioning services (“Drug Repositioning Division”).





The
      Genomics Division consists of proprietary gene expression and toxicogenomics
      databases, toxicogenomics services, software tools, microarray data generation
      and analysis and other professional services and solutions. These services
      are
      designed to help customers discover and prioritize drug targets, identify
      biomarkers, predict toxicity and understand the mechanism of toxicity and obtain
      insights into the efficacy of specific compounds. The Preclinical Division
      consists of *in
      vivo* (in life)
      research studies and related laboratory services to enable customers primarily
      in the United States to assess the safety and pharmacologic effects of candidate
      compounds for the purpose of seeking FDA approval to initiate human trials.
      The
      Drug Repositioning Division, which resulted from the acquisition of certain
      technologies in 2004 that continue to be developed, consists of an integrated
      multi-technology platform used to assist customers in (i) identifying
      alternative indications for failed, stalled or deprioritized drug candidates,
      and in the future, potentially assist customers in (ii) expanding indications
      for currently marketed drugs; and (iii) prioritizing and identifying indications
      for compounds entering preclinical development.





The
      Company is currently conducting a review of its overall business strategy with
      the assistance of outside consultants. As a result of this review, the Company
      may contemplate a range of actions that could have a material impact on its
      business as it is presently conducted. The Company expects to complete its
      review by late September 2006. Using preliminary findings from this review,
      the
      Company recently initiated a restructuring of its Genomics Division intended
      to
      reduce its cash use. The Company gave notice of termination to approximately
      80
      employees, effective October 5, 2006, which will result in severance costs
      of
      $1,800. Once fully implemented, the Company estimates that these staff
      reductions will reduce its annual salary and fringe benefits costs by
      approximately $8,000. The Company expects to realize additional savings in
      certain non-employee costs in connection with this restructuring.





*Basis
      of Presentation*





The
      accompanying unaudited consolidated condensed financial statements have been
      prepared in accordance with U.S. Generally Accepted Accounting Principles
      (“GAAP”) for interim financial information and the instructions to Form 10-Q and
      Article 10 of Regulation S-X. The consolidated condensed balance sheet as of
      June 30, 2006, consolidated condensed statements of operations for the three
      and
      six months ended June 30, 2006 and 2005 and the consolidated condensed
      statements of cash flows for the six months ended June 30, 2006 and 2005 are
      unaudited, but include all adjustments (consisting of normal recurring
      adjustments) that the Company considers necessary for a fair presentation of
      the
      financial position, operating results and cash flows, respectively, for the
      periods presented. Although the Company believes that the disclosures in these
      financial statements are adequate to make the information presented not
      misleading, certain information and footnote information normally included
      in
      financial statements prepared in accordance with GAAP have been condensed or
      omitted pursuant to the rules and regulations of the United States Securities
      and Exchange Commission (“SEC”). All material intercompany accounts and
      transactions have been eliminated in consolidation.





Results
      for any interim period are not necessarily indicative of results for any future
      interim period or for the entire year. The accompanying unaudited consolidated
      condensed financial statements should be read in conjunction with the
      consolidated financial statements and notes thereto included in the Company’s
      Annual Report on Form 10-K for the year ended December 31, 2005.


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*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.





*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:


**June
                  30,**
              
              **December
                  31,****2006**
              
              **2005**Microarrays
              
              $
              2,969
              
              $
              2,199Laboratory
                  reagents
              
              
              404
              
              
              324Tissue
                  samples
              
              
              1,809
              
              
              2,2485,182
              
              
              4,771Less:Microarray
                  lower of cost or market reserve
              
              
              (675
              )
              
              —Tissue
                  sample reserves
              
              
              (1,677
              )
              
              (1,654
              )Inventory,
                  net
              
              $
              2,830
              
              $
              3,117


*Comprehensive
      Loss*





The
      Company accounts for comprehensive loss as prescribed by Statement of Financial
      Accounting Standards No. 130, “Reporting Comprehensive Income”. Comprehensive
      income (loss) is the total net income (loss) plus all changes in equity during
      the period except those changes resulting from investment by and distribution
      to
      owners. Total comprehensive loss, which primarily includes unrealized gains
      or
      losses in the Company’s marketable securities available-for-sale, was $11,314
      and $2,552 for the three months ended June 30, 2006 and 2005, respectively,
      and
      $23,184 and $6,637 for the six months ended June 30, 2006 and 2005,
      respectively.





*New
      Accounting Pronouncements*





In
      July
      2006, the Financial Accounting Standards Board issued Interpretation No. 48,
      “Accounting for Uncertainty in Income Taxes” (“FIN 48”) which clarifies the
      accounting for income taxes by prescribing the minimum recognition threshold
      a
      tax position is required to meet before being recognized in the financial
      statements. FIN 48 also provides guidance on derecognition, measurement,
      classification, interest and penalties, accounting in interim periods,
      disclosure and transition. FIN 48 is effective for fiscal years beginning after
      December 15, 2006. The Company does not expect the adoption of this
      Interpretation to have a material impact on its financial
      statements.





Effective
      January 1, 2006, the Company adopted the fair value recognition provisions
      of
      Statement of Financial Accounting Standards (“SFAS”) No. 123 (revised 2004),
“Share-Based Payment” ** (“SFAS
      123R”), using the modified prospective transition method and therefore has not
      restated results for prior periods. Under this transition method, stock-based
      compensation expense for the three and six months ended June 30, 2006 includes
      compensation expense for all stock-based compensation awards granted (i) prior
      to, but not yet vested as of, January 1, 2006, based on the grant date fair
      value estimated in accordance with the original provision of SFAS No. 123,
      “Accounting for Stock-Based Compensation” ** (“SFAS
      123”) and (ii) after January 1, 2006 based on the grant date fair value
      estimated in accordance with the provisions of SFAS 123R. For the first half
      of
      2006, stock-based compensation awards consisted of options awarded under the
      1997 Equity Incentive Plan and the 1997 Non-Employee Directors’ Stock Option
      Plan. The Company recognizes these compensation costs on a straight-line basis
      over the requisite service period of the award, which is generally the option
      vesting period and typically occurs ratably over periods ranging from two to
      four years. Prior to the adoption of SFAS 123R, the Company recognized
      stock-based compensation expense in accordance with Accounting Principles Board
      Opinion No. 25, “Accounting for Stock Issued to Employees” (“APB 25”). In March
      2005, the SEC issued Staff Accounting Bulletin No. 107 (“SAB 107”) regarding the
      SEC’s interpretation of SFAS 123R and the valuation of share-based payments for
      public companies. The Company has applied the provisions of SAB 107 in its
      adoption of SFAS 123R. See Note 2 to the Consolidated Condensed Financial
      Statements for a further discussion on stock-based compensation.


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The
      Company’s results of operations for the three and six months ended June 30, 2006
      were impacted by the recognition of $235 and $550, respectively, in non-cash
      expense related to the fair value of the Company’s stock-based compensation
      awards. Based on outstanding share-based awards as of December 31, 2005, the
      Company estimates that non-cash stock compensation expense in 2006 will be
      approximately $700 to reflect the continued vesting of outstanding stock option
      grants that remained unvested as of December 31, 2005. The impact of stock
      compensation expense in future periods will be dependent on the number and
      type
      of share-based payments issued to employees and non-employee directors and
      this
      estimate does not include the impact of other possible stock-based awards that
      could be made during the balance of 2006.





In
      November 2005, the Financial Accounting Standards Board issued FASB Staff
      Position No. 115-1, “The Meaning of Other-Than-Temporary Impairment and Its
      Application to Certain Investments” (“FSP FAS 115-1”). FSP FAS 115-1 addresses
      the determination as to when an investment is considered impaired, whether
      that
      impairment is other than temporary and the measurement of an impairment loss.
      FSP FAS 115-1, which is effective for reporting periods after December 31,
      2005,
      also includes accounting considerations subsequent to the recognition of an
      other-than-temporary impairment and requires certain disclosures about
      unrealized losses that have not been recognized as other-than-temporary
      impairments. The adoption of FSP FAS 115-1 had no material impact on the
      Company’s financial position, results of operations or cash flows.





**Note
      2 — Stock-based compensation**





At
      June
      30, 2006, the Company has the following stock-based compensation plans: 1997
      Equity Incentive Plan (the “Stock Plan”), 1997 Non-Employee Directors’ Stock
      Option Plan (the “Directors’ Plan”) and Employee Stock Purchase Plan (the
“ESPP”).





*Stock
      Plan*





The
      Company has a Stock Plan, under which the Compensation Committee (the
“Committee”) of the Company’s Board of Directors, at its discretion, can grant
      stock options to employees, certain employee directors and consultants of the
      Company and related corporations. The Stock Plan currently authorizes the grant
      of stock options for up to 10,600,000 shares of Common Stock. The stock options
      granted under the Stock Plan expire at the earlier of termination or the date
      specified by the Committee at the date of grant, but not more than ten years
      from such grant date. As noted later, the Stock Plan was amended upon approval
      of the Stockholders in June 2006, to allow the issuance of restricted stock
      awards and to make certain other changes.





*Directors’
      Plan*





The
      Company has a Directors’ Plan to provide for granting of stock options to
      purchase up to 900,000 shares of Common Stock to non-employee directors of
      the
      Company. Stock options are to be granted at the fair market value of the Common
      Stock at the grant date. The stock options granted under the Directors’ Plan
      expire ten years from such grant date.





*ESPP*





The
      Company has an ESPP that currently allows for an aggregate of 1,250,000 shares
      of Common Stock to be purchased. The ESPP allowed employees to purchase shares
      of Common Stock of the Company at each purchase date, through payroll deductions
      of up to a maximum of 15% of their combined salary and bonus, at 85% of the
      lesser of the market price of the shares at the time of purchase or the market
      price on the beginning date of an offering (or, if later, the date during the
      offering when the employee was first eligible to participate), with a limit
      of
      600 shares per purchaser per purchase date. The ESPP was suspended effective
      February 1, 2005.





Prior
      to
      January 1, 2006, the Company accounted for these plans under the recognition
      and
      measurement provisions of APB 25. Accordingly, the Company recognized
      compensation expense, if any, only to the extent that the fair value of the
      underlying stock on the date of grant exceeded the exercise or acquisition
      price
      of the stock or stock-based award. Any resulting compensation expense was
      recognized ratably over the associated service period, which was generally
      the
      option vesting period. No stock-based compensation expense was recognized in
      the
      Consolidated Condensed Statement of Operations for the three and six months
      ended June 30, 2005, as all stock options granted by the Company had been
      granted with an exercise price equal to the fair value on the grant date and
      the
      ESPP was considered non-compensatory under APB 25.





Effective
      January 1, 2006, the Company adopted the fair value recognition provisions
      of
      SFAS 123R, using the modified prospective transition method and therefore has
      not restated results for prior periods. Under this transition method,
      stock-based compensation expense for the first half of 2006 included
      compensation expense for all stock-based compensation awards granted (i) prior
      to, but not yet vested as of, January 1, 2006 based on the grant date fair
      value
      estimated in accordance with the original provisions of SFAS 123, and (ii)
      after
      January 1, 2006 based on the grant date fair value estimated in accordance
      with
      the provisions of SFAS 123R.




As
      a
      result of adopting SFAS 123R, the Company’s net loss in the Consolidated
      Condensed Financial Statements for the three and six months ended June 30,
      2006
      was $235 and $550, respectively, higher than if the Company had continued to
      account for stock-based


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compensation
      under APB 25. The impact on basic and diluted net loss per share for the three
      and six months ended June 30, 2006 was $0.01 and $0.02 per share, respectively.





Prior
      to
      January 1, 2006, the Company provided pro forma disclosure amounts in accordance
      with SFAS No. 148 “Accounting for Stock-Based Compensation—Transition and
      Disclosure”, as if the fair value method defined by SFAS 123R had been applied
      to its stock-based compensation. To facilitate quarter-to-quarter comparisons,
      the following table illustrates the effect on net loss and net loss per share
      as
      if the Company had applied the fair value recognition provisions of SFAS 123R
      to
      stock-based compensation for the indicated period:


**Three
                  Months**
              
              **Six
                  Months****Ended**
              
              **Ended****June
                  30,**
              
              **June
                  30,****2005**
              
              **2005**Net
                  loss, as reported
              
              $
              (2,610
              )
              $
              (6,711
              )Add:
                  Stock-based employee compensation expense includedin
                  reported net loss
              
              
              —
              
              
              —Deduct:
                  Stock-based employee compensation expense determinedunder
                  fair value-based method for all awards
              
              
              (530
              )
              
              (1,145
              )Pro
                  forma net loss
              
              $
              (3,140
              )
              $
              (7,856
              )Basic
                  and diluted net loss per share:As
                  reported
              
              $
              (0.08
              )
              $
              (0.21
              )Pro
                  forma
              
              $
              (0.10
              )
              $
              (0.25
              )


A
      recent
      amendment to the Stock Plan was approved by the Stockholders in June 2006,
      allowing the issuance of restricted stock awards, in addition to stock options.
      The amendment also eliminates awards to consultants after June 1, 2006, enables
      the Compensation Committee to structure awards to be performance-based,
      eliminates option repricing except (i) in connection with a change in
      capitalization of the Company or (ii) with stockholder approval and extends
      the
      term of the Stock Plan.





The
      Company determined the fair value of each option grant on the date of grant
      using the Black-Scholes option pricing model for the indicated periods, with
      the
      following assumptions:




**Three
                  Months Ended**
              
              **Six
                  Months Ended****June
                  30,**
              
              **June
                  30,****2006**
              
              **2005**
              
              **2006**
              
              **2005**Weighted
                  average fair value of grants
              
              $
              1.04
              
              $
              1.24
              
              $
              1.11
              
              $
              1.26Expected
                  volatility
              
              
              57
              %
              
              51
              %
              
              55
              %
              
              52
              %Risk-free
                  interest rate
              
              
              5.11
              %
              
              3.61%
                  to 3.73
              %
              
              4.49%
                  to 5.11
              %
              
              3.41%
                  to 3.93
              %Expected
                  lives
              
              
              3
                  years
              
              
              3
                  years
              
              
              3
                  years
              
              
              3
                  yearsDividend
                  rate
              
              
              0
              %
              
              0
              %
              
              0
              %
              
              0
              %


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The
      following is a summary of option activity for the six months ended June 30,
      2006:




**Outstanding
                  Options****Weighted****Average****Weighted**
              
              **Remaining**
              
              **Aggregate****Average**
              
              **Contractual**
              
              **Intrinsic****Shares**
              
              **Exercise
                  Price**
              
              **Life
                  (Years)**
              
              **Value****Outstanding
                  at January 1, 2006**
              
              
              5,515,504
              
              $
              6.86Options
                  granted
              
              
              101,500
              
              $
              2.66Options
                  exercised
              
              
              (37,796
              )
              $
              3.85Options
                  cancelled
              
              
              (492,433
              )
              $
              6.60**Outstanding
                  at June 30, 2006**
              
              
              5,086,775
              
              $
              6.82
              
              
              5.7
              
              $
              41**Vested
                  and expected to vest at June 30, 2006**
              
              
              4,850,423
              
              $
              6.96
              
              
              5.6
              
              $
              41**Exercisable
                  at June 30, 2006**
              
              
              4,443,176
              
              $
              7.28
              
              
              5.3
              
              $
              41




The
      aggregate intrinsic value in the table above represents the total intrinsic
      value (the difference between the Company’s closing stock price on the last
      trading day of the second quarter of 2006 and the exercise price, multiplied
      by
      the number of in-the-money options) that would have been received by the option
      holders had all option holders exercised their options on June 30, 2006. This
      amount is subject to change based on changes to the fair market value of the
      Company’s Common Stock. Total intrinsic value of options exercised for the six
      months ended June 30, 2006 was not material.




As
      of June
      30, 2006, $585 of total unrecognized compensation cost related to stock options
      is expected to be recognized over a weighted-average period of 2.0 years. This
      estimate does not include the impact of other possible stock-based awards that
      may be made during the balance of 2006, nor does it take into account the
      restructuring which was announced in August 2006, as described in Note
      4.





Cash
      received from option exercises for the six months ended June 30, 2006 was $145.





**Note
      3 — Segment information**





The
      Company’s operations are organized into three business segments: Genomics
      Division, Preclinical Division and Drug Repositioning Division, all of which
      are
      more fully described in Note 1.





The
      following table presents revenue and operating income (loss) for each of these
      segments. Management uses these measures to evaluate segment performance. To
      arrive at operating income (loss) for each segment, management has included
      all
      direct costs for providing the segment’s services and an allocation for
      corporate overhead on a consistent and reasonable basis. Management has excluded
      interest (income) expense, other (income) expense and write-down of equity
      investment, and could also exclude certain unusual or corporate-related costs
      in
      the future. In addition, while the Company’s Consolidated Condensed Statements
      of Operations include adjustments to reflect the elimination of inter-segment
      transactions, individual segments may include these types of transactions.
      Management does not believe these transactions are material and believes that
      their inclusion would not impact either management’s or shareholders’
understanding of the operations of the segments. For purpose of clarity, revenue
      is reported net of inter-segment transactions. The Company does not identify
      or
      allocate, nor does management evaluate, assets by segment.


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




**Three
                  Months Ended**
              
              **Six
                  Months Ended****June
                  30,**
              
              **June
                  30,****2006**
              
              **2005**
              
              **2006**
              
              **2005****Genomics
                  Services**Revenue
              
              $
              4,683
              
              $
              14,166
              
              $
              13,431
              
              $
              27,405Operating
                  income (loss) (1)
              
              
              (6,064
              )
              
              1,669
              
              
              (9,873
              )
              
              2,504Depreciation
                  and amortization expense
              
              
              2,498
              
              
              2,601
              
              
              4,970
              
              
              5,410**Preclinical
                  Services**Revenue
              
              $
              6,600
              
              $
              5,820
              
              $
              10,634
              
              $
              12,254Operating
                  income (loss) (1)
              
              
              (2,502
              )
              
              (2,838
              )
              
              (7,466
              )
              
              (5,840
              )Depreciation
                  and amortization expense
              
              
              829
              
              
              782
              
              
              1,655
              
              
              1,769**Drug
                  Repositioning Services**Revenue
              
              $
              9
              
              $
              147
              
              $
              29
              
              $
              214Operating
                  income (loss) (1)
              
              
              (3,372
              )
              
              (2,460
              )
              
              (6,897
              )
              
              (4,919
              )Depreciation
                  and amortization expense
              
              
              290
              
              
              146
              
              
              575
              
              
              264





(1)
            Includes
                non-cash stock compensation expenses of $86, $83 and $66****and
                $201, $193 and $156 for the three and six months ended June 30, 2006,
                respectively, for Genomics services, Preclinical services and Drug
                repositioning services.





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




**Three
                  Months Ended**
              
              **Six
                  Months Ended****June
                  30,**
              
              **June
                  30,****2006**
              
              **2005**
              
              **2006**
              
              **2005****Segment
                  Operating Income (Loss)**Genomics
                  services
              
              $
              (6,064
              )
              $
              1,669
              
              $
              (9,873
              )
              $
              2,504Preclinical
                  services
              
              
              (2,502
              )
              
              (2,838
              )
              
              (7,466
              )
              
              (5,840
              )Drug
                  repositioning services
              
              
              (3,372
              )
              
              (2,460
              )
              
              (6,897
              )
              
              (4,919
              )(11,938
              )
              
              (3,629
              )
              
              (24,236
              )
              
              (8,255
              )Interest
                  (income), net
              
              
              (755
              )
              
              (617
              )
              
              (1,528
              )
              
              (1,117
              )Other
                  (income) expense
              
              
              103
              
              
              (402
              )
              
              100
              
              
              (427
              )Write-down
                  of equity investment
              
              
              —
              
              
              —
              
              
              275
              
              
              —Net
                  loss
              
              $
              (11,286
              )
              $
              (2,610
              )
              $
              (23,083
              )
              $
              (6,711
              )


During
      the
      three months ended June 30, 2006, one customer of the Company’s Genomics and
      Preclinical Divisions accounted for 10% or more of the Company’s revenue
      (10.6%). During the six months ended June 30, 2006, no customer accounted for
      10% or more of the Company’s revenue. During the three and six months ended June
      30, 2005, one Genomics Division customer accounted for 10% or more of the
      Company’s revenue (18.2% and 11.0%, respectively). The following table sets
      forth information on the composition of the Company’s total revenue by
      geographic region:




**Geographic
                  Region****North
                  America**
              
              **Europe**
              
              **Pacific
                  Rim**For
                  the three months ended:June
                  30, 2006
              
              
              72%
              
              
              16%
              
              
              12%June
                  30, 2005
              
              
              49%
              
              
              27%
              
              
              24%For
                  the six months ended:June
                  30, 2006
              
              
              72%
              
              
              14%
              
              
              14%June
                  30, 2005
              
              
              51%
              
              
              19%
              
              
              30%


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**Note
      4 — Subsequent event**





As
      previously discussed in Note 1, the Company has notified approximately 80
      employees that their employment will terminate effective October 5, 2006,
      consistent with the Worker Adjustment and Retraining Notification (WARN) Act.
      When the terminations are effective, the affected employees will be given
      severance that is expected to cost approximately $1,800, which costs will be
      recorded in the third quarter of 2006, but not paid until the fourth quarter
      of
      2006 due to the timing of the actual termination date.


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**Item
      2.****Management’s
      Discussion and Analysis of Results of Operations and Financial
      Condition**





*This
      Quarterly Report on Form 10-Q (“Form 10-Q”) contains forward-looking statements
      regarding future events and the future results of Gene Logic Inc. (“Gene Logic”)
      that are based on current expectations, estimates, forecasts and projections
      about the industries in which Gene Logic operates and the beliefs and
      assumptions of the management of Gene Logic. Words such as “expects,”
“anticipates,” “targets,” “goals,” “projects,” “intends,” “plans,” “believes,”
“seeks,” “estimates,” variations of such words, and similar expressions are
      intended to identify such forward-looking statements. These forward-looking
      statements are only predictions and are subject to risks, uncertainties and
      assumptions that are difficult to predict. Therefore, actual results may differ
      materially and adversely from those expressed in any forward-looking statements.
      Factors that might cause or contribute to such differences include those
      discussed in the Company’s Annual Report on Form 10-K for the year ended
      December 31, 2005 under the section entitled “Risk Factors” and in Part II, Item
      1A of this Form 10-Q. Gene Logic undertakes no obligation to revise or update
      publicly any forward-looking statements to reflect any change in management’s
      expectations with regard thereto or any change in events, conditions, or
      circumstances on which any such statements are based.*





Unless
      the
      context otherwise requires, references in this Form 10-Q to “Gene Logic,” “Gene
      Logic Laboratories Inc.,” “Gene Logic Ltd.,” “Gene Logic K.K.,” the “Company,”
“we,” “us,” and “our” refer to Gene Logic Inc. and its wholly owned
      subsidiaries. Gene Logic®, GeneExpress®, BioExpress®, ToxExpress®, ASCENTA® and
      Genesis Enterprise System® are registered trademarks of Gene Logic. Drug
      Repositioning and SelectionTM, SCIANTISTM, ToxScreenTM, ToxShieldTM, ToxEdgeTM,
      ToxPlusTM and Phase R SM are
      trademarks of Gene Logic.





**Overview**





We
      conduct
      our operations through three business segments:





·
            **Genomics
                Division**:
                we
                sell subscriptions and perpetual licenses to our proprietary gene
                expression and toxicogenomics databases, and provide toxicogenomics
                services, software tools, microarray data generation and analysis
                and
                other professional services and solutions to customers worldwide
                to help
                in their drug research and
                development.


·
            **Preclinical
                Division**:
                we
                provide*in
                vivo*(in
                life) studies and related laboratory services to enable customers
                primarily in the United States to assess the safety and pharmacologic
                effects of candidate compounds for the purpose of seeking FDA approval
                to
                initiate human trials.


·
            **Drug
                Repositioning Division**:
                we
                have partnerships with customers to identify alternative indications
                for
                their failed, stalled or deprioritized drug candidates through the
                application of an integrated multi-technology platform, with the
                goal of
                returning such candidates to the drug development
                pipeline.





We
      are
      currently conducting a review of our overall business strategy with the
      assistance of outside consultants. As a result of this review, we may
      contemplate a range of actions that could have a material impact on our business
      as it is presently conducted. We expect to complete our review by late September
      2006. Using preliminary findings from this review, we recently initiated a
      restructuring of our Genomics Division intended to reduce its cash use. We
      gave
      notice of termination to approximately 80 employees, effective October 5, 2006,
      which will result in severance costs of $1.8 million. Once fully implemented,
      we
      estimate that these staff reductions will reduce our annual salary and fringe
      benefits costs by approximately $8 million. We expect to realize additional
      savings in certain non-employee costs in connection with this
      restructuring.





Historically,
      we have derived a majority of our Genomics Division revenue from licenses to
      our
      databases, in the form of multi-year subscriptions and annual subscriptions
      to
      our smaller databases or a subset of our larger databases; more recently, we
      have also granted perpetual licenses to our data and/or software tools. Fees
      are
      payable ratably over the life of the agreement for multi-year agreements,
      ratably or up-front for shorter-term agreements and, in the case of perpetual
      licenses, upon delivery of the data or software. Generally, our Genomics
      Division contracts may be terminated in the event of breach by either party
      not
      cured within any applicable cure period. In the past, we have invested in new
      database content, upgraded our databases and developed new versions of our
      software tools. Future investments in these areas are being evaluated as part
      of
      our strategic review of our Genomics Division.





Our
      Preclinical Division revenue is primarily from fixed price contracts, under
      which a portion of the contract price is due at the time the study starts,
      with
      the balance payable upon the achievement of various milestones over the study’s
      duration. We also receive some revenue from cost plus contracts with United
      States Government agencies, under which we are reimbursed for our budgeted
      costs, subject to periodic audit, and receive a fixed fee. Costs under cost
      plus
      contracts are reimbursed monthly, along with a pro rata portion of the fixed
      fee. Contracts may range in duration from a few weeks to several years. Most
      of
      our Preclinical Division contracts may be terminated by the customer at any
      time, subject to payment to us of certain costs and, in some instances, a
      portion of our profit or fixed fee, or a cancellation fee.





The
      success of the Preclinical Division is dependent on our capacity and on our
      achieving optimal use of that capacity. Results in 2006 are beginning to show
      the positive impact of our recent capacity expansion and other improvements
      in
      operations and business development.


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Our
      Drug
      Repositioning Division resulted from our acquisition of certain technology
      from
      Millennium Pharmaceuticals, Inc. (“Millennium”) in 2004. We have invested, and
      continue to invest, significant amounts in the development of the Drug
      Repositioning technologies and of the Drug Repositioning Division.





We
      have
      established partnerships to reposition drug candidates with several
      pharmaceutical and biotechnology customers. Under these agreements, we do not
      typically derive up-front revenue. Generally, a partner agrees to make available
      a stated number of failed, stalled or deprioritized drug candidates as to which
      we will conduct the initial evaluation using our integrated multi-technology
      platform, at our expense. We will inform our partner of any possible new
      indications we identify. In some instances, our partner has the option to elect
      to have us conduct mutually agreed upon animal model validation studies based
      on
      our hypothesis, which may be partially or entirely at our expense. Validated
      drug candidates would then be returned to a partner’s pipeline at its sole
      election and we could receive milestone payments if a drug candidate is returned
      to the partner’s development pipeline and royalties and/or milestone payments
      based on sales if the drug candidate begins commercial sales. If a partner
      declined a drug candidate for an indication we had found, we could in some
      cases
      acquire the rights to develop the drug candidate for the particular indication.
      We have acquired one such candidate, but have not established a development
      plan
      for that candidate. Under the terms of another agreement, we may become equal
      owners with our partner of drug candidates for which potential new therapeutic
      utility is discovered and we would jointly decide how to proceed with the
      development, commercialization and funding of such candidate.





Revenue
      from our Drug Repositioning Division has not been significant to date and we
      do
      not expect to receive significant revenue under any of our drug repositioning
      agreements in 2006.





We
      have
      incurred operating losses in each year since our inception, including losses
      of
      $48.3 million in 2005, $28.5 million in 2004 and $24.8 million in 2003. At
      June
      30, 2006, we had an accumulated deficit of $284.1 million. Our losses have
      resulted principally from costs incurred in the development, marketing and
      sale
      of services from our Genomics and Preclinical Divisions, development of the
      Drug
      Repositioning Division, the impairment of our Preclinical Division goodwill
      and
      acquisitions of research and development. These costs have exceeded our revenue
      and we expect to incur additional operating losses in the future.





**Results
      of Operations**





*Three
      Months Ended June 30, 2006 and 2005*





**Total
      Revenue.** Total
      revenue decreased 44% to $11.3 million for the three months ended June 30,
      2006
      as compared to $20.1 million for the same period in 2005. During the three
      months ended June 30, 2006, one customer of our Genomics and Preclinical
      Divisions, accounted for greater than 10% of our total revenue. During the
      three
      months ended June 30, 2005, one Genomics Division customer, accounted for
      greater than 10% of our total revenue. During the three months ended June 30,
      2006 and 2005, 12% and 24% of our total revenue, respectively, was from
      customers in the Pacific Rim, and 16% and 27% of our total revenue,
      respectively, was from customers in Europe. The decline in revenue from
      customers in the Pacific Rim reflects the impact of agreements for Genomics
      services that were terminated, renegotiated at reduced service levels or
      transitioned into perpetual licenses in 2005. The decline in revenue from
      customers in Europe primarily reflects the impact of a deliverable to a Genomics
      Division customer in 2005 which did not recur at the same level in
      2006.





***Genomics
      Services Revenue.*** Revenue
      from our Genomics services, the majority of which consists of fees from
      subscription agreements to our BioExpress and ToxExpress System databases,
      was
      $4.7 million for the three months ended June 30, 2006, a decrease of $9.5
      million, or 67%, from $14.2 million for the same period in 2005. The
      2006 decrease in revenue resulted from declining
      subscription revenue, the absence of anticipated sales of perpetual
      licenses to database products that failed to materialize and slower than
      anticipated sales growth for microarray data generation and analysis services.
      Specifically, the 2006 results reflect the absence of $6.9 million in
      subscription fees from agreements that have expired and $3.1 million in
      additional fees from customers to whom we granted perpetual licenses to certain
      data, partially offset by higher revenue of $0.8 million from increased
      microarray data generation and analysis services in 2006. For 2006, we presently
      anticipate our Genomics Division revenue to be significantly lower than
      previously anticipated.





In
      2006,
      long-term subscription agreements with five customers will expire by their
      terms
      and two agreements allow for early termination at the customer’s election. These
      agreements accounted for 20% of our total 2005 revenue and 28% of our 2005
      Genomics services revenue. Also, these agreements accounted for 33% and 59%
      of
      our total revenue and Genomics services revenue, respectively, for the six
      months ended June 30, 2006. As to the two agreements that were subject to early
      termination at the customer’s election, one customer terminated its agreement
      early and one customer elected to continue its agreement. As to the remaining
      five agreements, three agreements have expired by their terms and one was
      terminated by mutual agreement. Two of these customers purchased perpetual
      licenses to data and software in connection with their respective terminations.
      Negotiations are underway for the remaining agreement. There is no assurance
      that the remaining agreement scheduled to expire will be extended or that any
      agreement resulting from our discussions with such customer will be on terms
      comparable to, or as favorable to us, as the existing subscription
      agreement.





***Preclinical
      Services Revenue.*** Revenue
      from our Preclinical services, which consist of fees from preclinical safety
      and
      pharmacology studies and related laboratory services, was $6.6 million for
      the
      three months ended June 30, 2006, an increase of $0.8 million, or
      13%,


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from
      $5.8
      million for the same period in 2005. The increase is primarily attributable
      to
      increased utilization of capacity and an increase in the number of large-animal
      studies conducted in the three months ended June 30, 2006. For the remainder
      of
      2006, we expect continued improvements in revenue due to increased utilization
      of our capacity.





**Cost
      of Preclinical Services Revenue.** Cost of
      Preclinical services revenue consists of direct and indirect costs related
      to
      conducting preclinical safety and pharmacology studies and related laboratory
      services, including direct and indirect labor, study materials and facility
      costs and depreciation. Cost of preclinical services revenue increased $0.6
      million for the three months ended June 30, 2006 to $7.2 million from $6.6
      million for the same period in 2005 reflecting higher revenue of $0.8 million
      in
      2006, partially offset by slight improvements in gross margins to negative
      9%
      for the three months ended June 30, 2006 from negative 14% in the same period
      in
      2005. When compared to the first quarter of 2006, gross margins for the second
      quarter of 2006 improved significantly from negative 59% to negative 9%, which
      reflects an improving trend in our business. For the remainder of 2006, we
      expect gross margins to continue to improve, largely as a result of increased
      capacity utilization.





**Database
      Production Expense.** Database
      production expenses, which consist primarily of costs related to the acquisition
      and processing of tissues and overhead expenses needed to generate the content
      of the BioExpress and ToxExpress System databases and costs to provide
      microarray data generation and analysis services, decreased to $7.6 million
      for
      the three months ended June 30, 2006 from $8.0 million for the same period
      in
      2005.  The
      decrease consisted primarily of a $1.3 million reduction in database content
      generation expenses, including $0.8 million in lower costs for agreements with
      third parties, partially offset by a $0.7 million lower of cost or market
      impairment of inventory in 2006. For the remainder of 2006, we expect database
      production expenses to decrease largely due to reductions in related
      personnel.





**Research
      and Development Expense.** Research
      and development expenses, which consist primarily of costs associated with
      the
      ongoing development of our drug repositioning technologies, increased to $2.5
      million for the three months ended June 30, 2006 from $1.4 million for the
      same
      period in 2005. The increase was primarily a result of increased development
      efforts related to our drug repositioning technologies and evaluation of
      customer-supplied drug candidates under the terms of our drug repositioning
      partnerships. For the remainder of 2006, we expect research and development
      expenses to increase modestly, as we continue to develop our drug repositioning
      technologies and do repositioning work on customer-supplied drug
      candidates.





**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, decreased to $6.0 million for the three months ended June 30, 2006
      from $7.7 million for the same period in 2005. The decrease is largely due
      to a
      reduction of $0.8 million in costs under our 2006 annual employee incentive
      compensation plan due to our Genomics Division revenue shortfall and other
      savings from general cost controls over a wide range of expense categories,
      partially offset by $0.1 million in non-cash compensation expense resulting
      from
      the impact of the Statement of Financial Accounting Standards No. 123 (revised
      2004), “Share-Based Payment” (“SFAS 123R”). Beginning in the fourth quarter
      of 2006, we expect selling, general and administrative expenses to be lower
      as a
      result of the reduction in our workforce.





**Net
      Interest Income.** Net
      interest income increased to $0.8 million for the three months ended June 30,
      2006 from $0.6 million for the same period in 2005, due to increases in our
      rates of return on investments, partially offset by a decline in the balance
      of
      our cash and cash equivalents and marketable securities
      available-for-sale.





**Other
      (Income) Expense.** Other
      (income) expense was an expense of $0.1 million for the three months ended
      June
      30, 2006 compared to income of $0.4 million for the same period in 2005, due
      to
      foreign currency transaction losses and gains in 2006 and 2005, respectively,
      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.





*Six
      Months Ended June 30, 2006 and 2005*





**Total
      Revenue.** Total
      revenue decreased 40% to $24.1 million for the six months ended June 30, 2006
      as
      compared to $39.9 million for the same period in 2005. During the six months
      ended June 30, 2006, no customer accounted for greater than 10% of our total
      revenue. During the six months ended June 30, 2005, one Genomics Division
      customer accounted for greater than 10% of our total revenue. During the six
      months ended June 30, 2006 and 2005, 14% and 30% of our total revenue,
      respectively, was from customers in the Pacific Rim, and 14% and 19% of our
      total revenue, respectively, was from customers in Europe. The decline in
      revenue from customers in the Pacific Rim reflects the impact of agreements
      for
      Genomics services that were terminated, renegotiated at reduced service levels
      or transitioned into perpetual licenses in 2005.





***Genomics
      Services Revenue.*** Revenue
      from our Genomics services was $13.4 million for the six months ended June
      30,
      2006, a decrease of $14.0 million, or 51%, from $27.4 million for the same
      period in 2005. The 2006 decrease in revenue resulted from declining
      subscription revenue, the absence of anticipated sales of perpetual
      licenses to database products that failed to materialize and slower than
      anticipated sales growth for microarray data generation and analysis services.
      Specifically, the 2006 results reflect the absence of $11.9 million in
      subscription fees from agreements that have expired, $2.1 million in additional
      fees from customers to whom we granted perpetual licenses


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to
      certain
      data and/or software and reduced revenue of $2.0 million from certain agreements
      with existing customers renegotiated at reduced service levels, partially offset
      by higher revenue of $1.4 million from increased microarray data generation
      and
      analysis services in 2006.





***Preclinical
      Services Revenue.*** Revenue
      from our Preclinical services was $10.6 million for the six months ended June
      30, 2006, a decrease of $1.6 million, or 13%, from $12.3 million for the same
      period in 2005. The decrease is primarily attributable to a decline in both
      the
      number and size of studies conducted during the first quarter of 2006, partially
      offset by increased utilization of capacity and an increase in the number of
      large-animal studies conducted during the second quarter of 2006, which reflects
      an improving trend in our business.





**Cost
      of Preclinical Services Revenue.** Cost of
      preclinical services revenue decreased $0.2 million for the six months ended
      June 30, 2006 to $13.6 million from $13.8 million for the same period in 2005
      reflecting lower revenue of $1.6 million in 2006, partially offset by declines
      in gross margins to negative 28% for the six months ended June 30, 2006 from
      negative 13% in the same period in 2005.





**Database
      Production Expense.** Database
      production expenses decreased to $15.3 million for the six months ended June
      30,
      2006 from $16.2 million for the same period in 2005.  The
      decrease consisted primarily of a $1.9 million reduction in database content
      generation expenses, including $1.3 million in lower costs for agreements with
      third parties, partially offset by a $0.7 million lower of cost or market
      impairment of inventory in 2006.





**Research
      and Development Expense.** Research
      and development expenses increased to $5.0 million for the six months ended
      June
      30, 2006 from $2.8 million for the same period in 2005. The increase was
      primarily a result of increased development efforts related to our drug
      repositioning technologies and repositioning work on customer-supplied drug
      candidates.





**Selling,
      General and Administrative Expense.** Selling,
      general and administrative expenses decreased to $14.5 million for the six
      months ended June 30, 2006 from $15.3 million for the same period in 2005.
      The
      decrease is largely due to a reduction of $0.8 million in costs under our 2006
      annual employee incentive compensation plan due to our Genomics Division revenue
      shortfall, partially offset by $0.3 million in non-cash compensation expense
      as
      a result of the impact of SFAS 123R.





**Write-down
      of Equity Investment.** In
      connection with our investment in MetriGenix, we had entered into a subscription
      agreement granting MetriGenix a license to use our BioExpress System and had
      been issued a warrant to enable us to maintain our 15% equity ownership in
      MetriGenix, which would terminate upon termination of the subscription
      agreement. In March 2006, we terminated the subscription agreement by mutual
      agreement and the warrant was therefore terminated. As a result, we recorded
      a
      $0.3 million write-down of the fair value of this warrant during the six months
      ended June 30, 2006. At June 30, 2006, the remaining book value of our
      investment in MetriGenix was $3.0 million, which we believe approximates fair
      value.





**Net
      Interest Income.** Net
      interest income increased to $1.5 million for the six months ended June 30,
      2006
      from $1.1 million for the same period in 2005, due to increases in our rates
      of
      return on investments, partially offset by a decline in the balance of our
      cash
      and cash equivalents and marketable securities available-for-sale.





**Other
      (Income) Expense.** Other
      (income) expense was an expense of $0.1 million for the six months ended June
      30, 2006 compared to income of $0.4 million for the same period in 2005, due
      to
      foreign currency transaction losses and gains in 2006 and 2005, respectively,
      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.





**Liquidity
      and Capital Resources**





From
      inception through June 30, 2006, we have financed our operations and
      acquisitions through the issuance and sale of equity securities and payments
      from customers. As of June 30, 2006, we had approximately $59.5 million in
      cash,
      cash equivalents and marketable securities available-for-sale, compared to
      $82.1
      million as of December 31, 2005.





Net
      cash
      from operating activities decreased to a negative $18.7 million for the six
      months ended June 30, 2006 from a positive $6.7 million for the same period
      in
      2005, primarily due to our increased net loss for the six months ended June
      30,
      2006 and the timing of customer payments (including prepayments) for our
      services in 2005 and payments under our compensation and retention plans in
      2006. We presently anticipate that our use of cash for the second half of 2006
      will be slightly higher than that in the first half of 2006 as a result of
      anticipated operating losses and payments of $3.5 million to Millennium as
      the
      final payment of the technology acquisition price (as discussed below) and
      severance benefits for those employees included in the restructuring.





During
      the
      six months ended June 30, 2006 and 2005, our investing activities consisted
      primarily of purchases, sales and maturities of available-for-sale securities,
      capital expenditures and software development and database upgrade costs.
      Capital expenditures for the six months ended June 30, 2006 and 2005 were $2.0
      million and $10.0 million, respectively. The decrease in capital expenditures
      was primarily


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due
      to the
      completion in 2005 of our Preclinical Division capacity expansion and other
      facility renovations. For the remainder of 2006, we expect to incur capital
      expenditures for additional equipment purchases of no greater than $1
      million.





We
      have
      capitalized software development costs of $0.6 million and $0.9 million for
      the
      six months ended June 30, 2006 and 2005, respectively. These costs related
      to
      efforts to enhance the software platform of our BioExpress and ToxExpress System
      databases. Also, we have incurred database upgrade costs of $0.9 million and
      $0.7 million for the six months ended June 30, 2006 and 2005, respectively,
      enhancing the content of our databases using microarrays from Affymetrix. Any
      future investments in upgrades and new versions of our software tools are being
      evaluated as part of our strategic review of our Genomics Division.





Our
      financing activities, other than the repayment of capital lease obligations
      and
      an equipment loan, have primarily consisted of the exercise of stock
      options.





In
      July
      2004, we purchased and licensed certain drug repositioning technologies and
      hired a research team from Millennium. We contractually agreed to spend an
      aggregate of $14.5 million to develop and commercialize these technologies.
      We
      have met that commitment. During the second quarter of 2006, Millennium agreed
      to allow us to defer the final purchase price payment of $3.5 million for
      approximately 30 days and that payment was made in cash during July 2006.





To
      generate our gene expression data, we use Affymetrix microarrays,
      instrumentation and software. Under the terms of our current supply and license
      agreement, we agreed to purchase a minimum of $7.5 million in products and
      services from Affymetrix in 2006. As of June 30, 2006, we have purchased $3.6
      million in products and services related to this commitment.





Specific
      future financial commitments as of June 30, 2006 are set forth in the following
      table:




**Within
                  6****Total**
              
              **Months**
              
              **2007
                  & 2008**
              
              **2009
                  & 2010**
              
              **Beyond
                  2010**Capital
                  lease obligations
              
              $
              138
              
              $
              77
              
              $
              61
              
              $
              —
              
              $
              —Long-term
                  debt
              
              
              613
              
              
              477
              
              
              109
              
              
              27
              
              
              —Acquired
                  technologies payable
              
              
              3,500
              
              
              3,500
              
              
              —
              
              
              —
              
              
              —Payment
                  obligations to Affymetrix
              
              
              3,907
              
              
              3,907
              
              
              —
              
              
              —
              
              
              —Operating
                  leases
              
              
              23,386
              
              
              3,126
              
              
              10,456
              
              
              6,786
              
              
              3,018Total
              
              $
              31,544
              
              $
              11,087
              
              $
              10,626
              
              $
              6,813
              
              $
              3,018


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. However, our cash
      requirements may change as a result of the current review of our overall
      business strategy, including any actions that we take as a result of that
      review. These estimates are forward-looking statements that involve risks and
      uncertainties. Our actual future capital requirements and the adequacy of our
      available funds will depend on many factors, including those discussed under
      “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31,
      2005 and in Part II, Item 1A of this Form 10-Q.





**Critical
      Accounting Policies**





Our
      consolidated condensed financial statements are prepared in accordance with
      accounting principles generally accepted in the United States, which require
      management to make estimates and assumptions that affect the reported amounts
      of
      assets and liabilities at the date of the financial statements and the reported
      amounts of revenue and expenses during the reporting period. Actual results
      could differ from these estimates. The following discussion highlights what
      we
      believe to be the critical accounting policies and judgments made in the
      preparation of these consolidated condensed 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


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arrangements,
      that any billed costs under our government contracts are not allowed or that
      cost or profit estimates change resulting in losses under such contracts,
      revenue recognized for any reporting period would be adjusted and could be
      adversely affected.





In
      accordance with Emerging Issues Task Force Issue No. 00-21, “Revenue
      Arrangements with Multiple Deliverables”, revenue recognized for any
      multiple-element contract is allocated to each element of the arrangement based
      on the relative fair value of the element. The determination of fair value
      of
      each element is based on our analysis of objective evidence from comparable
      sales of the individual element. If we are unable to determine evidence of
      fair
      value for any undelivered element of the arrangement, revenue for the
      arrangement is deferred and recognized using the revenue recognition method
      appropriate to the predominant undelivered element.





**Genomics
      Services Revenue.** The
      majority of Genomics services revenue consists of fees earned under subscription
      agreements for all or parts of our gene expression databases, the BioExpress
      System and ToxExpress System, which are typically for a specific multi-year
      term. We have also granted to some customers perpetual licenses to certain
      data
      from our BioExpress and ToxExpress System databases and software tools. In
      addition, we derive a smaller but growing percentage of revenue from providing
      other services, including various toxicogenomics reports, microarray data
      generation and analysis and other professional services and subscriptions to
      smaller solutions. Revenue from subscription agreements is recognized ratably
      over the period during which the customer has access to the database. Certain
      subscription agreements have included a right of early termination (which,
      in
      some instances, is subject to conditions) by the customer, without penalty,
      on a
      specified date prior to the normal expiration of the term. If any agreement
      has
      a right of early termination, revenue is recognized ratably over the
      subscription term up to the possible date of early termination, based on
      subscription fees earned under the agreement through the possible date of early
      termination. If such early termination does not occur, the balance of the
      subscription fees earned under the agreement is recognized as revenue ratably
      over the remaining term of the agreement. Revenue from perpetual licenses to
      data and software for which the Company is not obligated to provide continuing
      support or services is recognized when the data and/or software has been
      delivered. Revenue from perpetual licenses for which the Company is obligated
      to
      provide continuing support or services is recognized during the period such
      support or services are provided. Revenue from other services is recognized
      when
      the services are performed. Our agreements generally provide for termination
      in
      the event of a breach of the agreement by either party or a bankruptcy or
      insolvency of either party.





During
      2005, we entered into several contractual arrangements with multiple
      deliverables, such as licenses to access our BioExpress and ToxExpress System
      databases and microarray data generation and analysis and other professional
      services. For some of these arrangements, we were unable to determine
      objectively and reliably the fair value of individual undelivered elements,
      and
      in such arrangements, we recognize all revenue using the revenue recognition
      method appropriate to the predominant undelivered element. We also defer the
      direct and incremental expenses associated with the delivery of services for
      which revenue has been deferred and recognize these expenses as we recognize
      the
      related revenue. The timing of revenue recognition associated with agreements
      we
      enter into in future periods may also be dependent on our ability to objectively
      and reliably determine the fair value of deliverables included in those
      agreements.





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





Goodwill
      and Other Intangible Assets Impairment





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





Under
      Statement of Financial Accounting Standards No. 142, “Goodwill and Other
      Intangible Assets”, we are required to perform an annual impairment test of our
      goodwill and periodic reviews of our other intangible assets. In addition,
      we
      are required to test for impairment at any point we have an indication that
      impairment may exist. We have elected to perform our annual impairment test
      of
      goodwill as of October 1. The goodwill impairment test that we have historically
      selected consisted of a ten-year discounted cash flow


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analysis,
      including the determination of a terminal value, and required management to
      make
      various judgments and assumptions, including revenue growth rates and discount
      rates, which management believed to be reasonable. Our annual impairment test
      as
      of October 1, 2004 did not indicate an impairment of our goodwill.





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





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





Our
      assessment of the fair value of our Genomics Division and Preclinical Division
      is dependent on subjective estimates we make of inherently uncertain future
      net
      cash flows over extended periods. Accordingly, our estimates for future periods
      of net cash flows may change as market conditions and circumstances dictate,
      including the current review of our overall business strategy and any actions
      that we take as a result of that review. Future impairment tests of our goodwill
      and other intangibles may result in additional impairment charges based on
      these
      changing estimates.





***Accounts
      Receivable and Unbilled Services***





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





***Inventory***





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




We
      also
      maintain an inventory of microarrays and reagents used to generate genomic
      data
      for our databases and for services in our Genomics Division. This inventory
      is
      valued at the lower of cost or market. Certain items in inventory may be
      considered impaired, obsolete, or excessive and as such, we may establish an
      allowance to reduce the carrying value of these items to their net realizable
      value. Based on certain estimates, assumptions and judgements made from
      information available at the time, we determine the appropriate amount of any
      such inventory allowance. If these estimates or assumptions, or the market
      for
      the use of our microarrays and reagents change, we may be required to record
      additional reserves.




***Equity
      Investments***





Following
      the write-down of $0.3 million in the first quarter of 2006, we hold an equity
      investment in one company (MetriGenix) with a remaining book value of $3.0
      million as of June 30, 2006. We record an investment impairment charge when
      it
      is believed that an investment has experienced a decline in value that is other
      than temporary. Future adverse changes in market conditions or poor operating
      results of the underlying investee could result in our inability to recover
      the
      carrying value of this investment that may not be reflected in such an
      investment’s current carrying value, thereby possibly requiring an impairment
      charge in the future.





**Recently
      Issued Accounting Pronouncements**





In
      July
      2006, the Financial Accounting Standards Board issued Interpretation No. 48,
      "Accounting for Uncertainty in Income Taxes" ("FIN 48") which clarifies the
      accounting for income taxes by prescribing the minimum recognition threshold
      a
      tax position is required to meet before being recognized in the financial
      statements. FIN 48 also provides guidance on derecognition, measurement,
      classification, interest and penalties, accounting in interim periods,
      disclosure and transition. FIN 48 is effective for fiscal years beginning after
      December 15, 2006. We do not expect the adoption of this Interpretation to
      have
      a material impact on our financial statements.





Effective
      January 1, 2006, we adopted the fair value recognition provisions of Statement
      of Financial Accounting Standards No. 123 (revised 2004), “Share-Based Payment”
(“SFAS 123R”), using the modified prospective transition method, and therefore
      have not restated results for prior periods. Under this method, we recognize
      compensation expense for all share-based payments granted after January 1,
      2006
      and for those that were granted prior to, but have not yet vested as of, January
      1, 2006, in accordance with SFAS 123R. For the first half of 2006, stock-based
      compensation awards consisted of options awarded under the 1997 Equity Incentive
      Plan and the 1997 Non-Employee Directors’ Stock Option Plan. Under the fair
      value recognition provisions of SFAS 123R, we recognize stock-based compensation
      net of an estimated forfeiture rate and recognize the compensation cost for
      those shares expected to vest on a straight-line basis over the requisite
      service period of the award. Prior to SFAS 123R adoption, we accounted for
      share-based payments under


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Accounting
      Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” and
      accordingly, were required to recognize compensation expense only to the extent
      that the fair value of the underlying stock on the date of grant exceeded the
      exercise or acquisition price of the stock or stock-based award. Since stock
      options granted by us in the last several years have been granted with an
      exercise price equal to the fair value on the grant date, we did not recognize
      any expense for such options prior to our adoption of SFAS 123R.





Our
      results of operations for the three and six months ended June 30, 2006 were
      impacted by the recognition of $0.2 million and $0.6 million, respectively,
      in
      non-cash expense related to the fair value of our stock-based compensation
      awards. Based on outstanding share-based payments as of January 1, 2006, we
      estimate that non-cash stock compensation expense in 2006 will be approximately
      $0.7 million to reflect the continued vesting of outstanding stock option grants
      that remained unvested as of January 1, 2006. The impact of stock compensation
      expense in future periods will be dependent on the number and type of
      share-based payments issued to employees and non-employee directors and this
      estimate does not include the impact of other possible stock-based awards that
      could be made during the balance of 2006.





In
      November 2005, the Financial Accounting Standards Board issued FASB Staff
      Position No. 115-1, “The Meaning of Other-Than-Temporary Impairment and Its
      Application to Certain Investments” (“FSP FAS 115-1”). FSP FAS 115-1 addresses
      the determination as to when an investment is considered impaired, whether
      that
      impairment is other than temporary and the measurement of an impairment loss.
      FSP FAS 115-1, which is effective for reporting periods after December 31,
      2005,
      also includes accounting considerations subsequent to the recognition of an
      other-than-temporary impairment and requires certain disclosures about
      unrealized losses that have not been recognized as other-than-temporary
      impairments. The adoption of FSP FAS 115-1 had no material impact on our
      financial position, results of operations or cash flows.





**Item
      3.****Quantitative
      and Qualitative Disclosure about Market Risk**





We
      have
      exposure to financial market risks, including changes in interest rates. At
      June
      30, 2006, we had cash and cash equivalents of $24.8 million and marketable
      securities available-for-sale of an additional $34.7 million. We invest our
      excess cash primarily in money market funds, obligations of the United States
      Government and its agencies and marketable debt securities of companies with
      strong credit ratings. These instruments have maturities of twenty-four months
      or less when purchased. We do not utilize derivative financial instruments,
      derivative commodity instruments or other market risk sensitive instruments,
      positions or transactions in any material fashion. Accordingly, we believe
      that,
      while the instruments we hold are subject to changes in the financial standing
      of the issuer of such securities, we are not subject to any material risks
      arising from changes in foreign currency exchange rates, commodity prices,
      equity prices or other market changes that affect market risk sensitive
      instruments. Based on our cash and cash equivalents and marketable securities
      available-for-sale balances at June 30, 2006, a hypothetical 100 basis point
      adverse movement in interest rates would have resulted in an increase in the
      net
      loss of approximately $0.3 million for the six months ended June 30, 2006.
      Actual changes in rates may differ from the hypothetical assumptions used in
      computing this exposure.





Since
      the
      beginning of 2005 and as a result of changing our distribution arrangements
      in
      Japan, we have been subject to risk from changes in foreign exchange rates
      relating to revenue from our Japanese customers, as such agreements are now
      denominated in Japanese Yen. Such changes could result in foreign currency
      exchange gains or losses. As a policy, we convert our customer payments made
      in
      Japanese Yen to United States dollars upon receipt of such payment. Revenue
      derived from the Pacific Rim as a percentage of total revenue was 14% for the
      six months ended June 30, 2006, and was primarily derived from our customers
      in
      Japan. Exchange rate fluctuations between the United States dollar and the
      currencies of these countries could result in positive or negative fluctuations
      in the amounts relating to revenue reported in our consolidated condensed
      financial statements. A hypothetical 10% adverse change in average foreign
      currency movements would have resulted in an increase in the net loss of
      approximately $0.3 million for the six months ended June 30, 2006. 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 June
      30, 2006, under the supervision and with the participation of our management,
      including the Chief Executive Officer (“CEO”) and Chief Financial Officer
      (“CFO”), an evaluation was performed of the effectiveness of the design and
      operation of our “disclosure controls and procedures” (“Disclosure Controls”).
      These are controls and procedures designed to reasonably assure that information
      required to be disclosed in our reports filed under the Exchange Act, such
      as
      this Form 10-Q, is recorded, processed, summarized and reported within the
      time
      periods specified in the rules and forms of the United States Securities and
      Exchange Commission (“SEC”). Disclosure Controls are also designed to reasonably
      assure that such information is accumulated and communicated to our management,
      including the CEO and CFO as appropriate, to allow timely decisions regarding
      required disclosure. Based on that evaluation, our CEO and CFO have concluded
      that, as of June 30, 2006, our disclosure controls and procedures were effective
      to provide reasonable assurance that information required to be disclosed in
      our
      Exchange Act reports is recorded, processed, summarized and reported within
      the
      time


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periods
      specified by the SEC, and that material information relating to us is made
      known
      to management, including the CEO and CFO, particularly during the period when
      our periodic reports are being prepared.





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





**Changes
      in Internal Control Over Financial Reporting**





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





**PART
      II****OTHER
      INFORMATION**





**Item
      1.****Legal
      Proceedings**





We
      are not
      currently a party to any material legal proceedings.





**Item
      1A.****Risk
      Factors**





As
      a
      result of the strategic review currently underway and the recently initiated
      restructuring of our Genomics Division, the following risk factors should be
      added to those previously disclosed in the Company’s Annual Report on Form 10-K
      for the year ended December 31, 2005 and our other subsequent filings with
      the
      SEC.




**We
      May Not Be Able To Identify Or Implement a Business Strategy That Will Achieve
      Our Objectives.**





We
      are
      currently exploring various business strategies designed to improve the
      performance and value of our businesses and enhance the value of our assets
      for
      our stockholders. We may not be able to identify desirable options or implement
      any of these strategic options on favorable terms, or at all, which could have
      a
      material adverse impact on the value of our business. In addition, whether
      or
      not we are successful in identifying and implementing alternative strategic
      options, we may experience impairments to the book value of one or more of
      our
      existing assets, including but not limited to, property and equipment,
      goodwill and other intangibles.


**As
      a Result Of Uncertainty About Our Long-Term Business Strategy, We May Have
      Difficulty Attracting Or Retaining Customers And Employees.**





As
      previously discussed, we recently initiated a restructuring of our Genomics
      Division intended to reduce its cash use and, as a result of our strategic
      review, we may contemplate a range of actions that could have a material impact
      on our business as it is presently conducted, none of which may be
      successful.  Because of this uncertainty, customers and employees may have
      concerns about our future and may be hesitant to commit to a long-term
      relationship with us and existing employees may be distracted from their job
      responsibilities and seek other employment. We may also find it difficult to
      recruit new employees due to uncertainty over our future.  If customers do
      not believe that we will continue to support, enhance or update our services,
      they could be less willing to purchase those services. Therefore, until we
      announce a comprehensive strategy, and it becomes clear that the strategy is
      viable, our relationships with our customers and employees may be adversely
      affected.




**We
      May Be Unable To Secure Additional Financing To Implement a Business Strategy
      That We Would Like To Pursue.**





We
      believe
      that existing cash, cash equivalents and marketable securities
      available-for-sale will be adequate to fund our operations for the foreseeable
      future.  However, we may need additional debt or equity financing to
      implement any new business strategies.  Additional


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financing
      may not be available when needed or, if available, such financing may not be
      on
      favorable terms. If additional financing is obtained through the issuance of
      equity securities or debt convertible to equity, our existing stockholders
      may
      experience significant dilution.





**If
      We Are Unable To Maintain Compliance With NASDAQ’s Listing Requirements, Our
      Stock Could Be Delisted Which Would Negatively Impact Our Liquidity And Our
      Stockholders’ Ability To Sell Shares.**


Our
      listing on the NASDAQ Global Market is conditioned upon our continued compliance
      with the NASDAQ Marketplace Rules, including a rule that requires that the
      minimum bid price per share for our common stock not be less than $1.00 for
      30
      consecutive trading days. Given the recent price levels for our common stock,
      we
      cannot assure that we will be able to continue to comply with such rules. If
      we
      fail to comply and cannot remedy our noncompliance during any applicable notice
      or grace periods, our common stock could be delisted from the NASDAQ Global
      Market.  The delisting of our common stock would likely have a material
      adverse effect on the trading price, volume and marketability of our common
      stock.




Upon
      a
      delisting from the NASDAQ Global Market, our common stock would become subject
      to the penny stock rules of the SEC, in which event it is possible that the
      price of our common stock would further decline and likely that our stockholders
      would find it more difficult to sell their shares.




**As
      a Result Of The Restructuring Of Our Genomics Division, Insufficient Staffing
      To
      Support Operations Could Adversely Affect Demand For Our Services And Our
      Revenue.**





We
      have
      announced a significant restructuring of our Genomics Division that, once
      implemented, will reduce our future operating expenses. While we believe our
      personnel reductions have targeted areas not necessary to our ability to serve
      customers, there can be no assurance that these changes will not have a negative
      impact on our ability to keep retained staff or provide adequate services to
      our
      customers.  If we fail to maintain acceptable service levels, we may lose
      customers and/or the opportunity to provide more services.




**Item
      2.****Unregistered
      Sales of Equity Securities and Use of Proceeds**





None.





**Item
      3.****Defaults
      Upon Senior Securities**





None.





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





The
      Company held its Annual Meeting of Stockholders on June 1, 2006 (“Annual
      Meeting”). At the Annual Meeting, the Company’s stockholders elected two
      directors to the Company’s Board of Directors, approved an Amended and Restated
      1997 Equity Incentive Plan and ratified the selection of our independent
      auditors, as described below. At the Annual Meeting, 29,248,151 shares, out
      of a
      total of 31,805,069 shares of Common Stock outstanding at the record date,
      were
      represented in person or by proxy.


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The
      proposals considered at the Annual Meeting were voted on as
      follows:




**For**
              
              **Withheld**1
              To
                  elect two directors to hold office until the 2009 Annual
                  Meetingof
                  Stockholders or his earlier resignation or removal.Charles
                  L. Dimmler, III
              
              26,856,500
              
              2,391,651G.
                  Anthony Gorry, Ph.D.
              
              26,852,020
              
              2,396,131The
                  following individuals' term of office as a director continue
                  afterthe
                  meeting: Jules Blake, Ph.D.; Michael J. Brennan, M.D.,
                  Ph.D.;Frank
                  L. Douglas, M.D., Ph.D.; Mark D. Gessler and J. StarkThompson,
                  Ph.D.**For**
              
              **Against**
              
              **Abstain**
              
              **Broker**
                **Non-Votes**2
              To
                  approve an Amended and Restated 1997 Equity Incentive
                  Plan,
              
              15,370,236
              
              2,837,659
              
              61,689
              
              10,978,567including
                  to authorize the issuance of restricted stock awards,establish
                  a process for performance-based awards and extend theterm
                  of the plan.**For**
              
              **Against**
              
              **Abstain**3
              To
                  ratify the selection of Ernst & Young LLP as the
                  Company's
              
              27,840,538
              
              264,608
              
              1,143,005independent
                  registered public accounting firm for the year endingDecember
                  31, 2006.
  **Item
        5.****Other
        Information**





None.





**Item
      6.****Exhibits**





31
            Certifications
                pursuant to Rule
                13a-14(a)/15d-14(a).





32
            Certifications
                pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section
                906 of
                the Sarbanes-Oxley Act of 2002.




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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:  August
      9,
      2006


By: /s/
      Philip
      L. Rohrer, Jr.


Philip
      L.
      Rohrer, Jr.


Chief
      Financial Officer


( *Principal
      Financial and Accounting Officer* *)*


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