**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


**Washington,
      D.C. 20549**





**FORM
      10-K**


**(Mark
      One)**


**Annual
      Report Pursuant To Section 13 Or 15(D) Of The Securities Exchange Act Of
      1934**


**For
      the fiscal year ended December 31, 2005**


**OR**





**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
                of Other Jurisdiction of Incorporation or
                Organization)*
            *(I.R.S.
                Employer Identification No.)*





**610
      Professional Drive**


**Gaithersburg,
      Maryland 20879**


*(Address
      of Principal Executive Offices)*





Registrant’s
      phone number, including area code: **(301)
      987-1700**


Securities
      registered pursuant to Section 12(b) of the Act: **None**


Securities
      registered pursuant to Section 12(g) of the Act:


**COMMON
      STOCK, $.01 PAR VALUE**


*(Title
      of Class)*





Indicate
      by check mark if the Registrant is a well-known seasoned issuer, as defined
      in
      Rule 405 of the Securities Act: YES  ̈ NO x





Indicate
      by check mark if the Registrant is not required to file reports pursuant to
      Section 13 or Section 15(d) of the Act: YES  ̈ NO x





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  ̈





Indicate
      by check mark if disclosure of delinquent filers pursuant to Item 405 of
      Regulation S-K (Section 229.405 of this chapter) is not contained herein, and
      will not be contained, to the best of the Registrant’s knowledge, in definitive
      proxy or information statements incorporated by reference in Part III of this
      Form 10-K or any amendment to this Form 10-K: YES x NO  ̈





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





Indicate
      by check mark whether the Registrant is a large accelerated filer, an
      accelerated filer or a non-accelerated filer. (Rule 12b-2 of the Exchange Act):
      Large accelerated filer  ̈  Accelerated
      filer x  Non-accelerated
      filer  ̈





The
      aggregate market value of the voting stock (which consists solely of shares
      of
      Common Stock) held by non-affiliates of the Registrant as of June 30, 2005
      was
      approximately $102,814,000, based on the closing price on that date of Common
      Stock on The NASDAQ Stock Market.*





The
      number
      of shares outstanding of the Registrant’s Common Stock, $.01 par value, was
      31,791,521 as of March 1, 2006.





***
            *Excludes
                687,967 shares of Common Stock held by directors and executive officers
                and stockholders whose beneficial ownership exceeds 10% of the shares
                outstanding on June 30, 2005. Exclusion of shares held by any person
                should not be construed to indicate that such person possesses the
                power,
                direct or indirect, to direct or cause the direction of the management
                or
                policies of the Registrant, or that such person is controlled by
                or under
                common control with the
                Registrant.*





1


**TABLE
        OF CONTENTS**




**PART
                  I**ITEM
                  1.
              BusinessITEM
                  1A.
              Risk
                  FactorsITEM
                  1B.
              Unresolved
                  Staff CommentsITEM
                  2.
              PropertiesITEM
                  3.
              Legal
                  ProceedingsITEM
                  4.
              Submission
                  of Matters to a Vote of Security
                  Holders**PART
                  II**ITEM
                  5.
              Market
                  for the Registrant’s Common Equity, Related
                  Stockholder Matters and Issuer Purchases of Equity
                  SecuritiesITEM
                  6.
              Selected
                  Consolidated Financial DataITEM
                  7.
              Management’s
                  Discussion and Analysis of Results of Operations
                  and Financial ConditionITEM
                  7A.
              Quantitative
                  and Qualitative Disclosure About Market
                  RiskITEM
                  8.
              Financial
                  Statements and Supplementary DataITEM
                  9.
              Changes
                  in and Disagreements with Accountants on Accounting
                  and Financial DisclosureITEM
                  9A.
              Controls
                  and ProceduresITEM
                9B.
              Other
                Information**PART
                  III**ITEM
                  10.
              Directors
                  and Executive Officers of the
                  RegistrantITEM
                  11.
              Executive
                  CompensationITEM
                  12.
              Security
                  Ownership of Certain Beneficial Owners and Management
                  and Related MattersITEM
                  13.
              Certain
                  Relationships and Related
                  TransactionsITEM
                  14.
              Principal
                  Accountant Fees and Services**PART
                  IV**ITEM
                  15.
              Exhibits,
                  Financial Statements and Schedules and Reports on
                  Form 8-KSIGNATURESReport
                  of Independent Registered Public Accounting
                  Firm—Internal Control Over Financial ReportingReport
                  of Independent Registered Accounting
                  Firm—Consolidated Financial StatementsConsolidated
                  Balance Sheets as of December 31, 2005
                  and 2004Consolidated
                  Statements of Operations for the three
                  years ended December 31, 2005Consolidated
                  Statements of Stockholders’ Equity for the
                  three years ended December 31, 2005Consolidated
                  Statements of Cash Flows for the three
                  years ended December 31, 2005Notes
                  to Consolidated Financial
                  Statements




2




**PART
        I**
 
 *This
        Annual Report on Form 10-K (“Form 10-K”) 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 this Form 10-K under the section entitled “Risk Factors”. Gene
        Logic undertakes no obligation to revise or update publicly any forward-looking
        statements to reflect any change in management’s expectations with regard
        thereto or any change in events, conditions, or circumstances on which any
        such
        statements are based.*
 
 Unless
        the
        context otherwise requires, references in this Form 10-K 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. GeneChip ® is a
        registered trademark of Affymetrix, Inc. Viagra ® is a
        registered trademark of Pfizer, Inc.
 
 **ITEM1.**   **BUSINESS**
  **Corporate
        History**
 
 Gene
        Logic
        Inc. was incorporated in September 1994 as a Delaware corporation and commenced
        operations in 1996. In 1997, we completed our initial public offering. Our
        stock
        is traded on The NASDAQ Stock Market under the symbol “GLGC”. In 1998, we
        purchased Oncormed, Inc. In 2001, we created a company named MetriGenix,
        Inc. to
        hold certain technologies related to gene chip design. In late 2003,
        MetriGenix’s assets were acquired by a privately held company in which we
        retain a minority ownership interest. In 2003, we purchased TherImmune
        Research Corporation, which was later renamed Gene Logic Laboratories.
        In 2004, we acquired certain technologies from Millennium Pharmaceuticals,
        Inc.,
        which is the basis for our current Drug Repositioning Division.
 
 We
        are
        headquartered in Gaithersburg, Maryland. Our principal executive offices
        are
        located at 610 Professional Drive, Gaithersburg, MD 20879, and the telephone
        number is (301) 987-1700. Our Internet site is www.genelogic.com .
        Material
        contained on our Internet site is not incorporated by reference into this
        Form
        10-K.
 
 **Overview**
 
 Gene
        Logic
        provides innovative drug discovery and development solutions to the
        pharmaceutical and biotechnology industry. Our solutions help customers develop
        therapeutically and commercially valuable compounds in a more timely, efficient,
        and cost-effective manner. Our customers use our solutions to understand
        the
        effect of compounds on biological processes and to identify, analyze and
        evaluate critical safety, efficacy, and other patient clinical factors so
        that
        they may better assess the likely therapeutic and commercial value of their
        targets and compounds. Customers use our solutions throughout the pharmaceutical
        R&D process, from early discovery through late-stage clinical development.
 
 We
        operate
        our business through three business segments:
 ·
                **Genomics
                    Division:**through the use of our proprietary reference gene expression
                    and
                    toxicogenomics databases, toxicogenomics services, software tools,
                    microarray data generation and analysis and other professional
                    services
                    and solutions, we help customers worldwide to discover and prioritize
                    drug
                    targets, identify biomarkers, predict toxicity and understand
                    the
                    mechanism of toxicity, and obtain insights into the efficacy
                    of specific
                    compounds.
 ·
                **Preclinical
                    Division:**through
                    the use of*in
                    vivo*(in
                    life) models and related laboratory services, we enable customersin
                    the United Statesto
                    assess the safety and pharmacologic effects of candidate compounds
                    for the
                    purpose of submitting to the United States Food and Drug Administration
                    (“FDA”) an Investigational New Drug application (“IND”) seeking approval
                    to initiate human trials.
 ·
                **Drug
                    Repositioning Division:**through the use of a series of molecular pharmacology technologies,
                    we
                    assist customers to more effectively use their own compounds
                    by (i)
                    identifying alternative indications for customers’ failed, stalledordeprioritized drug candidates, and expect in the future to assist
                    customers to (ii) expand indications for customers’ currently marketed
                    drugs, and (iii) prioritize and identify indications for customers’
                    compounds in preclinical
                    development.




3




We
        sometimes refer to the combination of our Genomics Division and Preclinical
        Division as our “base business.”
 
 We
        provide
        our drug development solutions primarily to pharmaceutical and biotechnology
        companies that are located mainly in North America, Europe, and Japan. Our
        total
        revenue for 2005 was $79.4 million, of which $56.6 million, $22.2 million
        and
        $0.6 million were derived from our Genomics Division, Preclinical Division
        and
        Drug Repositioning Division, respectively. Total revenue for 2004 was $75.9
        million, of which $52.2 million and $23.8 million were derived from our Genomics
        Division and Preclinical Division, respectively. Total revenue for 2003 was
        $69.5 million, of which $52.0 million and $17.6 million were derived from
        our
        Genomics Division and Preclinical Division, respectively. We did not generate
        any revenue from our Drug Repositioning Division in 2004 or 2003.
 
 **Strategy**
 
 Our
        business strategy is to:
 
 **1.**
              **Develop
                  a sustainably profitable base business through increased revenue
                  growth
                  and improved operating margins;
                  and**
 **2.**
              **Through
                  our Drug Repositioning Division, build long-term value for the
                  Company,
                  our pharmaceutical customers and our shareholders from significant
                  success-based milestone and royalty payments (or other ownership
                  positions) from a pipeline of our partners’ drug candidates that are
                  successfully repositioned based on our
                  work.**
 
 To
        accomplish our strategy, we are implementing the following in each of our
        businesses.
 
 ***i.***
              ***Genomics
                  Division—We continue to diversify and expand our Genomics Division beyond
                  large, multi-year subscriptions. This is allowing us to expand
                  our
                  customer base from primarily large pharmaceutical and biotechnology
                  companies to include small to mid-size pharmaceutical and biotechnology
                  companies and academic, government and research
                  institutions.***
 
 In
        our
        Genomics Division, we initiated a strategy to increase revenue by broadening
        the
        number of genomics and toxicogenomics-based services we offer to customers
        thereby making our services more accessible and affordable for a broader
        potential customer base. While a majority of our Genomics Division revenue
        continues to come from broad licenses to our databases with large pharmaceutical
        customers, we derive a smaller but growing percentage of our revenue from
        a
        combination of our toxicogenomics services, software tools, microarray data
        generation and analysis and other professional services and solutions (i.e.,
        ASCENTA System and ToxShield). Our ToxExpress System now includes gene
        expression data derived from rat liver, kidney and heart, and rat hepatocytes.
        As part of our Microarray Data Generation and Analysis service, we have added
        new Single Nucleotide Polymorphism (“SNP”) genotyping capabilities to address
        our customers’ growing interest in examining single base-pair mutations as
        potential therapeutic entry points for research and development. We continue
        to
        update the gene expression data in our BioExpress System database using the
        latest human microarray technology. We have also granted perpetual licenses
        to
        some customers for certain data from our BioExpress and ToxExpress System
        databases as well as our software tools including all or part of the
        Genesis Enterprise System, GX Connect and ASCENTA System.
 
 ***ii.***
              ***Preclinical
                  Division—We continue to target the underserved biotechnology and small to
                  mid-size pharmaceutical company market, and continue to improve
                  the
                  quality of our services as we build a leading contract research
                  organization.***
 
 In
        our
        Preclinical Division, we are working to improve the utilization of our existing
        capacity for *in
        vivo* studies.
        To accomplish this we have redirected our marketing and sales efforts toward
        biotechnology companies and small to mid-size pharmaceutical companies. This
        market segment has greater need for outsourced study capabilities and assistance
        with study design, implementation and analysis and is relatively underserved
        by
        larger contract research providers. We have added sales staff in key geographic
        regions where we were previously underrepresented and continue to provide
        the
        consulting services requested by these customers. We also continue to seek
        business from large pharmaceutical companies when such opportunities arise.
        We
        continue to focus on improving our internal operational processes and quality
        controls. We also continue to consider strategic alternatives for this
        business.
  4




***iii.***
              ***Drug
                  Repositioning Division—We are seeking to build long-term value from
                  success-based milestone and royalty payments or from partial ownership
                  positions from our partners’ drug candidates when they are repositioned
                  and successfully moved back into clinical testing and to the commercial
                  market.***
 
 In
        2004,
        we acquired certain technologies from Millennium Pharmaceuticals, Inc.
        (“Millennium”) which we continue to develop and use in combination with our
        existing capabilities in genomics, toxicogenomics, and bioinformatics that
        together comprise the basis of our Drug Repositioning Division. We partner
        with
        pharmaceutical companies to identify alternate uses for their stalled, failed
        or
        deprioritized drug candidates and enable these drug candidates to return
        to the
        development pipeline and potentially to commercialization. We conduct our
        Drug
        Repositioning Division primarily through our research facility in Cambridge,
        Massachusetts. We plan to expand our Drug Repositioning Division into drug
        candidate selection and finding new indications for approved drugs.
 
 In
        2005,
        we grew the number of partnerships to reposition drug candidates for
        pharmaceutical companies beyond our agreement with Millennium and an unnamed
        pharmaceutical partner (unnamed at their request) to include partnerships
        with
        Pfizer, Inc., and with F. Hoffmann-La Roche Ltd. and one of its affiliates
        (collectively “Roche”). We expect that any significant revenue under these
        agreements will not occur in 2006. We intend to continue establishing
        partnerships with additional pharmaceutical companies in 2006. Some of our
        partnerships are structured to provide us with contingent milestone payments
        and
        royalties payable as we successfully reposition drug candidates that re-enter
        our partners’ development pipelines. Other partnerships provide us with an
        opportunity to acquire an ownership position in the drug candidate in exchange
        for paying a portion of the development costs. If a partner declines to develop
        a drug candidate for one or more indications we have found, we could acquire
        rights to develop the drug candidate further, either directly or through
        a
        third-party arrangement.
  **Scientific
        and Industry Background**
 
 The
        cells
        of all living organisms contain a blueprint or set of instructions for how
        each
        cell-type should work. This blueprint is passed from one generation to the
        next
        and is encoded in a set of molecules called deoxyribonucleic acid (“DNA”). These
        DNA molecules are organized into long strands that bind to each other in
        a
        twisted double helix structure. DNA molecules can be organized in a vast
        number
        of different ways, leading to the production of millions of different protein
        molecules. These protein
        molecules are the
        basic building blocks of all living organisms.
 
 Protein
        molecules are produced from DNA utilizing an intermediate molecule called
        messenger ribonucleic acid (“ mRNA”),
        which translates
        DNA into protein form. The specific sequence of DNA that produces a particular
        protein is called a gene .
        In
        humans, every cell contains three billion pairs of DNA molecules, referred
        to collectively as the human
        genome .
        Only a
        small percentage of the genome actively produces proteins.
 
 Cells
        are
        very different from each other in structure and function despite the fact
        that
        they share the same genetic blueprint. For example, a brain cell and a muscle
        cell, although very different, contain exactly the same DNA code. The reason
        for
        the difference in structure and function is that not all genes are active
        in any
        cell. The type of cell and its function are determined by which genes are
        actively producing protein and the amount of protein they are producing.
        In
        fact, almost any change in the activity of a cell, whether normal or diseased,
        is reflected in a change in the genes that are producing protein. This pattern
        of gene activity is called gene
        expression .
        The
        determination of patterns of gene expression is a broad measure of the function
        of a cell.
 
 Microarray
        technology has
        accelerated the process of measuring gene expression. Microarray technology
        uses
        millions of DNA sequences attached to a solid surface in a dense matrix.
        Samples
        of cells and tissues from humans or animals are prepared, and the resulting
        mRNA
        is then labeled and exposed to the surface of the microarray. The labeled
        mRNA
        adheres to its counterpart DNA on the microarray, resulting in information
        which
        can then be analyzed to determine the level and pattern of gene expression
        within that tissue or cell.
 
 While
        the
        biology of different normal and diseased cells can be evaluated by analyzing
        gene expressions patterns, there are also variations of the gene sequence
        for
        similar genes from individual to individual. These individual variations
        in gene
        sequence, known as SNPs, account for similar proteins working more or less
        effectively. These differences in protein function lead to individual variations
        in the effectiveness of drugs, susceptibility to disease, and toxicity of
        compounds. There may be hundreds or thousands of variations within any gene
        from
        one individual to another. There are thought to be about three million
        significant SNPs in the human genome, although not all of them have yet been
        discovered and the function for most is not known. These variations are
        determined by various methods and machines that allow a DNA sequence to be
        analyzed.
 
 Different
        patterns of gene expression are associated with normal and diseased cells,
        as
        well as either the toxic or therapeutic effect that drugs can have on cells.
  5




For
        example, a cancerous tissue can be compared to normal tissue to find aberrant
        gene activity that is associated with the cancer, and that information can
        be
        used to identify biomarkers (a molecular marker associated with a biological
        function) and targets and develop drugs to treat the disease. Using
        information about the human genome to develop drugs is called pharmacogenomics .
 
 Normal
        cells can also be compared to cells that have been treated with a specific
        compound, to determine if that compound has a toxic effect on cells. Using
        information about how gene expression patterns vary when chemicals are toxic
        to
        tissues is called toxicogenomics .
 
 The
        amount
        of information that is generated from sequencing three billion base pairs
        of DNA
        and using microarrays to look at gene expression patterns in tens of thousands
        of biological tissues and processes could not be stored and analyzed if it
        were
        not for advances in information technology that occurred with the development
        of
        computers and the internet. The science of using computers to capture and
        understand biology is known as bioinformatics .
 
 Besides
        gene expression data, there are many other methods to look at biological
        function. In addition to the many traditional methods, there are also new
        methods which are being developed. Some of these include:
 ·
            Metabolomics,
                which is the measurement of proteins that have been used or changed
                in
                performing their function. This information can be used to determine
                what
                pathways and biological functions have been active. ·
            Proteomics,
                which is the measurement of many proteins at once to analyze patterns
                of
                protein production and use. Proteomics measures proteins while gene
                expression measures mRNA. However, proteomics is much more difficult
                to do
                because there are millions of rapidly changing types of proteins
                as
                compared to tens of thousands of types of mRNA molecules. ·
            *In
                vivo*imaging,
                which is the use of imaging technologies to visually see where potential
                drugs are attaching to biological targets in animals. This can be
                done by
                putting either a label or tag on the compound of interest, injecting
                the
                labeled compound into a test animal, and using a machine to see where
                the
                labeled compound actually goes. Alternatively, the animal itself
                can be
                genetically modified so that a particular biological pathway or target
                is
                labeled in the animal. When that biological pathway or target is
                activated
                by a test compound, a signal from the tag can be seen using special
                imaging machines. ·
            *In
                vitro (“in dish”)*screening,
                which is the use of cells grown in culture to evaluate how compounds
                cause
                the cells to change or react. There are many different measurements
                that
                can be made on the cells. The cells used in these assays can also
                be
                genetically modified so they indicate a particular process or pathway
                in
                the cell that is being activated. 
 Gene
        expression and other methods of looking at biological functions are critical
        to
        pharmaceutical companies’ drug development processes. The current model for drug
        development is based on developing a systematic understanding of biology.
        Pharmaceutical companies develop drugs by seeking specific proteins that
        could
        be therapeutic targets. These companies then seek chemical compounds that
        could
        modulate or manipulate the targets in a way that would have a therapeutic
        effect. Scientists have the ability to screen large libraries of compounds
        using
        high-throughput automated systems against biological targets to identify
        potential therapeutic compounds that will modulate these targets. But, first,
        scientists must identify the targets, from among the 3,000 to 5,000 human
        genes
        that might produce proteins. One efficient way to identify these targets
        is
        using gene expression data produced from normal and diseased human tissues
        as
        well as from animal models and cell lines.
 
 The
        process of drug development is expensive, time consuming and risky. On average
        it takes 13 years from the beginning of the discovery effort to get a drug
        to
        market. During this time, a company will typically have filed one or more
        patent
        applications, but since patents have a maximum term of 20 years from the
        date of
        the initial filing, the period during which the drug is being evaluated and
        ultimately approved uses up a significant part of the period of exclusivity
        provided under patent law. Current studies estimate the overall success rate
        of
        a compound making it to market is 8% and the overall cost of developing a
        compound is between $800 million to $1.2 billion. On average, research and
        development costs have been doubling every five years, yet success rates
        for
        getting drugs to market have been flat or declining.
 
 Today,
        drug discovery and development in the United States generally consists of
        the
        following steps:
 ·
            ***Discovery.***Discovery is the process of identifying new biological targets and
                the
                compounds that can affect them. Targets must be identified, prioritized
                and validated. Gene expression data has been very useful in target
                identification and prioritization, but the process of target validation
                remains tedious, expensive and time-consuming. Through lead discovery
                and
                lead optimization, compounds that can affect identified targets are
                tested, analyzed, modified and optimized, using information about
                potential toxicity, absorption, distribution, metabolism and excretion. ·
            ***Preclinical
                Testing.***Compounds that are being considered as drugs must be studied to determine
                if the compound will have unacceptable toxic effects and if it will
                be
                effective in treating the targeted disease or condition. Traditionally,
                prior to initiating studies in humans, a pharmaceutical company conducts
                laboratory and animal studies to show evidence of effectiveness and
                levels
                of toxicity. More recently, compounds can also be evaluated for potential
                toxicity using toxicogenomics and effectiveness using pharmacogenomics.
                Although the Food and Drug Administration (“FDA”) accepts pharmacogenomics
                data as part of an Investigational New Drug Application (“IND”)
                submission, it does not accept pharmacogenomics data as a substitution
                for
                the animal studies required as part of the IND submission
                process.




6


·
            ***Investigational
                New Drug Application.***After completing preclinical testing, the company files an IND application
                with the FDA for permission to test the compound in humans. The IND
                application shows results of previous experiments; how, where and
                by whom
                the new studies will be conducted; the chemical structure of the
                compound;
                how it is thought to work in the body; any toxic effects found in
                the
                animal studies; and, how the compound is manufactured. In addition,
                the
                IND application must be reviewed and approved for ethical issues
                and
                protection of patient rights by the organization’s Institutional Review
                Board. Once the trials commence, progress reports on clinical trials
                must
                be submitted at least annually to the FDA. ·
            ***Clinical
                Trials.***These tests involve a series of studies (Phase I, II and III) involving
                up
                to several thousand patients over a multi-year period. These tests
                assess
                safety, appropriate dosage, and effectiveness in humans. ·
            ***New
                Drug Application (“NDA”).***Following successful completion of clinical trials, the company files
                an
                NDA application with the FDA. FDA approval of an NDA is required
                before
                any new drug can be commercialized. ·
            ***Approval.***Once the FDA approves the NDA, the new medicine becomes available
                for
                physicians to prescribe. The company must continue to periodically
                report
                to the FDA, including instances of adverse reactions and appropriate
                quality-control records. For some medicines, the FDA requires additional
                studies (Phase IV) to evaluate long-term effects.


Additional
        uses for compounds (sometimes called drug
        repurposing or repositioning )
        to date
        have typically been discovered by accident. An example of this is the drug
        Viagra, which was initially developed to treat heart disease and is now much
        more widely used for treating sexual dysfunction.
 
 **Our
        Business**
  **Genomics
        Division**
 
 Our
        Genomics Division includes proprietary gene expression and toxicogenomics
        databases, toxicogenomics services, software tools, and microarray
        data generation and analysis services (for gene expression and SNP genotyping),
        and other professional services. These services assist researchers in
        identifying and characterizing drug targets and biomarkers and can help predict
        potential human toxicity of drug candidates. Gene expression patterns and
        biological pathways in disease, genetic abnormalities, and mechanisms involved
        in drug efficacy and toxicity all help researchers make better informed
        decisions.
 
 Our
        Genomics Division are based on gene expression results and clinical data
        from a
        collection of over 35,000 diseased and normal human and animal model tissues,
        as
        well as primary cells and cell cultures. These samples, together with relevant
        pathology and clinical data are collected from clinical centers, teaching
        hospitals, academic medical centers, standard toxicology animal lab studies
        and,
        in some instances, commercial providers. The samples in our BioExpress System
        represent more than 400 separate clinical disease indications with focused
        collection programs in critical therapeutic areas of greatest market interest,
        including oncology, cardiovascular, central nervous system, inflammatory
        and
        metabolic diseases. The samples in our ToxExpress System are primarily derived
        from animal liver, the primary toxicity response site, as well as animal
        heart
        and kidney.
 
 We
        isolate
        and prepare the genetic material from these tissue samples and then analyze
        the
        genetic material through a high throughput, automated process using microarrays
        to determine gene expression. The results of this analysis and the corresponding
        pathology and clinical or experimental information for each sample are compiled
        using our software and bioinformatics capabilities, resulting in reference
        databases and software tools that are the foundation of our Genomics
        Division.
 
 Our
        Genomics Division currently comprises the following offerings:
 
 **BioExpress
        System**  **-** The
        BioExpress System is a database that enables drug development researchers
        to use
        our data to: (i) investigate human disease and disease progression by
        identifying and prioritizing disease-associated gene targets through an
        understanding of gene expression patterns, genetic abnormalities, disease
        pathways and disease mechanisms of action, (ii) examine the interrelationship
        between the human genome, disease mechanisms and related individual clinical
        parameters, and (iii) identify potential disease biomarkers. The database
        comprises gene expression data derived from normal and diseased human and
        animal
        tissues and related pathology and clinical or experimental information about
        those samples.
 
 **BioExpress
        Disease and Custom Suites**  **-** The
        BioExpress Disease Suites and Custom Suites consist of subsets
        of
        BioExpress System data with matched normal tissue sample data.  BioExpress
        Suites consist of information focused on a particular therapeutic area,
        including oncology, cardiovascular disease, central nervous system disorders,
        inflammatory and metabolic diseases, and normal human biology. Custom Suites
        consist of data subsets from multiple therapeutic specifically
        selected by the customer.
  7




**BioExpress
        Individual Samples**  **-** BioExpress
        Individual Samples are
        for
        customers who choose to study the gene expression data and associated clinical
        or experimental attributes of individually selected sample(s) from our
        BioRepository. These samples represent a variety of therapeutic areas, including oncology,
        cardiovascular disease, central nervous system disorders, inflammatory and
        metabolic diseases, and normal human biology .
 
 **ASCENTA
        System -** The
        ASCENTA System is a web-based analysis system that contains selected, curated
        gene expression data sets from the BioExpress System. The ASCENTA System
        allows
        researchers, who may not have the necessary level of resources or bioinformatics
        experience, to effectively use a significant portion of the BioExpress System’s
        capabilities to quickly profile gene expression across major human diseases
        including multiple sclerosis, inflammatory bowel disease, and Parkinson’s
        disease. Its intuitive format and convenient summary data reports are organized
        into individual genes, pathways and gene families utilizing human, rat and
        mouse
        tissue sample sets related to relevant therapeutic areas, including
        inflammation, oncology, central nervous system disorders, cardiovascular
        disease
        and metabolic disease. Additional algorithms and visualization and summary
        tools
        help researchers identify key genes and biological pathways that possess
        distinctive expression characteristics and disease-related expression patterns.
 
 **SCIANTIS
        System**  **-** The
        SCIANTIS System is derived from the ASCENTA System and is intended to be
        a
        cost-effective way for researchers in academic, government, and non-profit
        institutions to obtain access to parts of the data and technologies in the
        ASCENTA System. The data contained in this web-based system can be utilized
        as a
        lab-bench companion tool and is useful for a number of research applications
        in
        the life sciences. Researchers can quickly profile the expression patterns
        of
        genes across a wide collection of human, rat and mouse tissues, making SCIANTIS
        a cost-effective alternative to common laboratory gene expression analysis
        techniques such as Reverse Transcriptase Polymerase Chain Reaction (“RT-PCR”)
        and Northern blotting.
 
 **Microarray
        Data Generation and Analysis Services -** We offer
        a growing portfolio of services that enable customers to outsource the
        generation and analysis of gene expression and SNP genotyping information,
        primarily from customer-supplied biological samples. Our services are
        designed to deliver high quality, reproducible data in the customer’s preferred
        format. Recent
        portfolio additions include high-throughput SNP profiling using the Affymetrix
        GeneChip Mapping 500K Array Set and a proprietary gene expression profiling
        service specifically for primate studies. To provide their services, we
        use automation, state-of-the-art facilities and our expertise in sample
        handling, preparation, processing, and data analysis. Customers use this
        information to help make better decisions throughout their drug discovery
        and
        development process.
 
 **ToxExpress
        System -** The
        ToxExpress System is a database consisting of gene expression profiles and
        associated experimental data from rat and canine tissues as well as rat and
        human primary hepatocytes. These samples include both normal samples and
        treated
        samples (i.e., samples that have been exposed to specific compounds with
        known
        toxicity). The information for each treated sample includes a “toxicity
        profile”, containing time-course, dose and other classical toxicology study
        information, supplemented with data from studies on primary human liver tissues
        and cells and other animal model tissues. The ToxExpress System data can
        be used
        to develop predictive models and to undertake mechanistic studies on acute
        and
        chronic human toxicity. Customers use the data to develop risk
        assessment/management strategies, and to prioritize leads in
        development.
 
 **ToxSuite
        Datasets -** The
        ToxExpress System can be divided into compound, organ, and cell type-specific
        subsets collectively known as ToxSuite Datasets. ToxSuite Datasets consist
        of
        gene expression and experimental information focused on a specific area of
        interest or toxic end-point, including *in
        vivo* liver,
        kidney and heart and *in vitro* hepatocytes. Such specific studies allow
        researchers to add to their current databases and/or to screen individual
        compound classes suspected of causing a particular type of
        toxicity.
 
 **Toxicogenomics
        Services -** We offer
        toxicogenomics-related services based on proprietary predictive models derived
        from our ToxExpress System and our experience in molecular toxicology, *in
        vivo* studies,
        microarray analysis and software and database development. Our toxicogenomics
        services can be used to predict toxicity, help select potential lead compounds
        and potentially help resolve unexpected toxicity by assessing toxicity risk
        across multiple animal models. These services include:
 
 *ToxScreen
        Reports* - predict
        potential toxicity of candidate compounds based on our proprietary predictive
        toxicogenomic models and toxicity biomarkers. Our expanded offering includes
        rat
        liver, rat heart, and *in
        vitro* rat
        hepatocytes capabilities.
 
 8
 *Molecular
        Mechanism of Toxicity (“MOT”) Services* - provide
        analyses of gene expression changes to explain how specific compounds may
        exert
        and generate toxic effects in specific tissues and biological pathways.
 
 *Custom
        ToxExpress Services* - apply
        the technologies of the ToxExpress System and our internal experts to
        customer-specific, compound-related questions and database needs related
        to
        resolving toxicity-based issues.
  **ToxShield
          Suite -** The
          ToxShield Suite is an intuitive web-based system for use by toxicologists
          and
          drug safety scientists to assess and rank candidate compounds based on
          potential
          human toxicity, as determined using a rat liver model. Each ToxShield Suite
          report characterizes candidate compounds for potential predicted toxicity,
          proposes likely induced pathologies and finds reference compound matches
          from
          those included in the ToxExpress System.
 
 **Genesis
          Enterprise System Software -** The
          Genesis Enterprise System Software is our enterprise-wide bioinformatics
          solution. It is a sophisticated and comprehensive software platform for
          warehousing, comparing, mining, analyzing and visualizing gene expression
          and
          clinical information. This software enables drug development researchers
          to
          compile and rapidly assess large data sets (including our proprietary data,
          customer-derived data and publicly available research data), and contains
          various tools for conducting sophisticated analyses of gene expression
          data.
 
 **Preclinical
          Division**
 
 Our
          Preclinical Division is our contract research organization and comprises *in
          vivo* research
          studies, including general and specialty toxicology studies, and related
          laboratory services. These services enable our customers to assess the
          safety
          and pharmacologic effects of candidate compounds for the purpose of submitting
          to the FDA an IND seeking approval to initiate human trials.
 
 Our
          Preclinical Division includes the following:
 
 **General
          Toxicology Services -** Our
          general toxicology services are the cornerstone of our Preclinical Division.
          We
          offer general toxicology studies designed to assess the safety and risk
          profile
          of pharmaceuticals, biologics, nutraceuticals, environmental contaminants
          and
          other chemical compounds. These studies can be conducted on multiple animal
          model types and use both basic and specialized routes of administering
          compounds
          to subjects. We conduct studies on acute toxicity, chronic toxicity, sub-chronic
          toxicity and carcinogenicity. For such studies, we may help our customers
          design
          their studies, conduct and document studies, analyze results and help guide
          our
          customers through the FDA regulatory process.
 
 **Specialty
          Toxicology Services -** Our
          specialty toxicology services include:
 
 *Developmental
          and Reproductive Toxicology (“DART”) Services* - provide
          a detailed evaluation of stages of animal model reproduction and development
          in
          order to estimate at which stages of human reproduction a candidate compound
          under development presents a potential risk *.*
 
 *Safety
          Pharmacology Services* -
          investigate the effects of target compounds in mammalian species, primarily
          on
          the cardiovascular, respiratory and central nervous systems, and on the
          renal/urinary, gastrointestinal and immune functions.
 
 *Vaccine
          Testing Services* - general
          toxicology-related tests designed to evaluate the safety and biodistribution
          of
          vaccines.
 
 **Laboratory
          Services -** Our
          laboratory services group provides specialized laboratory testing related
          to:
 
 *Clinical
          and Anatomic Pathology* -
          analysis
          of the effects and mechanism of action of test article in blood, serum,
          organs
          and tissues of animal models.
 
 *Analytical
          Chemistry* -
          analysis
          of test article in terms of purity verification, product stability, dose
          verification, concentration verification, and pharmacokinetics in preclinical
          and clinical trial samples.
 
 *Immunology* -
          combination of immunoassays for preclinical, toxicology and clinical studies,
          including custom assay development, assay validation and qualification,
          biodistribution evaluation and chemiluminescent detection to determine
          test
          article presence for safe dose level and immune response.
  9




**Drug
        Repositioning Division**
 
 The
        pharmaceutical development process is widely recognized as being expensive,
        time-consuming and risky, with a high failure rate. Billions of dollars have
        been spent to identify and develop biologically active compounds that do
        not
        ultimately succeed for various reasons, including (i) insufficient effectiveness
        in treating the disease or condition for which they were designed; (ii) safety
        and toxicity issues; (iii) patient variability in responding to a drug
        candidate; and (iv) insufficient potential economic return for the company
        developing the drug candidate.
 
 Using
        traditional methods, scientists have great difficulty in determining and
        evaluating the complete extent of biological activity of drug candidates
        under
        development. As a result, the development of drug candidates that have limited
        effectiveness in human clinical trials for the selected indication are often
        stopped, even though such compounds may be effective in treating other medical
        problems. Such alternative uses are often discovered by accident, most often
        as
        a result of clinical experiences. For example, Pfizer’s Viagra, which was
        originally intended to treat heart conditions in men, was repositioned following
        advanced clinical trials. Viagra is now used to treat sexual dysfunction.
 
 Pharmaceutical
        companies have traditionally relied on two mainstream approaches to establish
        a
        robust compound portfolio - advancing internally developed candidates and
        in-licensing externally generated ones. The first approach continues to be
        time-consuming and expensive while the latter is limited by increased
        competition between pharmaceutical companies to in-license a finite number
        of
        quality drug candidates.
 
 We
        believe
        our Drug Repositioning Division provides an efficient and relatively
        cost-effective approach for systematically uncovering a drug candidate’s
        biological activity and using it to discover new development paths. We have
        the
        ability to run a drug candidate through our entire repositioning technology
        platform in less than one year, allowing us the potential to quickly and
        efficiently discover possible new indications for a drug candidate. Our Drug
        Repositioning Division uses a technology platform that integrates technologies
        acquired from Millennium Pharmaceuticals in 2004 (and improvements we have
        made
        to those technologies) with our core genomics, toxicogenomics and *in
        silico* (in
        computer data) biology capabilities. We continue to invest in the necessary
        scientific and technological expertise in order to further refine and improve
        the technologies that are the basis for our approach to drug repositioning.
        Our
        Drug Repositioning Division currently has the ability to process more than
        30
        drug candidates per year.
 
 In
        2005,
        we grew the number of partnerships to reposition drug candidates for
        pharmaceutical companies beyond our agreement with Millennium and another
        pharmaceutical partner to include partnerships with Pfizer, Inc. and Roche.
        We
        do not expect to derive any significant revenue from milestones or royalties
        under these agreements in 2006.
 
 The
        current emphasis for our Drug Repositioning Division is developing partnerships
        focused on the repositioning of stalled, failed or deprioritized drug
        candidates so that such drug candidates can be returned to clinical development.
        The drug candidates we are seeking are generally set aside due to issues
        other
        than serious toxicity. Currently, the agreements we have established with
        our
        pharmaceutical company partners require that we bear the up-front financial
        cost
        of identifying and, in some instances, the cost of conducting animal model
        studies to validate the potential new use in return for certain contingent
        payments or ownership positions (see “Contractual Arrangements”).
 
 Our
        Drug
        Repositioning Division is led by highly experienced drug researchers and
        technology experts who use multiple, proprietary technology platforms (including
        in-licensed technologies) for discovering potential new development paths
        for
        our partner’s drug candidates. Our partnerships to date have focused on the
        application of our indication-seeking technologies. We are evaluating the
        potential to expand our Drug Repositioning Division into drug selection and
        finding additional indications for drugs already on the market for our
        pharmaceutical partners.
 
 In
        2005,
        we initiated work on more than 30 drug candidates, and we expect to continue
        to
        maintain this capacity in 2006.
 
 The
        technologies used in our Drug Repositioning Division currently consist
        of:
 
 **Indication-Seeking
        Technologies -** We
        believe that no single technology is adequate to assess the effect of a compound
        across complex biological processes. Our multi-platform solution allows us
        to
        systematically and efficiently evaluate a range of biological activity that
        potentially may be affected by a drug candidate, including its potential
        effect
        on a wide variety of diseases without requiring a prior disease-specific
        hypothesis. The technologies we use to develop hypotheses about which diseases
        a
        drug candidate may be used to treat include *in
        vivo* (in
        life), *in
        vitro* (in
        dish), *in
        silico* (in
        computer data), and *ex
        vivo* (outside
        organism) assessments of a drug candidate at the DNA, RNA, protein, pathway,
        and
        cellular levels. Potential alternative therapeutic uses can then be validated
        through a study using an animal model related to the new disease indication
        performed either in our laboratories or those of a third-party service provider
        or by our pharmaceutical partners.
  10




*Real-Time
        In Vivo Animal Imaging* - We are
        using in-licensed technology in conjunction with proprietary protocols and
        procedures to create an optimal imaging program that allows the pharmacological
        action of a compound in organs and tissues to be visualized non-invasively
        using
        genetically engineered mice. This technology allows us to determine
        which organs are impacted by the compound, timing of the response and biological
        pathway information.
 
 *Ex
        Vivo Multiplex Bioanalytics* -
        Using
        sophisticated laboratory automation and proprietary targeted separation and
        analysis techniques, we can simultaneously measure levels of biomolecules
        in
        certain biological fluids collected from a compound-treated animal. By comparing
        the levels of biomolecules in treated animals to those in normal animals,
        we can
        identify activity caused by the compound which may signal potential alternative
        disease indications.
 
 *In
        Vitro Molecular Pharmacology* - Powered
        by sophisticated robotics and software, part of our technology platform allows
        us to apply a compound to a large number of cell types to identify pathways
        that
        may be activated or repressed by the compound. Another technology enables
        us to
        apply a compound to cells in a broad panel of cellular assays, each of which
        represents one or more relevant diseases, to measure the impact of the compound
        on the diseases.
 
 *In
        Silico Biology* - Our
        existing genomics capabilities enable us to find close relatives of the target
        protein in the genome, major and minor sites of expression of the target
        in the
        body, disease conditions that alter the expression of the target and a host
        of
        additional drug target parameters. We use the BioExpress System and our
        proprietary algorithms and biostatistical expertise to identify pathways
        and
        cell regulatory patterns to understand a compound’s mechanism of activity in any
        organ of interest.
 
 In
        the
        future, we may also use the following technologies:
 
 **Variable
        Drug Response Technologies -** Drug
        candidates sometimes provide inconclusive or conflicting results due to the
        fact
        that individual humans may metabolize compounds differently and therefore
        may
        react differently to a particular compound. For example, some humans may
        metabolize a drug more slowly than others and thus get a stronger dose than
        is
        desirable. We are currently assessing the development of a series of variable
        drug response technologies that could potentially help uncover such variable
        responses by assessing the potential role of common genetic variants of drug
        metabolizing enzymes in clinical outcomes for a given drug candidate. This
        program could assist customers in developing tests or criteria that can indicate
        appropriate dosing for individuals, thus making a drug candidate safer or
        more
        effective.
 
 **Customers,
        Sales, Marketing and Customer Support**
 
 During
        2005, two Genomics Division customers each accounted for 10% or more of our
        total revenue. In addition, our top five customers accounted for approximately
        37% of our total revenue in 2005.
 
 The
        following table sets forth information on the composition of our total revenue
        by geographic region for each of the last three fiscal years:
 **Geographic
                    Region****For
                    the year ended:**
                
                
                **North**
                  **America**
                
                **Pacific**
                  **Rim**
                
                **Europe**December
                    31, 2005
                
                
                51%
                
                
                29%
                
                
                20%December
                    31, 2004
                
                
                54%
                
                
                32%
                
                
                14%December
                    31, 2003
                
                
                48%
                
                
                34%
                
                
                18%
 We
          market
          and sell the services of our Genomics Division primarily to pharmaceutical
          and
          biotechnology companies based in North America, Japan and Europe. We are
          expanding our marketing and sales efforts for our Genomics Division into
          additional markets worldwide, including government, non-profit and academic
          research centers. We market and sell the services of our Preclinical Division
          to
          pharmaceutical and biotechnology companies based in the United States and
          to
          United States Government agencies. We market and sell the capabilities
          of our
          Drug Repositioning Division to pharmaceutical companies based in North
          America,
          Japan and Europe. We conduct our sales activities primarily through our
          direct
          sales force.
 
 **Genomics
          Division**
 
 We
          have a
          representative in Japan who assists us in making sales and provides marketing
          advice and support in connection with our Genomics Division. We pay our
          representative a fee based on the services licensed or sold as a result
          of the
          representative’s efforts. Prior to this arrangement, we had an arrangement with
          another representative, until July 2005, pursuant to which the representative
          received a share of revenues it generated for us in Japan. We also have
          an
          agreement with a distributor to distribute our SCIANTIS System to academic,
          government and other non-profit research organizations in 32 countries
          on a
          non-exclusive basis and in Japan on an exclusive basis.
 11




As
        part of
        our international expansion efforts, we maintain our own customer service
        support groups in Japan and the United Kingdom. These groups provide technical
        and customer support to our customers in Japan and Europe.
 
 To
        address
        the needs of our Genomics Division customers, we provide pre- and post-sales
        support activities through our genomics services and software support group,
        including technical demonstrations, planning and implementation of initial
        deployment and new and ongoing training, regular content updates, software
        upgrades, on-going support and follow-on training.
 
 **Preclinical
        Division**
 
 Our
        Preclinical Division staff, including study directors, toxicologists,
        pathologists and chemists, provide support for our Preclinical Division
        customers throughout the duration of each study, including prior to study
        commencement (development of testing protocol and regulatory guidance), during
        the study (real-time testing progress reports and monitoring) and post-study
        (analysis and reporting of study results).
 
 **Drug
        Repositioning Division**
 
 We
        have a
        team of business development professionals with diverse pharmaceutical and
        consulting experience who lead contract negotiations with potential
        pharmaceutical partners. Once a contract is signed, members of both the
        technology and business development groups interact with each pharmaceutical
        partner on a regular basis. We expect to continue to expand the staffing
        of our
        Drug Repositioning Division in future periods.
 
 **Research
        & Development**
 
 Research
        and development expenses for the years ended 2005, 2004 and 2003 were $6.8
        million, $2.4 million and $2.1 million, respectively. Of our total R&D
        expense for the years ended 2005 and 2004, most of the costs were associated
        with our Drug Repositioning Division.
 
 A
        majority
        of our research and development expense consists of investments in the
        development of the technologies and related business infrastructure required
        to
        commercialize our Drug Repositioning Division. The technologies we acquired
        in
        2004 from Millennium represent a significant portion of our Drug Repositioning
        Division technology platform. In connection with the acquisition, we agreed
        to
        spend at least $8.5 million over the first eighteen months to develop and
        commercialize these technologies. This initial investment requirement was
        achieved in 2005. In addition, we are required contractually to invest up
        to an
        additional $6.0 million over the subsequent twelve months. Based on the amount
        we have already spent, as of January 1, 2006 we have a remaining contractual
        obligation of $1.9 million.
 
 A
        smaller
        portion of our research and development expense consists of general technology
        and process improvements related to our Genomics Division. This portion of
        our
        research and development is focused on developing new applications and licensing
        or acquiring technologies to serve as platforms for the development of new
        gene
        expression, SNP genotyping and other molecular-based solutions. We continue
        to
        research methods to improve the production of our gene expression data and
        decreasing the size requirements for tissue samples. We also continue to
        invest
        in expanding our predictive toxicogenomics models for use in both our ToxExpress
        System database and our toxicogenomics services, such as ToxShield. We are
        also
        investing in new technologies to improve the throughput of our *in
        vitro* toxicogenomics models. We will continue to review other technology platforms
        and
        monitor related industry trends. Additions to the content of our BioExpress
        or
        ToxExpress System databases and related services are accounted for as database
        production expenses not research and development.
 
 **Contractual
        Arrangements**
 
 **Genomics
        Division**
 
 We
        expect
        that a majority of our Genomics Division revenue will continue to be derived
        from subscription agreements. Typically, our customers enter into multi-year
        agreements for our larger databases (and annual or multi-year agreements
        for
        certain of our smaller databases) to obtain non-exclusive access to all or
        parts
        of our gene expression and toxicogenomics databases. These agreements may
        be for
        a full database or a portion of a database tailored to a customer’s needs and
        most relevant to their drug development strategy. One of our subscription
        agreements contains specific content update requirements that, if not met,
        could result in a reduction in license fees. Pricing for these subscriptions
        is
        generally dependent upon such factors as the database solution being offered,
        the extent and type of use by the customer, the number of users at the customer
        site, the scope of installation at the customer’s site, requirements for
        customization, any content requirements and whether we provide any custom
        analysis or data management services. Contracts under these subscription
        agreements may be terminated by either party if the other party breaches
        the
        agreement and fails to cure such breach within any applicable cure period
        or in
        the event of a bankruptcy of either party. Many of our agreements require
        us to
        update our data on a periodic basis.
 12




In
        certain
        circumstances, customers may acquire a perpetual license to use certain
        information from our large databases. During 2005, a number of our
        pharmaceutical customers purchased perpetual licenses to various components
        of
        our databases. Pricing for perpetual licenses to data is generally dependent
        upon such factors as the data solution being offered, the extent and type
        of use
        by the customer and the number of users at the customer site. Some of our
        customers purchasing perpetual licenses continue as customers purchasing
        additional services, including licenses to other databases and microarray
        data
        generation and analysis services.
 
 We
        also
        derive a smaller but growing percentage of our revenue from a combination
        of
        toxicogenomics services, software tools, microarray data generation and analysis
        and other professional services and solutions (e.g., ASCENTA System and
        ToxShield). These services and the scope of the services we provide are based
        on
        the customer’s needs. Pricing for these services is generally dependent upon
        such factors as the number of samples or compounds analyzed, the type of
        analysis performed, the starting material provided by the customer, the type
        and
        source of GeneChip microarray used for the services and requirements for
        customization. Generally, contracts for services may be terminated by either
        party if the other party breaches the agreement and fails to cure such breach
        within any applicable cure period or in the event of a bankruptcy of either
        party.
 
 **Preclinical
        Division**
 
 Preclinical
        Division 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. 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.
 
 **Drug
        Repositioning Division**
 
 We
        have
        partnerships to reposition drug candidates for pharmaceutical companies.
        Under
        these agreements we do not receive up-front revenue, other than the up-front
        fees paid to us by Millennium related to our assessment of a single drug
        candidate. We are entitled to receive milestone payments in the event that
        a
        drug candidate is returned to the partners’ development pipeline and, if a drug
        candidate begins commercial sales, we would be entitled to a percentage of
        royalties based on actual sales or other compensation. Each partner has agreed
        to provide a stated number of drug candidates during the term of the applicable
        agreement, from which we can select those to be introduced into our
        drug repositioning pipeline. We will conduct repositioning assessments on
        those
        drug candidates at our expense and will inform our partners of any new possible
        indications we identify for these drug candidates. In some instances, our
        partners have the right to elect to have us conduct mutually agreed upon
        animal
        model validation studies based on our hypotheses, 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. If a partner elects not to pursue a new
        use we identify, we may have the option to develop, license and commercialize
        such use, subject to payments of success-based milestones and royalties to
        our
        partner. If we acquire such rights, we could elect to either (i) out-license
        the
        development rights to such drug candidate without further development on
        our
        part, or (ii) continue to develop the drug candidate, either through our
        own
        resources or with a development partner, to a point where we can more
        effectively out-license the drug candidate to a third-party for final
        development and commercialization. In some instances, our partnerships provide
        us with an opportunity to acquire a full or partial ownership position in
        the
        drug candidate in exchange for paying a portion of the development costs.
        In
        these instances, we would pursue development of these drug candidates either
        through a third-party arrangement or by continuing to develop them to a stage
        when they could be out-licensed.
 13




We
        do not
        expect to derive any significant revenue from milestones or royalties under
        these agreements in 2006.
 
 **Competition**
 
 Our
        competitors are generally different in each of our business
        segments.
 
 **Genomics
        Division**
 
 Our
        Genomics Division competes with internal capabilities of pharmaceutical and
        biotechnology companies and universities worldwide which may choose to use
        genomics technologies to generate for their own use similar sets of gene
        expression or SNP data. To a lesser extent, we also compete with commercial
        providers who offer less extensive and, in certain instances,
        population-specific data (e.g., deCODE genetics, Inc.). In addition, at least
        one privately held company that we know of (e.g., Iconix Pharmaceuticals,
        Inc.)
        licenses an alternative toxicogenomics database and provides predictive
        toxicogenomics services that compete with our toxicogenomics services. In
        addition, we face increasing competition from a variety of public and private
        companies in the area of microarray data generation and analysis services,
        including Expression Analysis, Inc., Clinical Data, Inc., and Icoria, Inc.
        However, we currently believe there are no commercially available gene
        expression databases of comparable size and scale to that of our BioExpress
        and
        ToxExpress System databases. Our services compete on the basis of: scope
        and
        quality of services offered; price; speed of delivery of specific services;
        strength of reputation; size of our databases and of our staff; alternative
        technologies; expertise and experience in specific technological and scientific
        areas; subject focus of genomics and toxicogenomics data sets and technologies;
        our ability to acquire, handle, process, store, analyze and present complex
        gene
        expression data and clinical annotation information in a timely, quality
        controlled and accurate manner; and, our ability to integrate proprietary
        gene
        expression data with publicly available and other third-party generated data
        sets.
 
 **Preclinical
        Division**
 
 The
        preclinical contract research industry in the United States is dominated
        by two
        large companies: Covance, Inc. and Charles River Laboratories International,
        Inc. There are other providers, including mid to small, public and privately
        held contract research organizations and internal capabilities of drug
        development companies and universities. We are a niche provider in the
        preclinical contract research services segment; our market share of
        preclinical research services is small relative to that of our primary
        competition. Our services compete on the basis of: scope and quality of services
        offered; speed of delivery of specific services; strength of reputation;
        size;
        the type of capacity available within our preclinical research facilities;
        our
        relative reputation for consistent, on-time and high quality performance
        in
        completing preclinical research studies; our relative ability to acquire,
        process, analyze and report data from preclinical studies in a timely, quality
        controlled and accurate manner; compliance with regulatory standards; and,
        the
        availability of animals for use in studies.
 
 **Drug
        Repositioning Division**
 
 Currently,
        a number of pharmaceutical and biotechnology companies are attempting to
        perform
        repositioning for their own candidate drugs. In addition, there are companies
        attempting to reposition candidate drugs on behalf of drug development partners,
        including Perlegen Sciences, Inc., BG Medicine, Vicus Biosciences LLC, Vanda
        Pharmaceuticals Inc. and CombinatoRX Inc. We believe our competitors’ offerings
        are generally based on a single, or otherwise limited, biological approach
        and
        we are not aware of any existing competitor that has developed, or is in
        the
        process of developing, a comparable suite of technologies to that employed
        by
        us. Other companies, some of whom are not doing repositioning work, have
        individual technologies that could directly compete with components of our
        drug
        repositioning technology platform. Certain pharmaceutical companies have
        begun to assemble efforts in repositioning using their own existing
        technologies. However, we do not know whether their existing technologies
        have
        yet been developed to enable a rapid, cost-effective approach to systematically
        and efficiently evaluate the broad range of biological activity of a compound,
        including its effect on a wide variety of diseases, without requiring a prior
        disease hypothesis. Because drug repositioning is a relatively new field,
        we
        compete primarily with internal research and development departments of
        pharmaceutical companies.
 
 **Backlog**
 
 We
        record
        an order backlog only for our Preclinical Division, which includes studies
        and
        projects that are performed over periods ranging from a few weeks to several
        years. Our order backlog is comprised of specific commitments under signed
        task orders and other written obligations, and in the case of certain government
        contracts, includes contracts wherein funding has been committed but not
        yet
        assigned to a specific project. We exclude from our backlog revenue on studies
        already commenced and previously recorded. Cancelled or terminated
        contracts are removed from our backlog. Our aggregate backlog at December
        31, 2005 and 2004 was $16 million and $18 million, respectively.
 14




We
        believe
        our backlog as of any date is not necessarily a meaningful indicator of future
        revenue from our Preclinical Division for a variety of reasons, including
        the
        following. First, studies vary in duration. For instance, some studies that
        are
        included in the December 31, 2005 backlog may be completed in 2006, while
        others
        may be completed in later years. Second, the scope of studies may change.
        For
        instance, studies may be terminated, reduced or increased in scope or delayed
        at
        any time by the customer, which may either increase or decrease their value.
        Signed, but delayed, contracts remain in our backlog unless and until a customer
        decides to cancel the particular study or service. Third, the success or
        failure
        of a study may affect the future development of a product or may result in
        cancellation or modification of subsequent studies.
 
 There
        can
        be no assurance that any amounts indicated under our backlog will be recognized
        as revenue at any point in the future, if at all.
 
 **Suppliers**
  **Genomics
        Division** ****
 
 To
        build
        our genomics and toxicogenomics databases that are the basis of our Genomics
        Division, we enter into collaboration agreements from time to time with
        institutions or individuals (including a few commercial providers), to obtain
        specific tissues, blood samples and cell lines and associated experimental
        or
        clinical data. We pay fees under these agreements and, in the case of
        non-commercial providers we may provide access to software and to certain
        gene
        expression data and financial support for the collaborator’s research.
        Non-commercial collaboration agreements typically have a term of two to three
        years, subject to automatic renewal unless earlier terminated by either party.
        Since we’ve already compiled a broad base of general data, our efforts are
        currently focused on the procurement of special, high-value, difficult to
        obtain
        and rare samples. We continue to believe that none of these collaboration
        agreements are individually material to our operations because any one can
        be
        replaced on comparable terms with another provider. In 2005, the annual amounts
        payable pursuant to each non-commercial collaboration agreement generally
        ranged
        from less than $15,000 to $300,000. The costs associated with these agreements
        are included in our database production expenses as the tissues are used.
        In
        2005, these costs in the aggregate were $1.6 million.
 
 To
        generate the gene expression data in our genomics and toxicogenomics databases
        and to provide microarray data generation and analysis and other services
        and
        solutions as part of our Genomics Division, we use Affymetrix, Inc.
        (“Affymetrix”) microarrays, reagents, instrumentation and software. We recently
        renegotiated, for a one year term, our supply and license agreement with
        Affymetrix due to the expiration in December 2005 of our prior agreement.
        Under
        terms of the renegotiated agreement, we are obligated to grant to
        Affymetrix a non-exclusive, royalty-free license to certain inventions we
        make
        related to their microarray technology and, under certain circumstances,
        to
        offer to negotiate with them a non-exclusive, royalty-bearing license for
        certain inventions we make related to sample processing. We also have agreed
        to
        purchase in 2006 a minimum of $7.6 million of microarrays, HTA plates, reagents,
        services under maintenance and service agreements and/or instrumentation.
        In
        addition, we are not required to pay annual license fees to Affymetrix nor
        royalties on any database licenses and sales commencing in 2006. The agreement
        also sets prices for the products, reagents and instrumentation we purchase
        from
        Affymetrix. The agreement is terminable by either party if the other party
        defaults under the agreement and after written notice from the non-defaulting
        party fails to cure the default during the applicable cure period.
 
 In
        the
        past, we also purchased from Affymetrix a reagent made by Enzo BioChem (“Enzo”).
        As first reported in 2004, in late 2003 Enzo terminated its distribution
        agreement with Affymetrix and filed suit against Affymetrix alleging in part
        that Affymetrix had agreements with us and other named customers to supply
        the
        reagent for use in potential violation of their rights. Subsequently, Affymetrix
        denied Enzo’s claims, filed counterclaims and also introduced a new alternative
        reagent, which we are using. The lawsuit is currently in the discovery and
        pretrial hearing stage.
 
 **Preclinical
        Division**
 
 For
        our
        Preclinical Division, we are not dependent on any particular suppliers of
        animals or services. We purchase the animals used for the studies from a
        number
        of different suppliers.
 15




**Drug
        Repositioning Division**
 
 In
        our
        Drug Repositioning Division, we have a non-exclusive license and sublicense
        from
        Promega Corporation (the “Promega License”) to use the luminescence technology
        we use in our real-time
        *in vivo* animal imaging. The term of the agreement is for the life
        of the relevant patents, unless earlier terminated upon breach by either
        party,
        bankruptcy or termination of Promega’s rights by an academic institution that
        holds certain rights to a portion of the technology (in which case we would
        seek
        separate licenses from Promega for its technology and directly from the
        institution). Under the terms of the agreement, we paid Promega an initial
        fee
        and we pay Promega an annual license maintenance fee and royalties on
        luminescent assay reagents we use that are not purchased from Promega. We
        also
        have a non-exclusive license with Xenogen Corporation (the “Xenogen License”),
        for which we pay an annual license fee to use the Xenogen Imaging Technology
        and
        certain related software in connection with our use of certain imaging equipment
        we purchased from Xenogen for use in performing real-time
        *in vivo* animal imaging. The term of the Xenogen license ends in 2008,
        with a three year renewal option, subject to earlier termination if we fail
        to
        make timely payment or otherwise breach the terms of the agreement and we
        have
        agreed to indemnify Xenogen and certain other persons and entities for liability
        resulting from our use of the technology.
 
 **Intellectual
        Property Rights**
 
 As
        of
        December 31, 2005, we had exclusive ownership or license rights to 58 issued
        patents, 25 of which are United States patents, and 107 patent applications,
        54
        of which are United States utility (non-provisional) or provisional patent
        applications. We do not at this time believe that any single patent or
        application is individually material to our business.
 
 With
        respect to proprietary know-how and products and processes for which patents
        are
        of questionable value or are difficult or impossible to obtain or enforce,
        we
        rely on confidentiality agreements and other trade secret protection measures
        to
        protect our interests. We take security measures to protect our proprietary
        know-how and technologies and confidential data, including requiring all
        employees, consultants and customers to enter into confidentiality agreements.
        In arrangements with our customers or suppliers that require the sharing
        of
        processes and data, our policy is to make available only such data as is
        relevant to our agreements with such customers and suppliers, subject to
        appropriate contractual restrictions, including requirements for them to
        maintain confidentiality and use such processes and data solely for our benefit.
        However, such measures may not adequately protect our data.
 
 In
        the
        areas of genomics, toxicogenomics and  bioinformatics technologies related
        to these capabilities, we seek patent rights primarily to protect our freedom
        to
        operate, and to obtain whatever exclusivity may be available under a given
        patent that relates to our main service offerings. We apply for patent
        protection on methods of obtaining and using genomic information and on
        databases, software, and user interface tools relating to the management
        and use
        of such information. Our applications may also contain claims to methods
        of
        identifying and using gene expression profiles and genetic markers, claims
        to
        novel genes and gene fragments, and claims to novel uses for known genes
        or gene
        fragments. We also actively file patent applications on technologies and
        methodologies we have developed in the field of toxicogenomics. Our
        toxicogenomics patent applications contain claims that cover methods of
        predicting toxicity, toxicity markers, statistical models, and other inventions
        related to our toxicogenomics program.
 
 We
        have a
        worldwide, nonexclusive, fully paid, non-transferable license for the life
        of
        certain patents from Incyte Corporation (“Incyte”) (formerly Incyte Genomics,
        Inc.), obtained in connection with the settlement of certain litigation in
        2001,
        to use i) a process that Affymetrix recommends we use in the preparation
        of
        samples for use with the Affymetrix GeneChip platform; and ii) certain patent
        rights related to the development and use of certain types of databases.
        The
        samples and process may only be used to generate gene expression data for
        use in
        research and development. The license may be terminated by Incyte under certain
        limited circumstances if we: i) use certain patents outside of the permitted
        field of use, or induce another party to do so; ii) violate certain agreements
        regarding any future disputes between the parties involving these patents;
        or
        iii) violate the confidentiality provisions of the agreement. If Incyte were
        to
        terminate the license agreement on the grounds that we materially breached
        such
        agreement and if we dispute such claim, the party in whose favor the court
        finds
        would be entitled to an agreed-upon payment from the losing party. Likewise,
        if
        we claim Incyte has materially breached the License Agreement and if Incyte
        disputes such claim, the party in whose favor the court finds would be entitled
        to an agreed-upon payment from the losing party.
 
 Under
        the
        terms of our supply agreement with Affymetrix described above under “Suppliers,”
we have the right to use Affymetrix products, software, systems and database
        patent rights to generate and use databases, license the data in such databases
        to third parties and provide sample processing services to generate and analyze
        data for a customer’s internal use for research and development. In addition, we
        are obligated to grant to Affymetrix a non-exclusive, royalty-free license
        to
        certain inventions we make related to their microarray technology and, under
        certain circumstances, to offer to negotiate with them a non-exclusive,
        royalty-bearing license for certain inventions we make related to sample
        processing.
 
 For
        our
        Drug Repositioning Division, we have acquired or obtained licenses to use
        certain intellectual property rights and technologies from Millennium, Xenogen
        and others, and we will, from time to time, continue to acquire and obtain
        licenses to use intellectual property rights and technologies as needed for
        our
        Drug Repositioning Division. We will also pursue patents, where appropriate,
        on
        new enabling technology used in our Drug Repositioning Division. Certain
        agreements with partners having rights to known drugs, under which our Drug
        Repositioning Division seeks new therapeutic uses for such compounds, provide
        us
        with certain intellectual property rights to those new uses. Where such
        agreements permit, we will pursue global patent protection for selected new
        uses
        that we have found for known drugs.
 16




**Government
        Regulation**
 
 **Genomics
        Division** ****
 
 Our
        Genomics Division depends upon our continued access to and use of tissue
        samples
        and related clinical data, which are affected by regulations governing
        disclosure of confidential personal data, such as regulations governing the
        disclosure of medical information, issued by the Department of Health and
        Human
        Services under the Health Insurance Portability and Accountability Act of
        1996
        (“HIPAA”), and applicable regulations of Canada and the European Union. We also,
        from time to time, perform certain experiments in our Genomics Division which
        must comply with applicable laboratory standards as prescribed by the Good
        Laboratory Practice (“GLP”) regulations promulgated by the FDA, which are more
        fully described under Preclinical Division below. We monitor our procedures
        to
        ensure that such procedures comply with applicable privacy regulations. The
        acquistion and use of human tissue by Gene Logic is generally subject to
        regulations imposed by the Internal Review Boards of the organizations providing
        such materials and to the requirements for patient informed
        consent.
 
 **Preclinical
        Division** ****
 
 Our
        Preclinical Division is subject to various regulatory requirements designed
        to ensure the quality and integrity of our testing processes. Our standard
        operating procedures are written in accordance with applicable regulations
        and
        guidelines for operating in the United States. The industry standards for
        conducting preclinical laboratory testing are embodied in GLP regulations
        promulgated by the FDA. In the United States, for studies intended for
        regulatory submission, GLP compliance is required by the FDA and the United
        States Environmental Protection Agency (“EPA”); foreign governments may require
        our North American customers to comply with certain regulatory
        requirements of other countries (in order to gain approval within these
        countries), such as regulations promulgated by the Japanese Ministry of Health,
        Labor and Welfare (“MHLW”) and Ministry of Agriculture, Forestry and Fisheries
        (“MAFF”), and in Europe, the Organisation for Economic Co-operation and
        Development (“OECD”). GLP regulations specify requirements for facilities,
        equipment, and professional staff and standardized procedures for conducting
        studies, including procedures for recording and reporting data and for managing
        study materials and records. In addition, we have established a required
        quality
        assurance program that monitors ongoing compliance with GLP regulations by
        auditing test data and reporting and conducting inspections of testing
        procedures. To further ensure the quality of our Preclinical Division, we
        have
        also instituted dedicated programs for improving processes and quality, which
        review study data and study reports on the basis of accuracy, completeness
        and
        compliance with applicable regulations.
 
 Our
        Preclinical Division is subject to periodic inspection by the FDA. As a result
        of an inspection in October 2003, we received an FDA Warning Letter (the
“FDA
        Letter”) in February 2005. The FDA Letter focused on issues related to two
        preclinical studies conducted in 2001 and 2002 by TherImmune Research
        Corporation, prior to its acquisition by us in 2003. The issues related to
        how
        the studies were conducted and to certain recordkeeping procedures. We worked
        cooperatively with the product sponsors for the two studies to address the
        issues raised by the FDA Letter. We submitted our response to the FDA addressing
        each of the violations cited in the FDA Letter identifying corrective actions
        we
        have taken, for further consideration by the FDA. Although we do not believe
        any
        further action by the FDA with regard to this report is likely, there can
        be no
        assurance that the FDA will not take further action.
 
 The
        FDA is
        required to inspect our facilities every two years. In August 2005, the FDA
        conducted a new inspection. At the conclusion of the inspection, they noted
        four
        observations, three of which also related to studies done prior to the
        acquisition of TherImmune by us and one of which related to services provided
        by
        a third party subcontractor. The inspection did not note any continuation
        or
        recurrence of discrepancies identified in the FDA Letter. We have responded
        to
        the FDA indicating how we were going to respond to those observations and
        improve our processes to make sure those issues relating to the noted
        observations did not recur and we subsequently reported to the FDA that we
        had
        taken corrective actions and implemented changes to prevent any recurrence
        of
        the noted observations. Although we do not believe any further action by
        the FDA
        with regard to this report is likely, there is no assurance that the FDA
        will
        not take further action.
 
 Our
        laboratory testing facilities are also subject to a variety of national,
        regional and local laws and regulations, including the Animal Welfare Act
        and
        the rules and regulations promulgated thereunder by the United States Department
        of Agriculture (“USDA”). These regulations establish the standards for the
        humane treatment, care, use and handling of animals by dealers and research
        facilities. Our laboratory testing facilities maintain standard operating
        procedures and the documentation necessary to comply with such regulations.
        In
        addition, our laboratory testing facilities are accredited by the American
        Association for Assessment and Accreditation of Laboratory Animal Care
        (“AAALAC”), are registered with the United States National Institutes of Health
        Office of Protection for Research Risks (“OPRR”), and comply with The Office of
        Laboratory Animal Welfare (“OLAW”) regulations.
 17




In
        connection with sales of the services of our Preclinical Division to United
        States Government agency customers and United States Government contractors,
        we
        are also subject to applicable government procurement laws, rules and
        regulations, including the Federal Acquisition Regulations (“FAR”) and
        supplemental agency regulations.
 
 **Drug
        Repositioning Division**
 
 Similar
        to
        our Preclinical Division, although on a smaller scale, our Drug Repositioning
        Division operations in our Cambridge, Mass. facilities are subject to a
        variety
        of national, state and local laws and regulations, including the Animal
        Welfare Act and the rules and regulations promulgated thereunder by the United
        States Department of Agriculture (“USDA”). These regulations establish the
        standards for the humane treatment, care, use and handling of animals by
        dealers
        and research facilities. In addition, our Cambridge facilities are registered
        with the United States National Institutes of Health Office of Protection
        for
        Research Risks (“OPRR”) and comply with The Office of Laboratory Animal Welfare
        (“OLAW”) regulations. Our Cambridge, Mass. facilities maintain standard
        operating procedures and the documentation necessary to comply with such
        regulations.
 
 **General** ****
 
 All
        of our
        laboratories are subject to licensing and regulation under federal, state
        and
        local laws relating to hazard communication and employee right-to-know
        regulations, the handling, storage and disposal of medical specimens, laboratory
        materials and hazardous waste and radioactive materials and the safety and
        health of laboratory employees.
 
 The
        Occupational Safety and Health Administration (“OSHA”) has established extensive
        requirements relating to workplace safety, which require us follow certain
        procedures including providing ongoing training and proper equipment for
        employees working in our facilities. Our employees receive initial and periodic
        training focusing on compliance with applicable hazardous materials regulations
        and health and safety guidelines.
 
 The
        use of
        controlled substances in our laboratory testing facilities is regulated in
        the
        United States by the United States Drug Enforcement Administration (“DEA”) and
        relevant state and local agencies. All of our laboratories using controlled
        substances for testing purposes are subject to licensure by the DEA and
        applicable state agencies.
 
 The
        regulations of the United States Department of Transportation and the United
        States Postal Service apply to the transportation of laboratory specimens
        via
        surface and air.
 
 **Seasonality**
 
 Customer
        purchasing patterns do not show significant predictable seasonal
        variation.
 
 **Human
        Resources**
 
 As
        of
        December 31, 2005, we had 434 employees, consisting of 430 within the United
        States, and 4 who reside in Europe or Japan. Most of our employees are engaged
        directly in research, development, production and marketing and sales
        activities. None of our employees are covered by collective bargaining
        agreements, and management considers relations with our employees to be
        good.
 
 **Available
        Information**
 
 We
        maintain a website at www.genelogic.com . However,
        material contained on our Internet site is not incorporated by reference
        into
        this Form 10-K. We make available free of charge on or through our website
        our
        SEC filings, including our Annual Report on Form 10-K, Quarterly Reports
        on Form
        10-Q, Current Reports on Form 8-K and amendments to those reports we file
        or
        furnish pursuant to Section 13(a) or 15(d) of the Securities Exchange Act
        of
        1934 as soon as reasonably practicable after such reports are electronically
        filed with, or furnished to, the Securities and Exchange Commission
        (SEC).
 18




**ITEM1A.**  **RISK
        FACTORS**
 
 We
        operate
        in a rapidly changing environment that involves a number of risks, some of
        which
        are beyond our control. Set forth below are risks and uncertainties we have
        identified as material that could cause actual results to differ materially
        from
        the results contemplated by the forward-looking statements contained in this
        Form 10-K and that could have material adverse effects on our business, results
        of operations, financial condition and cash flows.
 
 **Risks
        Related to Our Genomics Division**
 
 **To
        generate revenue growth and sustain profitability, we must retain existing
        and
        obtain additional customers for our Genomics Division and develop new and
        improved services.**
 
 Our
        strategy depends, in part, on continued growth in revenue from our Genomics
        Division. To achieve such growth, we must extend existing subscriptions and
        expand the scope and revenue potential of agreements with existing customers
        and
        develop new customers. Each of the subscription agreements that we have with
        our
        Genomics Division customers is for a specific term. These agreements may
        be
        terminated by either party in the event of breach or bankruptcy. If subscription
        agreements with major customers are terminated or expire and are not extended,
        or existing customers fail to buy additional services, or if we fail to enter
        into subscription agreements with new customers, our business could
        suffer.
 
 In
        2006,
        subscription agreements with five customers will expire by their terms and
        two
        agreements may terminate at the customer’s election. We received notice
        from one such customer of its election to terminate its agreement in 2006
        and
        the other customer did not elect to exercise its right to terminate its
        agreement early. These agreements accounted for 20% of our total 2005 revenue
        and 28% of our 2005 Genomics Division revenue. There is no assurance that
        the
        remaining agreements scheduled to expire will be extended or that any agreements
        resulting from our discussions with such customers will be on terms comparable
        to, or as favorable to us as, the existing subscription agreements.
 
 Our
        future
        growth is also dependent upon continuing to expand our services offering
        and
        potential customer base through developing new and improving existing services
        and growing sales of our toxicogenomics services, software tools, microarray
        data generation and analysis and other professional services and solutions
        (e.g., ASCENTA System and ToxShield).
 
 If
        we fail
        to achieve any of these goals, our Genomics Division segment could experience
        financial losses and our entire business could suffer.
 
 **Our
        genomics and toxicogenomics databases require continual upgrading and expansion,
        which may be difficult or expensive.**
 
 To
        continue to build our Genomics Division, we require timely access to normal
        and diseased human and animal tissue samples, other biological materials
        and
        related clinical and other information. Specific tissue and blood samples
        that
        we believe will enhance the content of our databases may be difficult to
        obtain
        or may not be available on terms acceptable to us. In addition, government
        regulation in the United States and foreign countries could restrict access
        to,
        or use of, human and other tissue samples and related data. If we lose access
        to
        sufficient numbers or sources of tissue samples or if tighter restrictions
        are
        imposed on our use of the information generated from tissue samples and related
        data, our Genomics Division may suffer.
 
 Approximately
        every two to three years, certain changes in the microarray platforms that
        we
        use from Affymetrix may be necessary and require us to upgrade the content
        of
        our databases, which is time-consuming and requires significant expense.
        Future
        upgrades could be more frequent, costly or difficult or some customers may
        want
        the databases to be reproduced on a different technology platform, which
        would
        be costly to implement. In 2005, we completed the upgrade of our BioExpress
        System database using the latest human GeneChip microarrays from Affymetrix.
        In
        2006, we expect to upgrade our ToxExpress System database using GeneChip
        microarrays from Affymetrix.
 
 **The
        genomics industry is competitive and evolving rapidly, and our Genomics Division
        may become obsolete or fail to be sufficiently useful.**
 
 Competition
        exists among entities attempting to identify genes associated with specific
        diseases, conduct toxicity testing of compounds and develop products and
        services based on these discoveries. Our Genomics Division directly competes
        in
        these areas with pharmaceutical and biotechnology companies and other companies
        providing services to these industries, academic and non-profit institutions
        and
        government or other publicly funded agencies, both in the United States and
        abroad. We are aware that these entities are using a variety of gene expression
        analysis methodologies, including the use of microarrays, to attempt to identify
        disease-related genes and to develop and make available databases of gene
        expression and toxicogenomics data. In some cases, such databases and other
        genomic data may be publicly available, but to our knowledge none of such
        databases are comparable in scope or utility to ours. In addition, certain
        pharmaceutical companies are developing in-house genomic research programs.
        To
        compete against existing and future technologies, we will need to continue
        to be
        able to demonstrate to potential and existing customers that the technologies
        and capabilities supporting our Genomics Division and, specifically, the
        BioExpress System and ToxExpress System databases, are superior to competing
        technologies and/or other gene expression-based resources.
 19




Our
        Genomics Division could become less competitive if we are not able to make
        the
        enhancements to our technology necessary to compete successfully with newly
        emerging technologies. The roles of genes in human biology and pathology
        are
        still being discovered. Few therapeutic products based on gene discoveries
        have
        been commercialized to date. If our customers no longer find genomics and/or
        toxicogenomics information useful or such information becomes obsolete as
        a
        viable drug discovery and development resource, our existing and potential
        customers may lose confidence in our Genomics Division and our business may
        suffer.
 
 **The
        sales cycle for our Genomics Division is lengthy; we may spend considerable
        resources on unsuccessful sales efforts or may not be able to complete deals
        on
        the schedule we anticipate.**
 
 The
        sales
        cycle for multi-year subscriptions to our BioExpress and ToxExpress System
        databases is estimated at nine to 15 months, and in certain circumstances
        could be longer. The sales cycle for our other services, including
        toxicogenomics reports, microarray data generation and analysis and other
        professional services and solutions, may not be as long but is still a matter
        of
        at least several months. The lengthy sales cycle is caused by a number of
        factors, including our need to educate our existing and potential customers
        and
        sell the benefits of the services of our Genomics Division to a
        variety of groups within such companies. In addition, each agreement may
        involve
        the negotiation of unique terms. We may expend substantial effort with no
        assurance that a new or extended subscription or other agreement will
        result. Actual and proposed consolidations of pharmaceutical and biotechnology
        companies have affected, and may in the future affect, the timing and progress
        of our Genomics Division sales efforts. Accordingly, our results will fluctuate
        because it is not always possible to effectively time the initiation of new
        subscription agreements or extensions of existing subscription
        agreements, or predict the timing of any potential resulting revenue from
        such
        agreements.
 
 **We
        rely on microarrays and other products supplied by Affymetrix to build the
        underlying genomics and toxicogenomics data of our databases and to provide
        our
        microarray data generation and analysis services.**
 
 Our
        continuing ability to build and update the gene expression data that are
        the
        foundation of our databases depends in part on the ability of Affymetrix
        to
        supply us with adequate quantities of high quality microarrays and other
        products and to make available licenses of technologies to use such products.
        We
        also rely on Affymetrix microarrays to provide our microarray data generation
        and analysis services and on a new line of SNP-based microarrays to provide
        our
        recently launched SNP genotyping services. Affymetrix provides us with
        microarrays, reagents, instrumentation and software under an agreement that
        expires December 31, 2006. There is no assurance that we can renew that
        agreement on terms comparable to, or as favorable to us as, the current
        agreement. That agreement is also terminable if we breach the agreement and
        fail
        to cure any breach within the applicable cure period. If Affymetrix is unable
        or
        unwilling to supply us with the products and licenses we require on acceptable
        terms or if the microarrays are unavailable or defective or otherwise
        unreliable, we may incur additional database production costs and we may
        need to
        obtain alternative technologies. Alternative technologies may not be available
        to us, or may only be available to us on unfavorable terms. Restricted or
        curtailed access to such products could cause our Genomics Division to suffer
        by
        preventing or delaying our ability to provide our services or increasing
        the
        cost to generate additional content for our databases, as well as causing
        us to be delayed or unable to meet content update obligations under existing
        Genomics Division subscription agreements.
 
 **Risks
        Related to our Preclinical Division**
 
 **The
        results of operations of our Preclinical Division will be adversely affected
        if
        we cannot obtain additional contracts to generate greater revenue from existing
        and new customers.**
 
 To
        reduce
        losses and achieve profitability in our Preclinical Division, we must obtain
        contracts to perform studies in order to generate greater revenue from existing
        and new customers and we must obtain the types of studies that can allow
        us to
        optimally use the capacity of our study facilities. Factors that could prevent
        us from obtaining adequate numbers, or appropriate types, of contracts for
        studies on a timely basis include the factors set forth in “Risks Related to our
        Preclinical Division” and whether we can provide competitive pricing vis-a-vis
        our competitors whose fixed cost structures are lower because of higher order
        volume and higher and better utilization of capacity, and whether the FDA
        Letter
        will continue to have a negative impact on our reputation for quality studies.
        In addition, demand by biotechnology and pharmaceutical companies for in-life
        animal studies to test the safety of their candidate compounds can fluctuate
        based on internal development pipeline issues, including whether they have
        candidates ready for such pre-IND studies and internal choices regarding
        resource allocation.
 20




**Failure
        to grow our Preclinical Division or the absence of viable strategic alternatives
        for this business could result in continuing material
        losses.**
 
 Our
        goal
        for our Preclinical Division is to improve its financial and operational
        performance. If we continue to experience suboptimal demand for our services,
        to
        experience underutilization of our capacity and to realize ongoing losses
        for
        this division and if we are unable to identify and implement acceptable
        strategic alternatives for the business, the Preclinical Division could cause
        us
        to continue to experience material losses.
 
 **Failure
        to provide quality studies could result in a loss of or inability to obtain
        additional business for our Preclinical Division.**
 
 If
        we fail
        to provide services with a level of quality acceptable to our customers (e.g.,
        in compliance with agreed study protocols, operating procedures, regulatory
        requirements, industry standards and customer expectations), we may be required
        to repeat the study at our expense, or refund amounts paid to us for the
        study,
        and we may experience an adverse effect on our reputation and lose
        business.
 
 **Failure
        to comply with existing regulations could result in a loss of revenue or
        increased costs from our Preclinical Division.**
 
 Our
        Preclinical Division is subject to extensive regulation and we are subject
        to
        periodic audit for compliance by regulatory authorities, including the FDA
        and
        the DEA. Any failure on our part to comply with applicable regulations could
        result in the termination of ongoing studies or the disqualification of data
        for
        submission to regulatory authorities or other regulatory action. If this
        were to
        happen, we could incur additional compliance costs or be subject to additional
        regulatory restrictions, we could be contractually required to repeat a study
        at
        no further cost to our customer or refund the cost of the study and
        customers might choose not to enter into or to renew contracts for our
        Preclinical Division in the future.
 
 We
        are
        also accredited by an industry approval group named The Association for
        Assessment and Accreditation of Laboratory Animal Care International, commonly
        referred to as “AAALAC”. AAALAC is a private nonprofit organization that
        promotes the humane treatment of animals in science through a voluntary
        accreditation program. Generally, our customers insist that their vendors
        be
        AAALAC accredited and, if we were to fail an inspection or lose our
        accreditation, our Preclinical Division would be severely impacted. In addition,
        our use of animals for our Preclinical Division is also regulated by the
        United
        States Department of Agriculture.
 
 Our
        Preclinical Division is subject to periodic inspection by the FDA. As a result
        of an inspection in October 2003, we received an FDA Warning Letter (the
“FDA
        Letter”) in February 2005. The FDA Letter focused on issues related to two
        preclinical studies conducted in 2001 and 2002 by TherImmune Research
        Corporation, prior to its acquisition by us in 2003. The issues related to
        how the studies were conducted and to certain recordkeeping procedures. We
        worked cooperatively with the product sponsors for the two studies to address
        the issues raised by the FDA Letter. We submitted our response to the FDA,
        addressing each of the violations cited in the FDA Letter and identifying
        corrective actions we have taken, for further consideration by the FDA. Although
        we do not believe any further action by the FDA with regard to this report
        is
        likely, there can be no assurance that the FDA will not take further action.
        While the Company is unable to quantify the impact of the FDA Letter, based
        on
        discussions with current and prospective customers, the FDA Letter has had
        a
        negative effect on the Company’s customers’ perception regarding the Company’s
        ability to provide preclinical contract research services.
 
 The
        FDA is
        required to inspect our facilities every two years. In August 2005, the FDA
        conducted a new inspection. At the conclusion of the inspection, they noted
        four
        observations, three of which also related to studies done prior to the
        acquisition of TherImmune by us and one of which related to services
        provided by a third party subcontractor. The inspection did not note any
        continuation or recurrence of discrepancies identified in the FDA Letter.
        We
        have responded to the FDA indicating how we were going to respond to those
        observations and improve our processes to make sure those issues relating
        to the
        noted observations did not recur and subsequently reported that we had taken
        corrective actions and implemented changes to prevent any recurrence of the
        noted observations. Although we do not believe any further action by the
        FDA
        with regard to this report is likely, there is no assurance that the FDA
        will
        not take further action.
 21




**Continuing
        negative performance of our Preclinical Division could affect the value of
        goodwill and creates risk to our results of operations.**
  In
        2003,
        we recorded goodwill of $43.0 million as a result of the acquisition of
        TherImmune. (now Gene Logic Laboratories Inc., our Preclinical Division).
        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 are required to test for impairment whenever we have an indication
        that impairment may exist. During September 2005, we determined that the
        carrying value of the goodwill associated with our Preclinical Division was
        likely impaired, due to lower than expected performance, including lower
        than
        anticipated revenue and declining gross margins and, in the fourth quarter
        of
        2005, we recorded a non-cash expense of $32.8 million representing the implied
        impairment of goodwill. Our estimates for future periods of the net cash
        flows
        may change as market conditions and circumstances dictate. Future impairment
        tests of our goodwill may result in additional impairment charges based on
        these
        changing estimates, which could have a material adverse effect on our results
        of
        operations.
 
 **Our
        results of operations may suffer if studies conducted by our Preclinical
        Division are delayed or reduced in scope, performed improperly or terminated
        or
        if contracts are not priced properly.**
 
 Our
        contracts for our Preclinical Division provide that services may be delayed,
        reduced in scope or terminated upon written notice. Terminations, delays
        or
        reductions may occur for a variety of reasons, including the failure of products
        to satisfy safety requirements, unfavorable interim test results of the study
        services, lack of availability of test material, the customer's decision
        to
        terminate the development of a test compound or to end a particular study,
        and
        our failure to perform properly our duties under the study services
        contract.
 
 Any
        delay,
        reduction in scope or termination could cause us to be unable to recover
        our
        costs or to realize profit on the affected contract and could have a material
        adverse effect on our business. If a study is improperly performed, we may
        have
        to repeat the study at our expense, refund the customer for the cost of the
        study and/or provide other remedies.
 
 Under
        fixed price contracts, there is the risk that we will improperly price one
        or
        more such contracts, which could result in our not recovering our anticipated
        costs or profit from such contracts. Under cost plus contracts with United
        States Government agencies, there is the risk of disallowance by such agencies
        of certain costs as a result of specific regulations and audits. Although
        our
        Preclinical Division contracts may entitle us to receive costs through the
        date
        of termination and, in some instances, a portion of our profit or a cancellation
        fee, it may be difficult to collect such amounts from a customer who has
        decided
        to terminate a study.
 
 **We
        rely on third parties to supply us with animals.**
 
 For
        our
        Preclinical Division, we purchase the animals used for our studies from a
        number
        of different suppliers, two of which are our major competitors. We don’t
        generally have problems with an adequate supply of these animals, although
        from
        time to time there can be temporary shortages for a particular species due
        to
        unanticipated demand, vendor-related events, health issues and other factors,
        which could lead to delays in commencing studies or possible cancellation
        of
        studies. Certain large animals, which are necessary to conduct certain studies
        and are only available abroad, may be more difficult to obtain. The supply
        of
        these animals can be affected by factors beyond our control, including but
        not
        limited to, export and import regulations and practices, natural disasters,
        political unrest, disease outbreaks, competition for supply and the limited
        number of potential suppliers and sources. Such shortages could be of lengthy
        duration and could result in delays or cancellations of higher value
        studies.
 
 **Preclinical
        research services may expose us to liability and related
        risks.**
 
 To
        the
        extent that our customers develop or use products based on our studies, if
        studies are not properly performed, we may be exposed to liability. Contractual
        indemnifications generally do not protect us against liability arising from
        certain of our own actions, such as negligence or misconduct. We could be
        materially and adversely affected if we were required to pay damages or bear
        the
        costs of defending any claim which is not covered by a contractual
        indemnification provision and is outside of or exceeds our insurance coverage
        or
        in the event that a party who must indemnify us does not fulfill its
        indemnification obligations. While we currently maintain professional liability
        insurance, our insurance coverage may not be adequate to protect us against
        future claims. Furthermore, our customers may not indemnify us against these
        types of claims or may not themselves be adequately insured or, in the case
        of
        smaller companies, have a net worth sufficient to satisfy any liability
        claims.
 
 **Actions
        of animal rights extremists may affect our business.**
 
 Our
        Preclinical Division requires the use of animals in our testing studies of
        the
        safety and efficacy of candidate compounds. Acts of vandalism and other wrongful
        acts by animal rights extremists who object to the use of animals in drug
        development could have a material adverse effect on our business. While we
        have
        taken certain security measures to protect our Preclinical Division employees
        and facilities, we cannot prevent all actions that may be taken by animal
        rights
        extremists.
 22




**Risks
        Related to Our Drug Repositioning Division**
 
 **The
        development of the repositioning technologies for our Drug Repositioning
        Division creates risks and uncertainties.**
 
 The
        technologies that form the foundation of our Drug Repositioning Division
        require
        further development and such development could take longer or cost more than
        we
        anticipate. The development of the technologies could prove to be less effective
        than we need in order to offer these services effectively. Moreover, the
        mere
        development of these technologies does not assure that they will, in turn,
        enable us to be successful in determining potential alternative therapeutic
        uses
        for our partners’ drug candidates or that we will be able to utilize these
        technologies at capacity levels that will enable us to achieve our business
        objectives.
 
 In
        addition, these technologies may rely on inventions to which third parties
        have
        obtained or are obtaining patent or other rights and we may need to in-license
        rights to use such inventions. We may not be able to obtain or retain license
        rights needed for one or more of these technologies on terms acceptable to
        us.
        In particular, we license certain technology in connection with certain products
        purchased from Xenogen Corporation and we also purchase and license the right
        to
        use Luciferase from Promega Corporation. The Xenogen license is for a term
        ending in 2008 with an option to renew for an additional three years. The
        Promega license is for a period ending on the expiration or abandonment of
        the
        last of the valid claims of the licensed patent rights. Each of these licenses
        is terminable if we breach the agreement and fail to cure such breach within
        the
        applicable cure period. In addition, the Promega license includes a sublicense
        to rights owned by an academic institution and the license from
        Promega would terminate if the license to Promega from the academic institution
        terminated. If either of these agreements were to terminate while the relevant
        patent claims were enforceable and if we were not able to obtain new licenses,
        we would have to abandon or substantially revise one of the key technologies
        used in our drug repositioning process.
 
 **Even
        if we successfully develop the repositioning technologies for our Drug
        Repositioning Division, these technologies may be quickly replaced, thereby
        making our current approach obsolete, or others may acquire or develop the
        same
        or similar technologies which could create competition for our services and,
        ultimately, could cause material risk of financial losses.**
 
 Pharmaceutical
        companies and other companies and research organizations are developing
        individual technologies for better understanding the complex biological
        processes affected by compounds and selecting, purposing and repurposing
        compounds. Such other parties may elect to use such technologies internally,
        in
        lieu of using our services, or may successfully offer such services based
        on
        their technologies in competition against us. While we have license rights
        related to certain of the technologies that comprise the technology platform
        for
        our Drug Repositioning Division, we do not currently have issued patents
        to any
        of the technologies and our license rights are generally non-exclusive. We
        will
        seek patents or other protection on other elements of the technologies we
        use to
        reposition drug compounds. We may not be able to obtain such protection or
        the
        technology may become obsolete.
 
 **We
        may be required to invest significant resources in identifying alternative
        uses
        for our partners’ compounds and we may not realize significant revenue from
        successfully repositioned drug candidates based on our
        work.**
 
 Our
        Drug
        Repositioning Division agreements provide revenue primarily from success-based
        milestones and royalties based on the successful repositioning and commercial
        sales  of drug candidates. Typically, we have agreed to perform
        our Drug Repositioning Division assessments without up-front
        payments.
 
 Accordingly,
        we may need to invest significant resources in seeking alternative uses for
        one
        or more partners’ drug candidates using our repositioning
        technologies, and we may find no new or alternative uses for these compounds.
        If
        we identify new or alternative uses for a given compound, we may not be able
        to
        realize any value from the identification of such alternative use until our
        partner determines, if ever, that the use makes the compound sufficiently
        desirable to warrant further development and commercialization. We do not
        control when, on what schedule or whether a partner will accept a drug candidate
        for redevelopment or at what pace, if at all, the partner will conduct further
        development effort of such repositioned drug candidate. Such decisions may
        be
        affected by internal policies and organization and other factors of which
        we may
        not be aware and over which we will have no influence.
 23




In
        the
        event that a partner declined to develop a compound for an indication we
        had
        found, we could acquire rights to develop that compound for particular
        indications and, if we were to elect to pursue development of any such compound,
        any such development would require that we promptly find a partner and/or
        that
        we invest substantial financial and other resources to develop the product
        to a
        stage where we could license it out to a third-party for final development
        and
        commercialization. We have not engaged in compound development to date and
        there
        can be no assurance that we would be successful in conducting such development
        or in identifying a licensing partner to continue such development on terms
        that
        would be profitable to us.
 
 These
        factors may limit our ability to earn significant revenue under any of our
        agreements.
 
 **Our
        approach to drug repositioning may not yield sufficient new indications and
        thus
        measurable successes to gain wide-spread market
        acceptance.**
 
 We
        may not
        succeed in achieving significant commercial market acceptance of any of our
        technologies used in drug repositioning activities because the technologies
        we
        use and our approach to drug repositioning may fail to generate sufficient
        new
        indications and thus measurable success for our pharmaceutical partners.
        This
        outcome would have a material adverse effect on our business, financial
        condition, results of operations and market valuation.
 
 **The
        sales cycle for our Drug Repositioning Division is lengthy; we may spend
        considerable resources on unsuccessful sales efforts or may not be able to
        complete deals on the schedule we anticipate.**
 
 Our
        Drug
        Repositioning Division strategy depends upon our ability to establish
        collaborative arrangements with  pharmaceutical partners to repurpose
        current clinical failures in their pipelines. If our Drug Repositioning
        Division is unable to establish partnerships with sufficient additional
        pharmaceutical companies, we may not be able to obtain enough compounds for
        repurposing and, ultimately, to recoup the investment we will have made in
        the
        development of this business.
 
 Our
        ability to obtain new customers depends upon our ability to convince them
        that
        our drug repositioning approach and technology platform can increase
        productivity for their drug development efforts. The sales cycle for our
        Drug
        Repositioning Division partnerships can take up to 12 months, and in certain
        circumstances longer, to complete. The lengthy sales cycle is caused by a
        number
        of factors, including our need to educate potential customers on the benefits
        of
        our approach to drug repositioning and the technologies we use. In addition,
        each agreement may involve the negotiation of terms in a context not familiar
        to
        our partners. We may expend substantial effort with no assurance that a new
        agreement will result. Actual and proposed consolidations of pharmaceutical
        and
        biotechnology companies could affect the timing and progress of our Drug
        Repositioning Division sales efforts.
 
 Furthermore,
        we may not be able to convince other customers to enter into agreements for
        services or on terms that are acceptable to us.
 
 **Other
        Risks**
 
 **We
        have a history of operating losses that are likely to continue for some time.**
 
 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
        December 31, 2005, we had an accumulated deficit of $261.0 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 goodwill described herein,
        and
        acquisitions of research and development. These costs have exceeded our revenue
        and we expect to incur additional losses in the future, including substantial
        losses relating to the ongoing development costs of our Drug Repositioning
        Division.
 
 **Our
        revenue is derived primarily from, and is subject to risks faced by, the
        pharmaceutical and biotechnology industries in the United States, Japan,
        Europe
        and other foreign countries; our revenue is also subject to foreign currency
        risk.**
 24




We
        expect
        that our revenue will continue to be derived primarily from agreements with
        pharmaceutical and biotechnology companies, as well as United States Government
        agencies. As a consequence, our results of operations may fluctuate
        substantially due to fluctuations or delays in our customers’ research and
        development expenditures and other factors affecting their purchasing decisions.
        These factors include:
 ·
              fluctuations
                  in current or potential customers’ research and development budgets;
 ·
              changes
                  in national or international economic
                  conditions;
 ·
              access
                  to capital markets by current or potential biotechnology
                  customers;
 ·
              market-driven
                  pressures on current or potential customers to improve productivity
                  efficiencies through consolidation, cost reduction and overall
                  research
                  and development effectiveness; ·
              decisions
                  by current or potential customers to purchase new, improved and/or
                  alternative technologies; ·
              pressure
                  to limit government spending in sectors relevant to our business
                  or
                  changes in government procurement practices, including the process
                  for
                  determining reimbursement rates related to United States Government
                  contracts;
    ·
              mergers
                  and acquisitions within the pharmaceutical and biotechnology
                  industry resulting in fewer potential customers for our services and
                  solutions;
   ·
              new
                  or more stringent application of FDA and other laws and regulations
                  in the
                  drug approval process; and
 ·
              regulatory
                  reviews by the FDA or other regulatory bodies that could delay
                  or increase
                  costs associated with drug
                  development.
 
 In
        addition, beginning in 2005, contracts with our Japanese customers are payable
        in  Japanese Yen and are subject to fluctuations due to changes in currency
        exchange rates.
 
 None
        of
        these factors is within our control.
 
 **Certain
        investments made by the Company may fluctuate in value and may create an
        adverse
        impact on our financial performance; the value of certain of our intangibles
        and
        long-term investments creates risk to our financial
        performance.**
 
 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 which, at December 31, 2005, had an aggregate value
        of
        $26.3 million. Whether or not these intangible assets are impaired involves
        significant judgment, including the following: (i) whether our licenses and
        internally developed intellectual property may not provide valid and economical
        competitive advantage; and (ii) whether our services we provide 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 periodic
        reviews of our intangible assets and we may be required to reduce the value
        of
        these assets if circumstances change.
 
 In
        addition, we have an investment in MetriGenix, Inc. with a book value as
        of
        December 31, 2005 of $3.2 million. This investment is subject to periodic
        evaluation for impairment. Since MetriGenix is an independent company in
        which
        we are a minority stockholder, the factors affecting an impairment analysis,
        which include potential revenue, cost of capital and fair market value of
        the
        entity, is not within our control. In the future, this investment may require
        an impairment charge in the future.
 
 **We
        may not be able to obtain adequate patent protection for new technologies
        and
        methods required for achieving our business objectives.**
 
 Our
        success will depend in part on our ability to protect confidential information
        and to obtain intellectual property rights and licenses sufficient to provide
        adequate exclusivity and to preserve our freedom to operate.
 
 We
        rely on
        confidentiality agreements and other trade secret protective measures to
        protect
        our interests in proprietary know-how and technology that are not patentable
        or
        for which patents are difficult to enforce. We have taken security measures
        to
        protect our proprietary know-how and confidential data and continue to explore
        further methods of protection. While we require all employees, consultants
        and
        customers with access to our trade secrets to enter into confidentiality
        agreements, we cannot be certain that we will be able to protect our trade
        secrets. We also rely on confidentiality procedures to prevent public disclosure
        of patentable proprietary technology prior to filing patents. Any material
        leak
        of confidential information into the public domain, or to third parties,
        could
        cause our business, financial condition and results of operations to suffer
        adverse consequences, including possible loss of patent rights.
 
 Our
        patent
        position involves complex legal and factual questions. Legal standards relating
        to the validity and scope of claims in the genomics technology field are
        still
        evolving. Therefore, the degree of exclusivity that future patent protection
        may
        provide for our proprietary technologies in this field is uncertain. Likewise,
        legal standards relating to validity of claims to new methods of using known
        drugs are still evolving. Hence, the likelihood of patenting potential new
        therapeutic uses of drug repositioning candidates also is
        uncertain.
 25


Specific
      risks and uncertainties that we face in the area of patent exclusivity
      include:


·
              the
                  pending patent applications we have filed, or to which we have
                  licensed
                  rights, may not result in issued patents or may take longer than
                  we expect
                  to result in issued patents; ·
              the
                  claims of any patents which are issued on our pending applications
                  may not
                  provide commercially meaningful protection or
                  value;
 ·
              the
                  patents licensed or issued to us may not provide adequate exclusivity
                  for
                  all aspects of our proprietary genomics
                  technology;
 ·
              other
                  companies may challenge patents issued or licensed to us;
                  and
 ·
              we
                  may not be able to obtain adequate patent protection for commercialization
                  of a potential new use of a successfully repositioned drug
                  candidate.
 
 **We
        may need to initiate patent enforcement litigation or be subject to future
        infringement claims.**
 
 In
        addition, other organizations, including companies, academic and non-profit
        institutions and governmental organizations are developing technologies in
        the
        genomics and drug repositioning fields. Many of these technologies are subject
        to the same evolving legal standards and related uncertainties about patent
        protection as our proprietary technologies. Therefore, it may be necessary
        for
        us to initiate litigation to protect and enforce our intellectual property
        rights.
 
 We
        also
        face risks that patents issued to other organizations may restrict our ability
        to do business, and that we may be unable to obtain or maintain licenses
        providing freedom to operate on acceptable terms. Thus, the technologies
        that we
        use to develop our services, and those that we incorporate in our services,
        may
        be subject to claims that they infringe the patents or proprietary rights
        of
        others. In particular, we are aware of a number of patents and patent
        applications owned by others relating to genetic markers and to the analysis
        of
        gene expression or the manufacture and use of microarrays and related materials.
        Therefore, we could be sued by parties alleging patent
        infringement.
 
 The
        risk
        of involvement in patent litigation may increase as the genomics, biotechnology
        and software industries and drug repositioning businesses expand, more patents
        are issued and other organizations engage in our business fields. We could
        incur
        substantial litigation costs to defend ourselves in patent infringement suits
        brought by other parties or to initiate such suits. In addition, patent
        litigation could cause disruption in our business activities and divert
        management’s time and attention from the operation of our business. In that
        regard, we have in the past purchased reagents from Affymetrix made by Enzo,
        and
        we also purchased such reagents directly from Enzo. In late 2003, Enzo
        terminated the agreement under which Affymetrix distributed that reagent
        and
        filed suit against Affymetrix. Affymetrix subsequently filed a counter suit
        and
        the two suits were consolidated. In those suits, Enzo alleges, among other
        things, rights to certain Affymetrix technologies and that Affymetrix had
        agreements with Gene Logic and other named customers to supply the reagent
        for
        use in potential violation of their rights. Affymetrix has denied Enzo’s claims
        and made its own counterclaims. We have not been made a party to that suit;
        we
        cannot predict the outcome of this litigation, its effect on us or the
        potential, if any, for claims being made against us. We have commenced using
        a
        new Affymetrix reagent kit. Although we have had discussions with Enzo to
        attempt to resolve any claims Enzo believes it may have with respect to our
        use
        of Enzo’s reagent, we have not reached any agreement as of the date of this Form
        10-K.
  **Our
            activities involve hazardous materials and may subject us to environmental
            liability.**
 
 Certain
            activities of our businesses involve the controlled use of limited quantities
            of
            hazardous and radioactive materials and may generate biological waste.
            We are
            subject to federal, state and local laws and regulations governing the
            use,
            manufacture, storage, handling and disposal of these materials and certain
            waste
            products. Although we believe that our safety procedures for handling
            and
            disposing of these materials comply with prescribed standards, we cannot
            completely eliminate the risk of accidental contamination or injury from
            these
            materials. In the event of an accident or we otherwise fail to comply
            with
            applicable regulations, we could lose our permits and/or approvals or
            be held
            liable for damages or penalized with fines.
 
 We
            believe
            that we comply in all material respects with currently applicable environmental
            laws and regulations and do not expect near term material additional
            capital
            expenditures for environmental control facilities. However, we may have
            to incur
            significant costs in the future to comply with environmental laws and
            regulations.  At
            present, we also believe we have appropriate insurance coverage against
            hazardous materials claims.
  **Our
        stock price could be volatile and could decline.**
 
 The
        market
        prices for securities of biotechnology and other technology companies serving
        the healthcare industry have been volatile. This volatility has significantly
        affected the market prices for these securities for reasons frequently unrelated
        to the operating performance of the specific companies. These broad market
        fluctuations may adversely affect the market price of our Common Stock. Events
        or factors that may have a significant impact on our business and on the
        market
        price of our Common Stock include those in the Risk Factors set forth in
        this
        section and the following:
 ·
              slowing
                  of revenue growth in our base
                  business;
 ·
              quarterly
                  and annual financial and operating
                  results;
 ·
              failure
                  to meet estimates or expectations of securities analysts or our
                  projections;
 ·
              sales
                  and/or purchases of our Common Stock by members of our senior management
                  and Board of Directors;
 ·
              announcements
                  by us or others of technological innovations or new products or
                  announcements regarding our services and
                  solutions;
 ·
              developments
                  in patent or other proprietary
                  rights;
 ·
              the
                  loss of significant licenses or supply
                  agreements;
 ·
              future
                  sales of substantial amounts of our Common Stock by our existing
                  stockholders;
 ·
              changing
                  market perception regarding investments in the pharmaceutical and
                  biotechnology industries;
 ·
              results
                  of clinical trials of potential repurposed drug candidates resulting
                  from
                  our Drug Repositioning Division;
                  and
 ·
              general
                  market conditions.
 
 These
        and
        other external factors may cause the market price and demand for our Common
        Stock to fluctuate substantially, which may limit or prevent investors from
        readily selling their shares of Common Stock and may otherwise negatively
        affect
        the liquidity of our Common Stock.
 
 **ITEM1B.**  **UNRESOLVED
        STAFF COMMENTS**
 
 None.
 26




**ITEM2.**   **PROPERTIES**
 
 The
        following table sets forth information regarding the principal facilities
        we own
        or lease, the location and approximate size of each such facility or the
        size of
        the space leased at such property, and their designated use. We believe that
        these facilities are in good condition, enable us to serve our customers
        efficiently and are sufficient to meet our business needs for the foreseeable
        future.
  Location
                Approximate
                  Square
                    Footage
                Operation
                Business
                    Segment
                Type
                    of
                  Holding
                ExpirationGaithersburg,
                    MD.
                28,408
                Administrative
                Mixed
                Lease
                2013Gaithersburg,
                    MD.
                57,410
                Laboratory
                Genomics
                Lease
                2011Gaithersburg,
                    MD.
                49,225
                Administrative
                Mixed
                Lease
                2007Gaithersburg,
                    MD.
                26,127
                Laboratory
                Preclinical
                Lease
                2011Gaithersburg,
                    MD.
                29,900
                Laboratory
                Preclinical
                Lease
                2012Gaithersburg,
                    MD.
                30,600
                Laboratory
                Preclinical
                Lease
                2010Gaithersburg,
                    MD.
                16,406
                Laboratory
                Preclinical
                Lease
                2010Cambridge,
                    MA.
                19,093
                Administrative,
                    R&D
                Drug
                    Repositioning
                Lease
                2008Berkeley,
                    CA.
                4,820
                Administrative
                Genomics
                Lease
                2007261,989




Our
        current facilities policy is that unneeded space can be subleased so that
        underutilized space is not an economic disadvantage to us. As of December
        31,
        2005, we subleased 10,341 square feet of space, resulting in $0.6 million
        in
        future sublease payments to us through 2007.
 
 **ITEM3.**   **LEGAL
        PROCEEDINGS**
 
 We
        are not
        currently a party to any legal proceedings that would have a material adverse
        effect on our financial condition or results of operations.
 
 **ITEM4.**   **SUBMISSION
        OF MATTERS TO A VOTE OF SECURITY HOLDERS**
  None.
 27




**Executive
        Officers**
 
 The
        following table sets forth, as of March 1, 2006, information regarding the
        names
        and ages of all our executive officers and their respective positions and
        offices with us.
  **Name**
                
                **Age**
                
                **Position**Mark
                    D. Gessler
                
                44
                
                Chief
                  Executive Officer and PresidentPhilip
                    L. Rohrer, Jr.
                
                49
                
                Chief
                  Financial OfficerY.
                    Douglas Dolginow, M.D.
                
                51
                
                Executive
                  Vice PresidentV.W.
                    Brinkerhoff, III
                
                61
                
                Senior
                  Vice President, General Manager, Gene Logic LaboratoriesDennis
                    A. Rossi
                
                55
                
                Senior
                  Vice President, General Manager, GenomicsF.
                    Dudley Staples, Jr.
                
                58
                
                Senior
                  Vice President, Secretary and General CounselJoanne
                    M. Smith-Farrell, Ph.D.
                
                36
                
                Vice
                  President, Corporate Development and
                  Strategy




**Mark
        D. Gessler** has
        served as Chief Executive Officer since June 2000 and as President since
        prior
        to March 2000. Since March 2000, Mr. Gessler has been a member of our Board
        of
        Directors and from April 2001 to November 2004, he served as Chairman of
        the
        Board of Directors. Mr. Gessler holds an MBA from the University of Tennessee.
 
 **Philip
        L. Rohrer, Jr.** has
        served as Chief Financial Officer since prior to March 2000. Mr. Rohrer holds
        a
        B.A. in biology from Hood College and an M.S.M. from Frostburg State
        University.
 
 **Y.
        Douglas Dolginow, M.D.** has
        served as Executive Vice President, Pharmacogenomics since August 2003. From
        prior to March 2000 to August 2003, Dr. Dolginow served as Senior Vice
        President, Pharmacogenomics. Dr. Dolginow received a M.D. degree from the
        University of Kansas.
 
 **V.W.
        Brinkerhoff, III** has
        served as Senior Vice President and General Manager, Gene Logic Laboratories
        since March 2005. From August 2001 to January 2005, Mr. Brinkerhoff served
        in
        various executive level positions including most recently as Group Vice
        President, Operations with Wilson Greatbatch Technologies, Inc., a medical
        device components manufacturer. From prior to March 2000 to August 2001,
        Mr.
        Brinkerhoff served in various executive level positions including most recently
        as a Vice President with Life Technologies, Inc., a global life science products
        company.
 
 **Dennis
        A. Rossi** has
        served as Senior Vice President and General Manager, Genomics since September
        2004. From February 2002 to January 2004, Mr. Rossi served as Vice President,
        Marketing for Accelrys, a subsidiary of Pharmacopeia, Inc., a life sciences
        and
        material sciences and services company. From April 2000 to February 2002,
        Mr.
        Rossi served as a Partner for Harvard Strategy Group, a life sciences consulting
        firm. From prior to March 2000 to April 2000, Mr. Rossi held several senior
        level management positions at Digital Equipment Corporation, an information
        technology company. Mr. Rossi holds an M.P.H. from The University of Hawaii
        and
        an M.B.A. from Boston University.
 
 **F.
        Dudley Staples, Jr.** has
        served as our Senior Vice President, Secretary and General Counsel since
        May
        2002. From prior to March 2000 to May 2001, Mr. Staples served as General
        Counsel of Online Office Supplies Company, an online seller of office supplies
        and subsidiary of eCommerce Industries, Inc., and then as Associate General
        Counsel of eCommerce Industries, Inc. Mr. Staples holds a J.D. degree from
        the
        University of Virginia School of Law.
 
 **Joanne
        M. Smith-Farrell, Ph.D.** has
        served as Vice President, Corporate Development and Strategy since October
        2004.
        From November 2003 to October 2004, Dr. Smith-Farrell served as Senior Director,
        Strategic Marketing. Prior to joining Gene Logic, from July 2002 to September
        2003, Dr. Smith-Farrell served as President and Chief Executive Officer of
        emGene, Inc., a privately-held biotechnology company. From prior to March
        2000
        to July 2002, Dr. Smith-Farrell served as Project Leader and Consultant for
        the
        Healthcare Practice of The Boston Consulting Group, a management consulting
        firm. Dr. Smith-Farrell holds a Ph.D. in physics from The Catholic University
        of
        America.
 28




**PART
        II**
 
 **ITEM5.**
              **MARKET
                  FOR THE REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER
                  PURCHASES OF EQUITY
                  SECURITIES**
  **Price
        Range of Common Stock**
 
 Our
        Common
        Stock is traded on the NASDAQ Stock Market under the symbol GLGC. The following
        table sets forth information regarding the high and low closing prices for
        our
        Common Stock, for the periods indicated.
  **High**
                
                **Low****Year
                    Ended December 31, 2005**First
                    Quarter
                
                $
                3.58
                
                $
                3.05Second
                    Quarter
                
                
                3.45
                
                
                2.77Third
                    Quarter
                
                
                5.78
                
                
                3.38Fourth
                    Quarter
                
                
                4.97
                
                
                3.28**Year
                    Ended December 31, 2004**First
                    Quarter
                
                $
                6.24
                
                $
                3.05Second
                    Quarter
                
                
                5.07
                
                
                3.60Third
                    Quarter
                
                
                4.09
                
                
                3.29Fourth
                    Quarter
                
                
                3.86
                
                
                3.25
  **Holders**
 
 On
            March
            1, 2006, the last reported sale price of our Common Stock on the NASDAQ
            Stock
            Market was $3.73. As of March 1, 2006, there were approximately 347 registered
            holders of record of our Common Stock, including one company, Cede & Co.,
            which is the Registered Nominee for the Depository Trust Company, acting
            as
            holder of record for beneficial holders whose stock is held in street
            name.
 
 **Dividend
            Policy**
 
 Since
            we
            became a public company, we have not paid dividends on our Common Stock.
            Currently, we intend to retain future earnings, if any, to finance the
            growth
            and development of our business and do not anticipate paying cash dividends
            for
            the foreseeable future.
  29




**ITEM6.**  **SELECTED
        CONSOLIDATED FINANCIAL DATA**
 
 The
        selected consolidated financial data set forth below with respect to our
        consolidated statements of operations for the years ended December 31, 2005,
        2004 and 2003 and with respect to the consolidated balance sheets as of December
        31, 2005 and 2004 have been derived from audited consolidated financial
        statements included as part of this Form 10-K. The statements of operations
        data for the years ended December 31, 2002 and 2001 and the balance sheet
        data
        as of December 31, 2003, 2002 and 2001 are derived from audited financial
        statements not included in this Form 10-K. The following selected consolidated
        financial data includes, for 2005, 2004 and 2003 only, the results for our
        Preclinical Division (resulting from the April 1, 2003 acquisition of
        TherImmune Research Corporation) and for 2005 and 2004 only, the results
        for our
        Drug Repositioning Division (resulting from the July 2004 acquisition of
        technologies from Millennium Pharmaceuticals, Inc.) and should be read in
        conjunction with the consolidated financial statements and notes thereto
        included elsewhere in this Form 10-K.
  **Year
                    Ended December 31,****2005**
                
                **2004**
                
                **2003**
                
                **2002**
                
                **2001****(in
                    thousands, except per share data)****Consolidated
                    Statements of Operations Data:**Revenue:Genomics
                    services
                
                $
                56,602
                
                $
                52,171
                
                $
                51,960
                
                $
                54,848
                
                $
                43,328Preclinical
                    services
                
                
                22,180
                
                
                23,766
                
                
                17,559
                
                
                -
                
                
                -Drug
                    repositioning services
                
                
                588
                
                
                -
                
                
                -
                
                
                -
                
                
                -Total
                    revenue
                
                
                79,370
                
                
                75,937
                
                
                69,519
                
                
                54,848
                
                
                43,328Expenses:Cost
                    of preclinical services
                
                
                27,504
                
                
                26,127
                
                
                16,058
                
                
                -
                
                
                -Database
                    production
                
                
                31,689
                
                
                42,496
                
                
                49,408
                
                
                57,941
                
                
                55,452Research
                    and development
                
                
                6,812
                
                
                2,449
                
                
                2,091
                
                
                2,367
                
                
                3,577Selling,
                    general and administrative
                
                
                31,594
                
                
                25,676
                
                
                22,198
                
                
                19,734
                
                
                19,323Amortization
                    of goodwill
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                1,524Purchased
                    research and development
                
                
                -
                
                
                8,817
                
                
                -
                
                
                -
                
                
                -Goodwill
                    impairment
                
                
                32,794
                
                
                -
                
                
                -
                
                
                -
                
                
                -Total
                    expenses
                
                
                130,393
                
                
                105,565
                
                
                89,755
                
                
                80,042
                
                
                79,876Loss
                    from operations
                
                
                (51,023
                )
                
                (29,628
                )
                
                (20,236
                )
                
                (25,194
                )
                
                (36,548
                )Interest
                    (income), net
                
                
                (2,625
                )
                
                (1,395
                )
                
                (1,652
                )
                
                (3,139
                )
                
                (8,645
                )Other
                    (income) expense
                
                
                (813
                )
                
                -
                
                
                (327
                )
                
                (250
                )
                
                (83
                )Write-down
                    of other than temporary decline in the valueof
                    marketable securities available-for-sale
                
                
                719
                
                
                -
                
                
                -
                
                
                -
                
                
                -Write-down
                    of equity investments
                
                
                -
                
                
                -
                
                
                4,268
                
                
                753
                
                
                2,495Loss
                    before income tax expense and equity in net lossof
                    unconsolidated investees
                
                
                (48,304
                )
                
                (28,233
                )
                
                (22,525
                )
                
                (22,558
                )
                
                (30,315
                )Income
                    tax expense
                
                
                -
                
                
                287
                
                
                2,246
                
                
                1,492
                
                
                533Loss
                    before equity in net loss of unconsolidated investees
                
                
                (48,304
                )
                
                (28,520
                )
                
                (24,771
                )
                
                (24,050
                )
                
                (30,848
                )Equity
                    in net loss of unconsolidated investees
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                2,322Net
                    loss
                
                
                (48,304
                )
                
                (28,520
                )
                
                (24,771
                )
                
                (24,050
                )
                
                (33,170
                )Amounts
                    per share, basic and diluted:Net
                    loss
                
                $
                (1.52
                )
                $
                (0.91
                )
                $
                (0.82
                )
                $
                (0.89
                )
                $
                (1.25
                )Shares
                    used in computing basic and diluted net loss per share
                
                
                31,744
                
                
                31,493
                
                
                30,112
                
                
                26,948
                
                
                26,540




**December
                  31,****2005**
              
              **2004**
              
              **2003**
              
              **2002**
              
              **2001****(in
                  thousands, except per share data)****Consolidated
                  Balance Sheets Data:**Cash,
                  cash equivalents and marketable securities
                  available-for-sale
              
              $
              82,125
              
              $
              102,915
              
              $
              111,823
              
              $
              167,102
              
              $
              197,818Working
                  capital
              
              
              67,600
              
              
              96,059
              
              
              111,015
              
              
              163,681
              
              
              187,184Total
                  assets
              
              
              160,719
              
              
              207,081
              
              
              227,366
              
              
              227,460
              
              
              256,927Total
                  long-term debt and capital lease obligations
              
              
              825
              
              
              1,008
              
              
              1,174
              
              
              750
              
              
              338Total
                  stockholders' equity
              
              
              124,856
              
              
              172,828
              
              
              199,589
              
              
              204,438
              
              
              226,027




Note:
      Certain reclassifications have been made to prior years' consolidated
      financial data to conform to the current year presentation.




30




**ITEM7.**
              **MANAGEMENT'S
                  DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL
                  CONDITION**
 
 We
        conduct
        our operations through three business segments:
 
 ·
              **Genomics
                  Division**:
                  we
                  sell subscriptions to our proprietary reference 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 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 compounds through the application
                  of a series of molecular pharmacology technologies, with the goal
                  of
                  returning such compounds to the drug development
                  pipeline.
 
 We
        derive
        a majority of our Genomics Division revenue from licenses to our databases.
        Typically, subscriptions to large databases are multi-year agreements, and
        subscriptions to our smaller databases or a subset of a database are annual
        or
        shorter term agreements. Pricing for these subscriptions varies, based on
        the
        nature of the database, including the proposed extent of use, scope of
        installation, requirements for customization, any content requirements and
        whether we provide any custom analysis or data management services. Generally,
        the fees for these subscriptions are payable ratably over the life of the
        agreement for multi-year agreements and ratably or up-front for shorter term
        agreements. Contracts with our customers other than our Japanese customers
        are
        dollar-denominated. Beginning in 2005, contracts with our Japanese customers
        are
        denominated in Japanese Yen. We also grant perpetual licenses to some customers
        for a fee, payable typically upon delivery of the data or software, for certain
        data from our BioExpress and ToxExpress System databases, as well as to certain
        of our software tools. As a result of our strategy to expand our customer
        base
        and market penetration, we also derive a smaller but growing percentage of
        our
        Genomics Division revenue from a combination of toxicogenomics services,
        software tools, microarray data generation and analysis services, and other
        professional services and solutions, with pricing and payment terms that
        vary
        depending on the service or solution being provided. In some cases, a single
        contract or related contracts may cover a combination of services and solutions.
        Generally, our Genomics Division contracts may be terminated in the event
        of
        breach by either party not cured within any applicable cure period. Our Genomics
        Division contracts may vary significantly in size and revenue from each of
        these
        contracts may be recognized over varying periods. Accordingly, the revenue
        from
        our Genomics Division may produce uneven results of operations.
 
 We
        continually invest in new database content. In addition, from time-to-time
        our
        databases may require periodic upgrades as new versions of microarrays are
        made
        available. We also periodically develop and provide new versions of our various
        software tools. In 2005, we completed an upgrade of our BioExpress System
        database and various versions of our software tools. In 2006, we expect to
        upgrade our ToxExpress System database and provide further versions of our
        software tools.
 
 Our
        Preclinical Division revenue is primarily from fixed price contracts, under
        which we benefit only if our costs are equal to or lower than anticipated.
        For
        most fixed price contracts, a portion of the contract price is due at the
        time
        the study starts, with the balance payable upon the achievement of various
        milestones over the study’s duration. We also receive some revenue from cost
        plus contracts, most of which are with United States Government agencies,
        under
        which we are reimbursed for our budgeted costs, subject to periodic audit,
        and
        receive a fixed fee. Costs under cost plus contracts are reimbursed monthly
        along with a pro rata portion of the fixed fee. Contracts may range in duration
        from a few weeks to several years. Most of our Preclinical Division contracts
        may be terminated by the customer at any time, subject to payment to us of
        certain costs and, in some instances, a portion of our profit or fixed fee,
        or a
        cancellation fee.
 
 The
        success of the Preclinical Division is dependent on our capacity and on our
        achieving optimal use of that capacity. In 2005, we completed our most recent
        capacity expansion, invested in improving and expanding our sales team, reduced
        the size of our workforce and took various steps to improve and emphasize
        the
        quality of our services. We continue to work to improve our results for this
        business.
 
 Our
        Drug
        Repositioning Division resulted from our acquisition of certain technology
        from
        Millennium Pharmaceuticals, Inc. (“Millennium”) in 2004. We have invested, and
        continue to invest, significant amounts in the development of the Drug
        Repositioning technologies and of the Drug Repositioning Division. Revenue
        in
        2005 for our Drug Repositioning Division was not significant.




31




In
        addition to the Millennium agreement and an agreement with another
        pharmaceutical partner, in 2005, we established partnerships to reposition
        drug
        candidates for Pfizer, Inc. and with F. Hoffmann-La Roche, Ltd. and one
        of its affiliates (collectively, “Roche”). Under these agreements, we do not
        derive any up-front revenue, other than the up-front fees paid to us by
        Millennium related to our assessment of a single drug candidate. Each partner
        has agreed to make available a stated number of failed, stalled or deprioritized
        drug candidates during the term of the applicable agreement. We will provide
        repositioning services on those drug candidates, at our expense, and will
        inform
        our partner of any possible new indications we identify. In some instances,
        our
        partners have the right to elect to have us conduct mutually agreed upon
        animal
        model validation studies based on our hypothesis, which may be partially
        or
        entirely at our expense. Validated drug candidates would then be returned
        to a
        partner’s pipeline at its sole election. We would be entitled to receive
        milestone payments if a drug candidate is returned to the partner's development
        pipeline and, if the drug candidate begins commercial sales, we would be
        entitled to royalties or milestone payments based on actual sales. If a partner
        declined a compound for an indication we had found, we could acquire the
        rights
        to develop the compound for the particular indication directly or indirectly.
        We
        do not expect to receive significant revenue under these 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
        December 31, 2005, we had an accumulated deficit of $261.0 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 goodwill described herein
        and
        acquisitions of research and development. These costs have exceeded our revenue
        and we expect to incur additional operating losses in the future.
 
 **Results
        of Operations**
 
 *Years
        Ended December 31, 2005 and 2004*
 
 **Total
        Revenue.** Total
        revenue increased $3.4 million, or 5%, to $79.4 million in 2005 from $75.9
        million in 2004. During 2005, two Genomics Division customers each accounted
        for
        greater than 10% of our total revenue. During 2004, no customer accounted
        for
        greater than 10% of our total revenue. Our top five customers in each year
        accounted for approximately 37% and 31% of our total revenue for 2005 and
        2004,
        respectively. During 2005 and 2004, 29% and 32% of our total revenue,
        respectively, was from customers in the Pacific Rim, and 20% and 14% of our
        total revenue, respectively, was from customers in Europe.
 
 ***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
        $56.6 million for 2005, an increase of $4.4 million, or 8%, from $52.2 million
        in 2004. The increase in 2005 reflected $11.7 million in additional revenue
        from
        sales to several existing customers of perpetual licenses for certain data
        and
        software, partially offset by $4.2 million less revenue from certain agreement
        extensions at reduced service levels and the absence of $3.9 million in
        subscription fees from agreements that expired.
 
 In
        2005,
        subscription agreements for all or part of our BioExpress System and/or
        ToxExpress System databases with ten customers expired by their terms and
        were
        subject to agreement extension discussions. These agreements accounted for
        31%
        of our total 2004 revenue and 46% of our 2004 Genomics Division services
        revenue. Of these, we renegotiated two agreements on terms similar to those
        in
        the prior agreements, four agreements expired by their terms and we renegotiated
        three agreements at reduced services levels, which will generate lower future
        revenue. One agreement expired at the end of 2005 and the customer purchased,
        for an additional fee of $5.5 million, a perpetual license to data to be
        delivered through 2006. Also in 2005, two subscription agreements not scheduled
        to expire by their terms in 2005 were terminated by mutual agreement. As
        part of
        such terminations, we provided the customers perpetual licenses to certain
        data
        and/or software.
 
 In
        2006,
        subscription agreements with five customers will expire by their terms and
        two
        agreements may expire at the customer’s election. We’ve received notice from one
        such customer of its election to terminate its agreement in 2006 and the
        other
        customer did not elect to exercise its right to terminate its agreement early.
        These agreements accounted for 20% of our total 2005 revenue and 28% of our
        2005
        Genomics services revenue. There is no assurance that the remaining agreements
        scheduled to expire will be extended or that any agreements resulting from
        our
        discussions with such customers will be on terms comparable to, or as favorable
        to us as, the existing subscription agreements.
 
 For
        2006,
        we expect to continue to derive more revenue from our services and reduce
        our
        dependence on large, multi-year subscription agreements.
 
 ***Preclinical
        Services Revenue.*** Revenue
        from our Preclinical Division services, which consist of fees from preclinical
        safety and pharmacology studies and related laboratory services, was $22.2
        million for 2005, a decrease of $1.6 million, or 7%, from $23.8 million for
        2004. The decrease is primarily attributable to a decline in both the number
        and
        size of studies conducted in 2005. We expect a decline in revenue for the
        beginning of 2006, followed by improvements for the remainder of
        2006.
  32




**Cost
        of Preclinical Services Revenue.** Cost of
        Preclinical Division services revenue, which consists of direct and indirect
        costs related to conducting preclinical safety and pharmacology studies and
        related laboratory services, including direct and indirect labor, study
        materials and facility costs and depreciation, increased to $27.5 million
        for
        2005 from $26.1 million for 2004. The increase primarily reflects $1.9 million
        of increased facility, labor and support charges resulting from capacity
        expansion in 2005, partially offset by a decrease of $1.1 million in expenses
        for subcontracted services by third parties. As a result of our continuing
        underutilization of our increased capacity, our gross margins were negative
        24%
        for 2005 compared to negative 10% in 2004. We expect negative gross margins
        to
        continue for the beginning of 2006, but expect gradual improvements throughout
        the rest of 2006, resulting from anticipated operational efficiencies and
        increasing revenue.
 
 **Database
        Production Expense.** Database
        production expenses, which currently consists primarily of costs related
        to the
        acquisition and processing of tissues and overhead expenses needed to generate
        additional content for the BioExpress and ToxExpress System databases, decreased
        to $31.7 million for 2005 from $42.5 million for 2004. The decrease consisted
        primarily of a $7.6 million reduction in database content generation expenses,
        including lower costs for acquiring tissues and certain agreements with third
        parties, and a decrease of $3.1 million in depreciation and amortization
        expense. For 2006, we expect database production expenses also to include
        an
        increase in costs associated with our microarray data generation and analysis
        services.
 
 **Research
        and Development Expense.** Research
        and development expenses, which now consist primarily of costs associated
        with
        the ongoing development of our Drug Repositioning technologies, increased
        to
        $6.8 million for 2005 from $2.4 million for 2004. The increase was primarily
        a
        result of development efforts relating to our Drug Repositioning technologies,
        which began in mid-2004. For 2006, we expect research and development expenses
        to increase modestly, as we continue to develop our Drug Repositioning
        technologies.
 
 **Selling,
        General and Administrative Expense.** Selling,
        general and administrative expenses, which consist primarily of sales,
        marketing, accounting, legal, human resources and other general corporate
        expenses, increased to $31.6 million for 2005 from $25.7 million for 2004.
        The
        increase is largely due to an increase of $5.3 million in our investment
        in our
        Drug Repositioning Division and accrued costs under our 2005 annual employee
        incentive compensation plan. For 2006, we expect selling, general and
        administrative expenses to increase due to increased sales and marketing
        activities for all our businesses including increases in the number of employees
        and costs under our 2006 annual employee incentive compensation plan and
        increased compensation expenses related to expensing stock-based awards under
        the revised Statement of Financial Accounting Standards No. 123(R), “Share-Based
        Payment” which we adopted January 1, 2006.
 
 **Purchased
        Research and Development.** During
        2004, we incurred a one-time expense of $8.8 million for the write-off of
        purchased in-process research and development associated with our Drug
        Repositioning Division.
 
 **Impairment
        of Goodwill.** During
        September 2005, we determined in conjunction with our annual strategic planning
        process and as part of our annual testing for impairment of goodwill, that
        the
        carrying value of the goodwill that resulted from the April 1, 2003 acquisition
        of TherImmune (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, we obtained an appraisal from an independent
        valuation firm. As a result of our review, we recorded a non-cash expense
        of
        $32.8 million representing the implied impairment loss of goodwill of our
        Preclinical Division.
 
 **Net
        Interest Income.** Net
        interest income increased to $2.6 million for 2005 from $1.4 million for
        2004,
        due to increases in our rates of return on investments.
 
 **Other
        Income.** Other
        income increased to $0.8 million for 2005 from zero for 2004, due to foreign
        currency transaction gains relating to our Japanese customers. As a result
        of
        changing our distribution arrangements in Japan and since 2005, our agreements
        with our Japanese customers are denominated in Japanese Yen.
 
 **Write-down
        of Other than Temporary Decline in the Value of Marketable Securities
        Available-for-Sale.** We
        recorded a $0.7 million write-down of our investment in Avalon Pharmaceuticals,
        Inc. in 2005, due to an other than temporary decline in its estimated market
        value.
 
 **Income
        Tax Expense.** Income
        tax expense historically consisted of a 10% withholding tax on certain payments
        by our Japanese customers. The withholding tax was eliminated effective July
        1,
        2004, as a result of the new tax treaty between the U.S. and Japan.
 
 *Years
        Ended December 31, 2004 and 2003*
  33




**Total
        Revenue.** Total
        revenue increased $6.4 million, or 9%, to $75.9 million in 2004 from $69.5
        million in 2003. During 2004 and 2003, no customer accounted for 10% or more
        of
        our revenue. However, three customers accounted for approximately 21% of
        our
        total revenue in 2004. During 2004 and 2003, 32% and 34% of our revenue,
        respectively, was from customers in the Pacific Rim, and 14% and 18% of our
        revenue, respectively, was from customers in Europe.
 
 ***Genomics
        Services Revenue.*** Revenue
        from our Genomics Division services, which consisted primarily of fees from
        subscription agreements to our BioExpress System and ToxExpress System
        databases, was $52.2 million in 2004, an increase of $0.2 million, or less
        than
        1%, from $52.0 million in 2003. The increase represents increased revenue
        of
        $3.8 million, reflecting a full period of revenue from some existing customers
        in 2004 as compared to 2003, $2.5 million resulting from the cumulative impact
        of a favorable Japanese exchange rate in 2004, $0.9 million in fees for
        subscriptions from new customers and expanded agreements and $0.9 million
        in
        fees for other services in 2004. These increases were offset by reduced revenue
        of $5.3 million in subscription fees resulting from the conclusion of agreements
        and $2.4 million from certain renewals at reduced service levels.
 
 ***Preclinical
        Services Revenue.*** Revenue
        from our Preclinical Division services, which consisted of fees from primarily
        preclinical safety and pharmacology studies and related laboratory services,
        was
        $23.8 million in 2004, an increase of $6.2 million, or 35%, from $17.6 million
        in 2003. The increase reflects the recording of twelve months of revenue
        in
        2004, whereas in 2003 we recognized only nine months of revenue because we
        acquired this business on April 1, 2003.
 
 **Cost
        of Preclinical Services Revenue.** Cost of
        Preclinical Division services revenue, which consisted 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, increased to $26.1 million
        in
        2004 from $16.1 million in 2003. The increase primarily reflects the recording
        of twelve months of costs of preclinical contract research services revenue
        in
        2004, whereas in 2003 we recognized only nine months of costs because we
        acquired this business on April 1, 2003. In addition, margins were impacted
        by
        adjustments in 2004 of $1.4 million, which included a credit to a single
        customer, a write-down of fixed assets acquired in the TherImmune acquisition
        and a loss of revenue resulting from a single customer’s inability to pay, as
        well as the impact of our facility renovations and preparations for increased
        capacity in 2005. The increase in cost of Preclinical Division services revenue
        resulted in our gross margins decreasing to a negative 10% in 2004 from 9%
        in
        2003.
 
 **Database
        Production Expense.** Database
        production expenses, which consisted primarily of costs related to the
        acquisition and processing of tissues and overhead expenses needed to generate
        additional content for the BioExpress System and ToxExpress System databases,
        decreased to $42.5 million in 2004 from $49.4 million in 2003. The decrease
        in
        2004 consisted primarily of a $4.6 million reduction in database content
        generation expenses, primarily resulting from more focused content development
        of our BioExpress System and ToxExpress System databases.
 
 **Research
        and Development Expense.** Research
        and development expenses, which consisted primarily of costs associated with
        our
        efforts to improve the processes currently used in the production of our
        BioExpress System and ToxExpress System databases and, in 2004, ongoing
        development of the Drug Repositioning technologies, as well as evaluations
        of alternative technology platforms for the generation of gene expression
        data,
        increased to $2.4 million in 2004 from $2.1 million in 2003.
 
 **Selling,
        General and Administrative Expense.** Selling,
        general and administrative expenses, which consisted primarily of costs of
        sales
        and marketing, finance and accounting, legal, human resources and other general
        corporate operations, increased to $25.7 million in 2004 from $22.2 million
        in
        2003. The increase was primarily due to the addition of costs associated
        with
        our Preclinical Division.
 
 **Purchased
        Research and Development Expense.** In 2004,
        we incurred a one-time, expense of $8.8 million, from the purchase of in-process
        research and development activities associated with the Drug Repositioning
        technologies.
 
 **Net
        Interest Income.** Net
        interest income decreased to $1.4 million in 2004 from $1.7 million in 2003,
        due
        primarily to a decline in our balance of cash, cash equivalents and marketable
        securities available-for-sale.
 
 **Income
        Tax Expense.** Income
        tax expense, which historically consisted of a 10% withholding tax on certain
        payments by our Japanese customers, decreased to $0.3 million in 2004 from
        $2.2
        million in 2003, reflecting the impact of the elimination of the withholding
        tax
        effective July 1, 2004, as a result of the new tax treaty between the U.S.
        and
        Japan.
  **Liquidity
        and Capital Resources**
 
 From
        inception through December 31, 2005, we have financed our operations and
        acquisitions through the issuance and sale of equity securities and payments
        from customers. As of December 31, 2005, we had approximately $82.1 million
        in
        cash, cash equivalents and marketable securities available-for-sale, compared
        to
        $102.9 million as of December 31, 2004.
  34




Net
        cash
        from operating activities increased to $0.4 million in 2005 from a negative
        $0.3
        million in 2004, primarily due to an improvement in operations (exclusive
        of the
        impairment of goodwill).
 
 In
        2005
        and 2004, our investing activities consisted primarily of purchases, sales
        and
        maturities of available-for-sale securities, capital expenditures and software
        development and database upgrade costs. Capital expenditures in 2005 and
        2004
        were $14.6 million and $5.2 million, respectively. The increase in capital
        expenditures was primarily due to costs to increase our Preclinical Division
        capacity, other facility renovations and equipment purchases. In 2006, we
        expect
        capital expenditures to amount to approximately $7 million. The expected
        decrease in capital expenditures in 2006 is primarily due to the completion
        of
        our Preclinical Division capacity and other facility renovations that occurred
        in 2005.
 
 We
        had
        capitalized software development costs of $2.1 million and $3.3 million in
        2005
        and 2004, respectively. These costs relate to ongoing efforts to enhance
        the
        software platform of our BioExpress and ToxExpress System databases. The
        decrease in software development costs was due to increased efforts on software
        projects not subject to capitalization and a reduction in our software
        development work force. Software development costs are expected to continue
        in
        2006, as a result of ongoing efforts to further enhance the software platforms
        of our databases. In addition, in 2005 we incurred approximately $4.2 million
        of
        database upgrade costs, as we enhanced the content of our BioExpress System
        database using the latest commercially available microarray platform from
        Affymetrix. In 2006, we expect to incur database upgrade costs ranging from
        $2.2
        million to $3.5 million, as we enhance the content of our ToxExpress System
        database using microarrays from Affymetrix.
 
 Our
        financing activities, other than the repayment of capital lease obligations
        and
        an equipment loan, have primarily consisted of the exercise of stock options
        and
        participation in our Employee Stock Purchase Plan.
 
 In
        July
        2004, we purchased and licensed certain drug repositioning and selection
        technologies and hired a research team from Millennium. We contractually
        agreed
        to spend at least $8.5 million over the first eighteen months following the
        purchase to develop and commercialize these technologies. As of December
        31,
        2005, we have met this commitment. We have a further obligation to invest
        up to
        an additional $6.0 million through July 2006 of which, as of December 31,
        2005,
        we have recorded $4.1 million in expenditures relating to this commitment
        and
        have a remaining obligation of $1.9 million. As part of the consideration,
        we
        also agreed to pay $3.5 million, in cash or stock at our election, to Millennium
        in the first half of 2006.
 
 To
        generate our gene expression data, we use Affymetrix microarrays,
        instrumentation and software. Under the terms of our current supply and license
        agreement, which became effective January 1, 2006, we agreed to purchase
        a
        minimum of $7.6 million in products and services from Affymetrix in 2006.
        In
        2005, under the prior agreement, we purchased $11.4 million in products and
        services, which included annual subscription fees for access to their
        microarrays and a license to use their technology and royalties based on
        a
        percentage of revenue from subscription agreements to our BioExpress and
        ToxExpress System databases.
 
 Specific
        future financial commitments as of December 31, 2005 are set forth in the
        following table:
  **Total**
                
                **2006**
                
                **2007
                    & 2008**
                
                **2009
                    & 2010**
                
                **Beyond
                    2010**Capital
                    lease obligations
                
                $
                219
                
                $
                158
                
                $
                61
                
                $
                -
                
                $
                -Long-term
                    debt
                
                
                640
                
                
                504
                
                
                109
                
                
                27
                
                
                -Technology
                    program funding commitment
                
                
                1,878
                
                
                1,878
                
                
                -
                
                
                -
                
                
                -Acquired
                    technologies payable
                
                
                3,500
                
                
                3,500
                
                
                -
                
                
                -
                
                
                -Payment
                    obligations to Affymetrix
                
                
                7,625
                
                
                7,625
                
                
                -
                
                
                -
                
                
                -Operating
                    leases
                
                
                26,490
                
                
                6,230
                
                
                10,456
                
                
                6,786
                
                
                3,018Total
                
                $
                40,352
                
                $
                19,895
                
                $
                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. 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” elsewhere in
        this Report.
 
 **Critical
        Accounting Policies**
 
 Our
        consolidated financial statements are prepared in accordance with accounting
        principles generally accepted in the United States, which require management
        to
        make estimates and assumptions that affect the reported amounts of assets
        and
        liabilities at the date of the financial statements and the reported amounts
        of
        revenue and expenses during the reporting period. Actual results could differ
        from these estimates. The following discussion highlights what we believe
        to be
        the critical accounting policies and judgments made in the preparation of
        these
        consolidated financial statements.
  35




***Revenue
        Recognition***
 
 Revenue
        is
        recognized in accordance with the SEC’s Staff Accounting Bulletin No. 104,
“Revenue Recognition” (“SAB 104”). SAB 104 requires that four basic criteria be
        met before revenue can be recognized: 1) persuasive evidence of an arrangement
        exists; 2) delivery has occurred or services rendered; 3) the fee is fixed
        and
        determinable; and 4) collectability is reasonably assured. As to 1), our
        business practices require that our services be performed pursuant to contracts
        with our customers. As to 2), we recognize revenue when services are rendered
        to
        our customers. Determination of 3) and 4) are based on management’s judgments
        regarding the fixed nature of our arrangements taking into account termination
        provisions and the collectability of fees under our arrangements. In addition,
        management reviews costs billed under our government contracts to ensure
        compliance with governmental regulations and cost and profit estimates on
        uncompleted contracts. Should changes in conditions cause management to
        determine these criteria are not met for certain future arrangements, that
        any
        billed costs under our government contracts are not allowed or that cost
        or
        profit estimates change resulting in losses under such contracts, revenue
        recognized for any reporting period would be adjusted and could be adversely
        affected.
 
 In
        accordance with Emerging Issues Task Force Issue No. 00-21, “Revenue
        Arrangements with Multiple Deliverables”, revenue recognized for any
        multiple-element contract is allocated to each element of the arrangement
        based
        on the relative fair value of the element. The determination of fair value
        of
        each element is based on our analysis of objective evidence from comparable
        sales of the individual element. If we are unable to determine evidence of
        fair
        value for any undelivered element of the arrangement, revenue for the
        arrangement is deferred and recognized using the revenue recognition method
        appropriate to the predominant undelivered element.
 
 **Genomics
        Services Revenue.** The
        majority of Genomics services revenue consists of fees earned under subscription
        agreements for all or parts of our gene expression reference databases, the
        BioExpress System and ToxExpress System, which are typically for a specific
        multi-year term. We have also granted to some customers perpetual licenses
        to
        certain data from our BioExpress and ToxExpress System databases and software.
        In addition, we derive a smaller but growing percentage of revenue from
        providing other services, including various toxicogenomics reports, microarray
        data generation and analysis and other professional services and subscriptions
        to smaller solutions. Revenue from subscription agreements is recognized
        ratably
        over the period during which the customer has access to the databases. Certain
        subscription agreements have included a right of early termination (which,
        in
        some instances, is subject to conditions) by the customer, without penalty,
        on a
        specified date prior to the normal expiration of the term. If any agreement
        has
        a right of early termination, revenue is recognized ratably over the
        subscription term up to the possible date of early termination, based on
        subscription fees earned under the agreement through the possible date of
        early
        termination. If such early termination does not occur, the balance of the
        subscription fees earned under the agreement is recognized as revenue ratably
        over the remaining term of the agreement. Revenue from perpetual licenses
        to
        data and software for which the Company is not obligated to provide continuing
        support or services is recognized when the data has been delivered. Revenue
        for
        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 some 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. These types of arrangements have resulted in an increase our deferred
        costs and deferred revenue as of December 31, 2005. The timing of revenue
        recognition associated with agreements we enter into in future periods may
        also
        be dependent on our ability to objectively and reliably determine the fair
        value
        of deliverables included in those agreements.
 
 **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.
  36




***Goodwill
        and Intangible Assets Impairment***
 
 In
        2003,
        we recorded goodwill of $43.0 million as a result of the acquisition of
        TherImmune. In addition, we have previously recorded goodwill and other
        intangible assets, including licenses to technologies or data, patent costs
        and
        software development and database upgrade costs. The determination of whether
        or
        not these other intangible assets are impaired involves significant judgment,
        including the following: (i) whether our licenses and internally developed
        intellectual property provide valid and economical competitive advantage;
        and
        (ii) whether the services we provide may become obsolete before we recover
        the
        costs incurred in connection with their development.
 
 Under
        Statement of Financial Accounting Standards No. 142, “Goodwill and Other
        Intangible Assets”, we are required to perform an annual impairment test of our
        goodwill and periodic reviews of our intangible assets. In addition, we are
        required to test for impairment at any point we have an indication that
        impairment may exist. We have elected to perform our annual impairment test
        of
        goodwill as of October 1. The goodwill impairment test that we have selected
        historically consisted of a ten-year discounted cash flow analysis, including
        the determination of a terminal value, and required management to make various
        judgments and assumptions, including revenue growth rates and discount rates,
        which management believed to be reasonable. Our annual impairment test as
        of
        October 1, 2004 did not indicate an impairment of our goodwill.
 
 During
        September 2005, we determined in conjunction with our annual strategic planning
        process and as part of our annual testing of goodwill, that the carrying
        value
        of the goodwill that resulted from the April 1, 2003 acquisition of TherImmune
        (now Gene Logic Laboratories Inc., our 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 representing
        the
        implied impairment of goodwill of our Preclinical Division.
 
 No
        impairment existed in the carrying value of goodwill for our Genomics
        Division.
 
 Our
        assessment of 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 the net cash flows may change as market conditions and circumstances dictate.
        Future impairment tests of our goodwill may result in additional impairment
        charges based on these changing estimates.
 
 ***Accounts
        Receivable and Unbilled Services***
 
 Our
        ability to collect outstanding receivables and unbilled services from our
        customers is critical to our operating performance and cash flows. Typically,
        arrangements with our customers require under the terms of a written contract
        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.
  37




***Equity
        Investments***
 
 Currently,
        we hold an equity investment in one company with an investment balance of
        $3.2
        million at December 31, 2005. 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 the investment’s
        current carrying value, thereby possibly requiring an impairment charge in
        the
        future.
 
 **Recently
        Issued Accounting Pronouncements**
 
 In
        2004,
        the Financial Accounting Standards Board issued a revised Statement of Financial
        Accounting Standards (“SFAS”) No. 123(R), “Share-Based Payment,” (“SFAS 123(R)”)
        and in 2005, the SEC approved a new rule that required us to adopt the statement
        on January 1, 2006. The new statement requires all share-based payments to
        employees to be recognized in the financial statements based on their fair
        values. Prior to our adoption of SFAS 123(R) on January 1, 2006, we historically
        accounted for our share-based payments to employees under the intrinsic value
        method of accounting set forth in Accounting Principles Board Opinion No.
        25,
“Accounting for Stock Issued to Employees.” Additionally, we complied with the
        stock-based employee compensation disclosure requirements of SFAS No. 148,
        “Accounting for Stock-Based Compensation-Transition and
        Disclosure”.
 
 SFAS
        123(R) permits companies to adopt its requirements using one of two
        methods:
 
 ·
            A
                “modified prospective” method in which compensation cost is recognized
                beginning with the effective date (a) based on the requirements of
                SFAS
                123(R) for all share-based payments granted or modified after the
                effective date and (b) based on the requirements of SFAS 123(R) for
                all
                awards granted to employees prior to the effective date of SFAS 123(R)
                that remain unvested on the effective
                date. 
 ·
            A
                “modified retrospective” method which includes the requirements of the
                modified prospective method described above, but also permits companies
                to
                restate based on the amounts previously recognized under SFAS 123(R)
                for
                purposes of pro forma disclosures either (a) all prior periods presented
                or (b) prior interim periods of the year of
                adoption. 
 We
        adopted
        SFAS 123(R) using the modified-prospective method. The effects on stock
        compensation expense in periods after adoption will be dependent on the number
        and type of share-based payments issued to employees. Based on outstanding
        share-based payments as of December 31, 2005, we estimate that non-cash stock
        compensation expense in 2006 will increase by approximately $0.7 million
        to $1.0
        million to reflect the continued vesting of outstanding stock option grants
        that
        remain unvested as of December 31, 2005. This estimate does not include the
        impact of other possible stock-based awards that may be made during
        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 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 and is effective for reporting periods
          after
          December 15, 2005. We believe that
          our
          current approach of determining whether investment losses are "other than
          temporary" is generally consistent with the provisions of FSP FAS 115-1,
          thus
          upon adoption we
          do not
          expect FSP FAS 115-1 to have a material impact on our financial position,
          results of operations or cash flows.
 
 **ITEM7A.**  **QUANTITATIVE
        AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK**
 
 We
        have
        exposure to financial market risks, including changes in interest rates.
        At
        December 31, 2005, we had cash and cash equivalents of approximately $43.9
        million and marketable securities available-for-sale of an additional $38.2
        million. We invest our excess cash primarily in money market funds, obligations
        of the U.S. Government and its agencies and marketable debt securities of
        companies with strong credit ratings. These instruments have maturities of
        twenty-four months or less when purchased. We do not utilize derivative
        financial instruments, derivative commodity instruments or other market risk
        sensitive instruments, positions or transactions in any material fashion.
        Accordingly, we believe that, while the instruments we hold are subject to
        changes in the financial standing of the issuer of such securities, we are
        not
        subject to any material risks arising from changes in foreign currency exchange
        rates, commodity prices, equity prices or other market changes that affect
        market risk sensitive instruments. Based on our cash and cash equivalents
        and
        marketable securities available-for-sale balances at December 31, 2005, a
        hypothetical 100 basis point adverse movement in interest rates would have
        resulted in an increase in the net loss of approximately $0.8 million for
        the
        year ended December 31, 2005. Actual changes in rates may differ from the
        hypothetical assumptions used in computing this exposure.
 
 Since
        the
        beginning of 2005 and as a result of changing our distribution arrangements
        in
        Japan, we have been subject to risk from changes in foreign exchange rates
        relating to revenue from our Japanese customers, as such agreements are now
        denominated in Japanese Yen. Such changes could result in foreign currency
        exchange gains or losses. Revenue derived from the Pacific Rim as a percentage
        of total revenue was 29% for the year ended December 31, 2005 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 financial statements. A hypothetical 10% adverse change
        in
        average foreign currency movements would have resulted in an increase in
        the net
        loss of approximately $1.7 **** million
        for the year ended December 31, 2005. There can be no assurance that losses
        related to this currency risk will not occur.
  38




**ITEM8.**  **FINANCIAL
        STATEMENTS AND SUPPLEMENTARY DATA**
 
 Our
        Consolidated Financial Statements and notes thereto, together with the Reports
        of Independent Registered Public Accounting Firm, appear on pages F-1 through
        F-23 of this Form 10-K and are incorporated herein by reference.
 
 **ITEM9.**
                **CHANGES
                    IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
                    DISCLOSURE**
 None.
  **ITEM9A.**  **CONTROLS
        AND PROCEDURES**
 
 Attached
        as exhibits to this Form 10-K are certifications of our Chief Executive Officer
        (CEO) and Chief Financial Officer (CFO), which are required in accordance
        with
        Rule 13a-14 of the Securities Exchange Act of 1934, as amended (the Exchange
        Act). This “Controls and Procedures” section includes information concerning the
        controls and controls evaluation referred to in the certifications. Part
        II,
        Item 8 of this Form 10-K sets forth the report of Ernst & Young LLP, our
        independent registered public accounting firm, regarding its audit of our
        internal control over financial reporting and of management’s assessment of
        internal control over financial reporting set forth below in this section.
        This
        section should be read in conjunction with the certifications and the Ernst
        & Young LLP report for a more complete understanding of the topics
        presented.
 
 **Evaluation
        of Disclosure Controls and Procedures**
 
 As
        of
        December 31, 2005, an evaluation was performed under the supervision and
        with
        the participation of our management, including the CEO and CFO, of the
        effectiveness of the design and operation of our “disclosure controls and
        procedures” (“Disclosure Controls”). These are controls and procedures designed
        to reasonably assure that information required to be disclosed in our reports
        filed under the Exchange Act, such as this Form 10-K, is recorded, processed,
        summarized and reported within the time periods specified in the United States
        Securities and Exchange Commission’s (“SEC’s”) rules and forms. Disclosure
        Controls are also designed to reasonably assure that such information is
        accumulated and communicated to our management, including the CEO and CFO,
        as
        appropriate to allow timely decisions regarding required disclosure. Based
        on
        that evaluation, our CEO and CFO, have concluded that, as of December 31,
        2005,
        our disclosure controls and procedures were effective to provide reasonable
        assurance that information required to be disclosed in our Exchange Act reports
        is recorded, processed, summarized and reported within the time periods
        specified by the SEC, and that material information relating to Gene Logic
        is
        made known to management, including the CEO and CFO, particularly during
        the
        period when our periodic reports are being prepared.
 
 Our
        management, including the CEO and CFO, does not expect that our Disclosure
        Controls or our internal control over financial reporting (see below under
        “Management’s Report on Internal Control over Financial Reporting”) will prevent
        or detect all error and all fraud. A control system, no matter how well designed
        and operated, can provide only reasonable, not absolute, assurance that the
        control system’s objectives will be met. The design of a control system must
        reflect the fact that there are resource constraints, and the benefits of
        controls must be considered relative to their costs. Further, because of
        the
        inherent limitations in all control systems, no evaluation of controls can
        provide absolute assurance that misstatements due to error or fraud will
        not
        occur or that all control issues and instances of fraud, if any, within the
        company have been detected. These inherent limitations include the realities
        that judgments in decision-making can be faulty and that breakdowns can occur
        because of simple error or mistake. Controls can also be circumvented by
        the
        individual acts of some persons, by collusion of two or more people, or by
        management override of the controls. The design of any system of controls
        is
        based in part on certain assumptions about the likelihood of future events,
        and
        there can be no assurance that any design will succeed in achieving its stated
        goals under all potential future conditions. Projections of any evaluation
        of
        controls effectiveness to future periods are subject to risks. Over time,
        controls may become inadequate because of changes in conditions or deterioration
        in the degree of compliance with policies or procedures.
  39




**Management’s
        Report on Internal Control Over Financial Reporting**
 
 Our
        management is responsible for establishing and maintaining adequate “internal
        control over financial reporting” to provide reasonable assurance regarding the
        reliability of our financial reporting and the preparation of financial
        statements for external purposes in accordance with generally accepted
        accounting principles. Internal control over financial reporting includes
        those
        policies and procedures that (i) pertain to the maintenance of records that
        in
        reasonable detail accurately and fairly reflect the transactions and
        dispositions of the assets of the company; (ii) provide reasonable assurance
        that transactions are recorded as necessary to permit preparation of financial
        statements in accordance with generally accepted accounting principles, and
        that
        receipts and expenditures of the company are being made only in accordance
        with
        authorizations of management and directors of the company; and (iii) provide
        reasonable assurance regarding prevention or timely detection of unauthorized
        acquisition, use or disposition of the company’s assets that could have a
        material effect on the financial statements.
 
 Under
        the
        supervision and with the participation of our management, including our CEO
        and
        CFO, we conducted an evaluation of the effectiveness of our internal control
        over financial reporting as of December 31, 2005 based on the framework in *Internal
        Control--Integrated*  *Framework* issued by
        the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
        Based on that evaluation, our management concluded that our internal control
        over financial reporting was effective as of December 31, 2005 to provide
        reasonable assurance regarding the reliability of financial reporting and
        the
        preparation of financial statements for external reporting purposes in
        accordance with generally accepted accounting principles.
 
 Management’s
        assessment of the effectiveness of our internal control over financial reporting
        as of December 31, 2005 has been audited by Ernst & Young LLP, an
        independent registered public accounting firm. Ernst & Young LLP has issued
        an attestation report concurring with management’s assessment, which is included
        in Part II, Item 8 of this Form 10-K.
 
 **Changes
        In Internal Control Over Financial Reporting**
 
 There
        were
        no changes in our internal controls over financial reporting during the fourth
        quarter of 2005 that materially affected or are reasonably likely to materially
        affect our internal controls over financial reporting.
  **ITEM
        9B.  OTHER INFORMATION**
  None.
  **PART
        III**
 **ITEM10.**  **DIRECTORS
        AND EXECUTIVE OFFICERS OF THE REGISTRANT**
  **Identification
        Of Directors**
 
 The
        information required by this item is incorporated by reference to the
        information set forth in the section entitled “Election of Directors,” contained
        in the Company’s definitive Proxy Statement for the 2006 Annual Meeting of
        Stockholders to be filed with the Securities and Exchange Commission within
        120
        days following the Company’s fiscal year ended December 31, 2005 (the “Proxy
        Statement”).
 
 **Identification
        Of Executive Officers**
 
 The
        information required by this item is incorporated by reference to the
        information set forth in the section entitled “Executive Officers” in Part I,
        following Item 4 of this Form 10-K.
 
 **Compliance
        With Section 16(A) Of The Securities Exchange Act Of 1934**
 
 The
        information required by this item is incorporated by reference to the
        information set forth in the section entitled “Section 16(a) Beneficial
        Ownership Reporting Compliance,” contained in the Proxy Statement.
 
 **Code
        Of Ethics**
 
 The
        information required by this item is incorporated by reference to the
        information set forth in the section entitled “Corporate Governance,” contained
        in the Proxy Statement.
  40




**ITEM11.**  **EXECUTIVE
        COMPENSATION**
 
 The
        information required by this item is incorporated by reference to the
        information set forth in the section entitled “Executive Compensation,”
contained in the Proxy Statement.
 
 
 **ITEM12.**  **SECURITY
        OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED MATTERS**
 
 The
        information required by this item is incorporated by reference to the
        information set forth in the section entitled “Security Ownership of Certain
        Beneficial Owners and Management,” contained in the Proxy
        Statement.
 
 
 **ITEM13.**  **CERTAIN
        RELATIONSHIPS AND RELATED TRANSACTIONS**
 
 The
        information required by this item is incorporated by reference to the
        information set forth in the section entitled “Certain Transactions,” contained
        in the Proxy Statement.
 
 
 **ITEM14.**  **PRINCIPAL
        ACCOUNTANT FEES AND SERVICES**
 
 The
        information required by this item is incorporated by reference to the
        information set forth in the section entitled “Principal Accountant Fees and
        Services,” contained in the Proxy Statement.
 
 **PART
        IV**
 **ITEM15.**  **EXHIBITS,
        FINANCIAL STATEMENTS AND SCHEDULES AND REPORTS ON FORM 8-K**
 **(a)1.
        Financial Statements**
  **Consolidated
                    Financial Statements of Gene Logic Inc.**
                PageReport
                    of Independent Registered Public Accounting Firm−Internal Control Over Financial Reporting
                F-2Report
                    of Independent Registered Public
                    Accounting Firm − Consolidated Financial Statements
                F-3Consolidated
                    Balance Sheets as of December 31, 2005
                    and 2004
                F-4Consolidated
                    Statements of Operations for the three
                    years ended December 31, 2005
                F-5Consolidated
                    Statements of Stockholders' Equity for the
                    three years ended December 31, 2005
                F-6Consolidated
                    Statements of Cash Flows for the three
                    years ended December 31, 2005
                F-7Notes
                    to Consolidated Financial
                    Statements
                F-8
 
 **(a)2.
        Financial Statement Schedules**
 
 Schedule
        II - Valuation and Qualifying Accounts
 
 All
        other
        schedules for which provision is made in the applicable accounting regulations
        of the SEC are not required under the related instruction or are inapplicable
        and therefore have been omitted.




41




**(a)3.
        Index to Exhibits**
  **Exhibit****Number**
                
                **Description
                    of Document**2.1
                
                Agreement
                    and Plan of Merger dated February 25, 2003, by and among Gene
                    Logic Inc.,
                    TherImmune Research Corporation, GLA II Corp., a Delaware corporation
                    and
                    wholly owned subsidiary of Gene Logic Inc., and Edward J. Krause,
                    III,
                    solely in his capacity as Securityholders' Representative.(14)3.1
                
                Amended
                    and Restated Certificate of Incorporation.(1)3.2
                
                By-Laws,
                    as amended and restated.(18)4.1
                
                Reference
                    is made to Exhibits 3.1 and 3.2.4.2
                
                Specimen
                    stock certificate.(1)*10.1
                
                Form
                    of Indemnity Agreement entered into between Registrant and its
                    directors
                    and officers.(1)*10.2
                
                Registrant's
                    1997 Equity Incentive Plan, as amended (the "Stock Plan").(13)*10.3
                
                Form
                    of Stock Option Agreement under the Stock Plan.(1)*10.4
                
                Form
                    of Stock Option Grant Notice.(1)*10.5
                
                Registrant's
                    Employee Stock Purchase Plan, as amended, and related offering
                    document.(13)*10.6
                
                Registrant's
                    1997 Non-Employee Directors' Stock Option Plan, as amended.(2)*10.7
                
                Form
                    of Nonstatutory Stock Option under the 1997 Non-Employee Directors'
                    Stock
                    Option Plan.(1)*10.12
                
                Employment
                    Agreement, dated June 7, 2001, between the Registrant and Michael
                    J.
                    Brennan.(12)*10.14
                
                Employment
                    Agreement, dated May 16, 1996, between the Registrant and Mark
                    D.
                    Gessler.(1)*10.15
                
                Amendment
                    to the Employment Agreement, dated July 9, 1997, between the
                    Registrant
                    and Mark D. Gessler.(1)10.22
                
                Lease
                    Agreement, dated August 22, 1997, between Registrant and ARE-708
                    Quince
                    Orchard, LLC.(1)10.22a
                
                First
                    Amendment to Lease, dated July 21, 2000, between Registrant and
                    ARE-708
                    Quince Orchard, LLC.(7)*10.45
                
                Amended
                    and Restated Employment Agreement, dated April 1, 1999, between
                    Registrant
                    and Y. Douglas Dolginow.(3)10.50
                
                Agreement,
                    effective January 1, 2002, between Registrant and Affymetrix,
                    Inc.(10)10.50a
                
                Letter
                    Agreement, amending Agreement effective January 1, 2002, between
                    Registrant and Affymetrix, Inc.(5)(B)*10.55
                
                Executive
                    Severance Plan, as amended February 2001.(8)*10.58
                
                Employment
                    Agreement, dated October 11, 1999, between Registrant and Philip
                    L.
                    Rohrer, Jr.(4)10.67
                
                Lease
                    Agreement, dated July 21, 2000 between Registrant and ARE-50
                    West Watkins
                    Mill, LLC.(6)*10.75
                
                Employment
                    Agreement, dated May 30, 2002, between Registrant and F. Dudley
                    Staples,
                    Jr.(11)10.78
                
                Settlement
                    and Nonexclusive License Agreement, dated January 10, 2001, between
                    Registrant and Incyte Corporation.(15)(A)10.79
                
                Lease
                    Agreement, dated November 20, 1999, between TherImmune Research
                    Corporation and Rickman Associates.(15)10.80
                
                Lease
                    Agreement, dated October 26, 2000, between TherImmune Research
                    Corporation
                    and Oxbridge Development at Crown Pointe, L.C.(15)10.81
                
                Lease
                    Agreement, dated June 22, 2001, between TherImmune Research Corporation
                    and Oxbridge Development at Crown Pointe, L.C., including amendments
                    dated
                    September 25, 2001 and December 20, 2002.(15)10.81a
                
                Third
                    Amendment to Lease dated June 22, 2001, between TherImmune Research
                    Corporation and Oxbridge Development at Crown Pointe,
                    L.C.(19)*10.82
                
                Employment
                    Agreement, dated July 2, 2003, between Registrant and Robert
                    R.
                    Proulx.(16)*10.83
                
                Employment
                    Agreement, dated November 4, 2004, between Registrant and Dennis
                    A.
                    Rossi.(17)*10.84
                
                Employment
                    Agreement, dated November 4, 2004, between Registrant and Joanne
                    M.
                    Smith-Farrell.(17)10.85
                
                Asset
                    Purchase Agreement, dated July 22, 2004, between Registrant and
                    Millennium
                    Pharmaceuticals, Inc.(17)(B)10.86
                
                Lease
                    Agreement, dated July 31, 2004, between Registrant and Thirty-Eight
                    Sidney
                    Street Limited Partnership.(17)10.87
                
                Lease
                    Agreement, dated October 5, 2004, between Registrant and ARE-Maryland
                    No.
                    23, LLC.(5)*10.88
                
                Employment
                    Agreement, dated March 10, 2005, between Registrant and V.W.
                    Brinkerhoff,
                    III.(20)*10.89
                
                2005
                    Executive Incentive Compensation Plan.10.90
                
                License
                    and Sublicense Agreement, dated September 12, 2005, between Registrant
                    and
                    Promega Corporation.(C)10.91
                
                License
                    Agreement for Real-Time*In
                    Vivo*Imaging Technology, effective November 17, 2004, between Registrant
                    and
                    Xenogen Corporation.(C)10.91a
                
                Amendment
                    to License
                    Agreement for Real-Time*In
                    Vivo*Imaging Technology, effective November 22, 2005, between Registrant
                    and
                    Xenogen Corporation.(C)*10.92
                
                2006
                    Performance Year Incentive Compensation Plan.21.1
                
                List
                  of Subsidiaries.23.1
                
                Consent
                  of Ernst & Young LLP, Independent Registered Public Accounting
                  Firm.31
                
                Certifications
                  pursuant to Rule 13a-14(a) and 15d-14(a).32
                
                Certification
                    pursuant to 18 U.S.C. Section 1350, as adopted, pursuant to Section
                    906 of
                    the Sarbanes-Oxley Act of 2002.
 
  42




*
              Indicates
                  management compensatory plan, contract or arrangement.
 
 (1)
              Filed
                  as an exhibit to Registrant’s Registration Statement on Form S-1, filed
                  October 7, 1997, as amended, (No. 333-37317) and incorporated herein
                  by
                  reference.
 
 (2)
              Filed
                  as an exhibit to Registrant’s Current Report on Form 8-K, filed on June 6,
                  2005, and incorporated herein by reference.
 
 (3)
              Filed
                  as an exhibit to Registrant’s Quarterly Report on Form 10-Q for the
                  quarter ended June 30, 1999, filed on August 13, 1999, and incorporated
                  herein by reference.
 
 (4)
              Filed
                  as an exhibit to Registrant’s Annual Report on Form 10-K for the fiscal
                  year ended December 31, 1999, filed on March 30, 2000, and incorporated
                  herein by reference.
 
 (5)
              Filed
                  as an exhibit to Registrant’s Annual Report on From 10-K for the fiscal
                  year ended December 31, 2004, filed on March 16, 2005, and incorporated
                  herein by reference.
 
 (6)
              Filed
                  as an exhibit to Registrant’s Quarterly Report on Form 10-Q for the
                  quarter ended September 30, 2000, filed on November 14, 2000, and
                  incorporated herein by reference.
 
 (7)
              Filed
                  as an exhibit to Registrant’s Annual Report on Form 10-K for the fiscal
                  year ended December 31, 2000, filed on March 29, 2001, and incorporated
                  herein by reference.
 
 (8)
              Filed
                  as an exhibit to Registrant’s Quarterly Report on Form 10-Q for the
                  quarter ended March 31, 2001, filed on May 11, 2001, and incorporated
                  herein by reference.
 
 (9)
              Filed
                  as an exhibit to Registrant’s Annual Report on Form 10-K for the fiscal
                  year ended December 31, 2002, filed on March 19, 2003, and incorporated
                  herein by reference.
 
 (10)
              Filed
                  as an exhibit to Registrant’s Annual Report on Form 10-K/A for the fiscal
                  year ended December 31, 2001, filed on July 31, 2003, and incorporated
                  herein by reference.
 
 (11)
              Filed
                  as an exhibit to Registrant’s Quarterly Report on Form 10-Q for the
                  quarter ended June 30, 2002, filed on August 9, 2002, and incorporated
                  herein by reference.
 
 (12)
              Filed
                  as an exhibit to Registrant’s Annual Report on Form 10-K for the fiscal
                  year ended December 31, 2001, filed on March 28, 2002, and incorporated
                  herein by reference.
 
 (13)
              Filed
                  as an exhibit to Registrant’s Proxy Statement with respect to the Annual
                  Meeting of Stockholders held on June 5, 2003, filed on April 25,
                  2003, and
                  incorporated herein by reference.
 
 (14)
              Filed
                  as an exhibit to Registrant’s Current Report on Form 8-K with respect to
                  the Company’s acquisition of TherImmune Research Corporation, filed on
                  April 3, 2003, and incorporated herein by reference.
 
 (15)
              Filed
                  as an exhibit to Registrant’s Quarterly Report on Form 10-Q for the
                  quarter ended June 30, 2003, filed on August 14, 2003, and incorporated
                  herein by reference.
 
 (16)
              Filed
                  as an exhibit to Registrant’s Quarterly Report on Form 10-Q for the
                  quarter ended September 30, 2003, filed on November 13, 2003, and
                  incorporated herein by reference.
  43




(17)
              Filed
                  as an exhibit to Registrant’s Quarterly Report on Form 10-Q for the
                  quarter ended September 30, 2004, filed on November 9, 2004, and
                  incorporated herein by reference.
 
 (18)
              Filed
                  as an exhibit to Registrant’s Current Report on Form 8-K with respect to
                  the Company’s amended By-Laws to provide for a non-executive Chairman of
                  the Board of Directors, filed on November 12, 2004, and incorporated
                  herein by reference.
 
 (19)
              Filed
                  as an exhibit to Registrant’s Annual Report on Form 10-K for the fiscal
                  year ended December 31, 2003, filed on March 15, 2004, and incorporated
                  herein by reference.
 
 (20)
              Filed
                  as an exhibit to Registrant’s Current Report on Form 8-K with respect to
                  the Company’s hiring of V. W. Brinkerhoff, III as Senior Vice President
                  and General Manager, Gene Logic Laboratories, filed on March 10,
                  2005, and
                  incorporated herein by reference.
 
 (A)
              Confidential
                  treatment has been granted with respect to certain portions of
                  this
                  exhibit pursuant to an Order Granting Application Under the Securities
                  Exchange Act of 1934 and Rule 24b-2 Thereunder Respecting Confidential
                  Treatment dated December 12, 2003.
 
 (B)
              Confidential
                  treatment has been granted with respect to certain portions of
                  this
                  exhibit pursuant to an Order Granting Application Under the Securities
                  Exchange Act of 1934 and Rule 24b-2 Thereunder Respecting Confidential
                  Treatment dated May 5, 2005.
 
 (C)
              Confidential
                  treatment has been requested with respect to certain portions of
                  this
                  exhibit. Omitted portions have been filed separately with the
                  SEC.
 
 
 **(b)3.
        Reports on Form 8-K**
 
 During
        the
        three months ended December 31, 2005, the Company filed the following reports:
 
 The
        Current Report of Form 8-K, filed October 28, 2005, with respect to the
        Company’s financial results for the three months ended September 30, 2005 and
        the Company’s determination of the impairment of the goodwill related to its
        Preclinical Division.
  44




**SIGNATURE**
 
 Pursuant
        to the requirements of Section 13 or 15(d) 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, on the 16 th day of
        March, 2006.
   **GENE
                  LOGIC INC.**
                BY:*/s/
                  MARK D. GESSLER*
                Mark
                  D. Gessler
                Chief
                  Executive Officer and President
 
 Pursuant
        to the requirements of the Securities Exchange Act of 1934, this report has
        been
        signed below by the following persons on behalf of the Registrant and in
        the
        capacities and on the dates indicated.
  **Name**
                
                **Position**
                
                **Date***/s/
                    MARK D. GESSLER*
                
                Chief
                    Executive Officer,
                
                March
                    16, 2006(Mark
                    D. Gessler)
                
                President
                    and Director*(Principal
                    Executive Officer)**/s/
                    PHILIP L. ROHRER, JR.*
                
                Chief
                    Financial Officer
                
                March
                    16, 2006(Philip
                    L. Rohrer, Jr.)
                
                *(Principal
                    Financial and**Accounting
                    Officer)**/s/
                    JULES BLAKE*
                
                Director
                
                March
                    16, 2006(Jules
                    Blake, Ph.D.)*/s/
                    MICHAEL J. BRENNAN*
                
                Director
                
                March
                    16, 2006(Michael
                    J. Brennan, M.D., Ph.D.)*/s/
                    CHARLES L. DIMMLER, III*
                
                Director
                
                March
                    16, 2006(Charles
                    L. Dimmler, III)*/s/
                    FRANK L. DOUGLAS*
                
                Director
                
                March
                    16, 2006(Frank
                    L. Douglas, M.D., Ph.D.)*/s/
                    G. ANTHONY GORRY*
                
                Director
                
                March
                    16, 2006(G.
                    Anthony Gorry, Ph.D.)*/s/
                    J. STARK THOMPSON*
                
                Chairman
                    of the Board
                
                March
                    16, 2006(J.
                    Stark Thompson, Ph.D.)




45




**Gene
        Logic Inc.**
 
 **Index
        to Consolidated Financial Statements**
 
 **Page**Report
                  of Independent Registered Public Accounting Firm - Internal Control
                  Over
                  Financial Reporting
              F-2Report
                  of Independent Registered Public Accounting Firm - Consolidated
                  Financial
                  Statements
              F-3Consolidated
                  Balance Sheets as of December 31, 2005 and 2004
              F-4Consolidated
                  Statements of Operations for the three years ended December 31,
                  2005
              F-5Consolidated
                  Statements of Stockholders’ Equity for the three years ended December 31,
                  2005
              F-6Consolidated
                  Statements of Cash Flows for the three years ended December 31,
                  2005
              F-7Notes
                  to Consolidated Financial Statements
              F-8
      F-1




**Reportof
        Independent Registered Public Accounting Firm
        -**
 
 **Internal
        Control Over Financial Reporting**
 
 The
        Board
        of Directors and Stockholders of Gene Logic Inc.
 
 We
        have
        audited management’s assessment, included in the accompanying Management’s
        Report on Internal Controls Over Financial Reporting listed at Item 9A, that
        Gene Logic Inc. maintained effective internal control over financial reporting
        as of December 31, 2005, based on criteria established in *Internal
        Control-Integrated Framework* issued by
        the Committee of Sponsoring Organizations of the Treadway Commission (the
        COSO
        criteria). Gene Logic Inc.’s management is responsible for maintaining effective
        internal control over financial reporting and for its assessment of the
        effectiveness of internal control over financial reporting. Our responsibility
        is to express an opinion on management’s assessment and an opinion on the
        effectiveness of the company’s internal control over financial reporting based
        on our audit.
 
 We
        conducted our audit in accordance with the standards of the Public Company
        Accounting Oversight Board (United States). Those standards require that
        we plan
        and perform the audit to obtain reasonable assurance about whether effective
        internal control over financial reporting was maintained in all material
        respects. Our audit included obtaining an understanding of internal control
        over
        financial reporting, evaluating management’s assessment, testing and evaluating
        the design and operating effectiveness of internal control, and performing
        such
        other procedures as we considered necessary in the circumstances. We believe
        that our audit provides a reasonable basis for our opinion.
 
 A
        company’s internal control over financial reporting is a process designed to
        provide reasonable assurance regarding the reliability of financial reporting
        and the preparation of financial statements for external purposes in accordance
        with generally accepted accounting principles. A company’s internal control over
        financial reporting includes those policies and procedures that (1) pertain
        to
        the maintenance of records that, in reasonable detail, accurately and fairly
        reflect the transactions and dispositions of the assets of the company; (2)
        provide reasonable assurance that transactions are recorded as necessary
        to
        permit preparation of financial statements in accordance with generally accepted
        accounting principles, and that receipts and expenditures of the company
        are
        being made only in accordance with authorizations of management and directors
        of
        the company; and (3) provide reasonable assurance regarding prevention or
        timely
        detection of unauthorized acquisition, use, or disposition of the company’s
        assets that could have a material effect on the financial statements.
 
 Because
        of
        its inherent limitations, internal control over financial reporting may not
        prevent or detect misstatements. Also, projections of any evaluation of
        effectiveness to future periods are subject to the risk that controls may
        become
        inadequate because of changes in conditions, or that the degree of compliance
        with the policies or procedures may deteriorate.
 
 In
        our
        opinion, management’s assessment that Gene Logic Inc. maintained effective
        internal control over financial reporting as of December 31, 2005 is fairly
        stated, in all material respects, based on the COSO criteria. Also, in our
        opinion, Gene Logic Inc. maintained, in all material respects, effective
        internal control over financial reporting as of December 31, 2005, based
        on the
        COSO criteria.
 
 We
        also
        have audited, in accordance with the standards of the Public Company Accounting
        Oversight Board (United States), the consolidated balance sheets of Gene
        Logic
        Inc. as of December 31, 2005 and 2004, and the related consolidated statements
        of operations, stockholders’ equity, and cash flows for each of the three years
        in the period ended December 31, 2005, and our report dated March 14, 2006
        expressed an unqualified opinion thereon.
 
 
 /s/
        ERNST
& YOUNG LLP
 
 
 Baltimore,
        Maryland
 March
        14,
        2006
 F-2




**Reportof
        Independent Registered Public Accounting
        Firm -**
 
 **Consolidated
        Financial Statements**
 
 The
        Board
        of Directors and Stockholders Gene Logic Inc.
 
 We
        have
        audited the accompanying consolidated balance sheets of Gene Logic Inc. as
        of
        December 31, 2005 and 2004, and the related consolidated statements of
        operations, stockholders’ equity, and cash flows for each of the three years in
        the period ended December 31, 2005. Our audits also included the financial
        statement schedule listed in the Index at Item 15(a). These financial statements
        and schedule are the responsibility of the Company’s management. Our
        responsibility is to express an opinion on these financial statements and
        schedule based on our audits.
 
 We
        conducted our audits in accordance with the standards of the Public Company
        Accounting Oversight Board (United States). Those standards require that
        we plan
        and perform the audit to obtain reasonable assurance about whether the financial
        statements are free of material misstatement. An audit includes examining,
        on a
        test basis, evidence supporting the amounts and disclosures in the financial
        statements. An audit also includes assessing the accounting principles used
        and
        significant estimates made by management, as well as evaluating the overall
        financial statement presentation. We believe that our audits provide a
        reasonable basis for our opinion.
 
 In
        our
        opinion, the financial statements referred to above present fairly, in all
        material respects, the consolidated financial position of Gene Logic Inc.
        at
        December 31, 2005 and 2004, and the consolidated results of its operations
        and
        its cash flows for each of the three years in the period ended December 31,
        2005
        in conformity with U.S. generally accepted accounting principles. Also, in
        our
        opinion, the related financial statement schedule, when considered in relation
        to the basic financial statements taken as a whole, presents fairly in all
        material respects the information set forth therein.
 
 We
        also
        have audited, in accordance with the standards of the Public Company Accounting
        Oversight Board (United States), the effectiveness of Gene Logic Inc.’s internal
        control over financial reporting as of December 31, 2005, based on criteria
        established in *Internal
        Control-Integrated Framework* issued by
        the Committee of Sponsoring Organizations of the Treadway Commission and
        our
        report dated March 14, 2006 expressed an unqualified opinion thereon.
 
 
 /s/
        ERNST
& YOUNG LLP
 
 
 Baltimore,
        Maryland
 March
        14,
        2006




F-3




**GENELOGIC
        INC.**
 
 **Consolidated
        Balance Sheets**
 **as
        of December 31, 2005 and 2004**
 **(in
        thousands, except share data)**


**2005**
              
              **2004****ASSETS**Current
                  assets:Cash
                  and cash equivalents
              
              $
              43,946
              
              $
              53,237Marketable
                  securities available-for-sale
              
              
              38,179
              
              
              49,678Accounts
                  receivable, net of allowance of $709 and $436 in 2005 and 2004,
                  respectively
              
              
              3,544
              
              
              4,953Unbilled
                  services
              
              
              7,779
              
              
              6,406Inventory,
                  net
              
              
              3,117
              
              
              1,683Prepaid
                  expenses
              
              
              2,403
              
              
              2,210Other
                  current assets
              
              
              961
              
              
              2,185Total
                  current assets
              
              
              99,929
              
              
              120,352Property
                  and equipment, net
              
              
              30,682
              
              
              23,034Long-term
                  investments
              
              
              3,239
              
              
              4,239Goodwill
              
              
              12,913
              
              
              45,707Other
                  intangibles, net
              
              
              13,399
              
              
              13,695Other
                  assets
              
              
              557
              
              
              54Total
                  assets
              
              $
              160,719
              
              $
              207,081**LIABILITIES
                  AND STOCKHOLDERS' EQUITY**Current
                  liabilities:Accounts
                  payable
              
              $
              5,630
              
              $
              5,256Accrued
                  compensation and employee benefits
              
              
              6,702
              
              
              3,990Other
                  accrued expenses
              
              
              4,269
              
              
              4,629Current
                  portion of capital lease obligations
              
              
              144
              
              
              136Current
                  portion of long-term debt
              
              
              497
              
              
              494Acquired
                  technologies payable
              
              
              3,492
              
              
              -Deferred
                  revenue
              
              
              11,595
              
              
              9,788Total
                  current liabilities
              
              
              32,329
              
              
              24,293Deferred
                  revenue
              
              
              -
              
              
              3,595Capital
                  lease obligations, net of current portion
              
              
              57
              
              
              204Long-term
                  debt, net of current portion
              
              
              127
              
              
              174Acquired
                  technologies payable
              
              
              -
              
              
              3,347Deferred
                  rent
              
              
              3,350
              
              
              2,640Total
                  liabilities
              
              
              35,863
              
              
              34,253Commitments
                  and contingencies
              
              
              -
              
              
              -Stockholders'
                  equity:Preferred
                  stock, $.01 par value; 10,000,000 shares authorized; and no shares
                  issuedand
                  outstanding as of December 31, 2005 and 2004
              
              
              -
              
              
              -Common
                  stock, $.01 par value; 60,000,000 shares authorized; 31,771,835
                  and31,654,413
                  shares issued and outstanding as of December 31, 2005 and 2004,
                  respectively
              
              
              318
              
              
              317Additional
                  paid-in-capital
              
              
              385,586
              
              
              385,313Accumulated
                  other comprehensive loss
              
              
              (78
              )
              
              (136
              )Accumulated
                  deficit
              
              
              (260,970
              )
              
              (212,666
              )Total
                  stockholders' equity
              
              
              124,856
              
              
              172,828Total
                  liabilities and stockholders' equity
              
              $
              160,719
              
              $
              207,081




See
      accompanying notes.




F-4




**GENELOGIC
        INC.**
 
 **Consolidated
        Statements of Operations**
 **For
        the Years Ended December 31, 2005, 2004 and 2003**
 **(in
        thousands, except per share data)**
 **2005**
                
                **2004**
                
                **2003**Revenue:Genomics
                    services
                
                $
                56,602
                
                $
                52,171
                
                $
                51,960Preclinical
                    services
                
                
                22,180
                
                
                23,766
                
                
                17,559Drug
                    repositioning services
                
                
                588
                
                
                -
                
                
                -Total
                    revenue
                
                
                79,370
                
                
                75,937
                
                
                69,519Expenses:Cost
                    of preclinical services
                
                
                27,504
                
                
                26,127
                
                
                16,058Database
                    production
                
                
                31,689
                
                
                42,496
                
                
                49,408Research
                    and development
                
                
                6,812
                
                
                2,449
                
                
                2,091Selling,
                    general and administrative
                
                
                31,594
                
                
                25,676
                
                
                22,198Purchased
                    research and development
                
                
                -
                
                
                8,817
                
                
                -Goodwill
                    impairment loss
                
                
                32,794
                
                
                -
                
                
                -Total
                    expenses
                
                
                130,393
                
                
                105,565
                
                
                89,755Loss
                    from operations
                
                
                (51,023
                )
                
                (29,628
                )
                
                (20,236
                )Interest
                    (income), net
                
                
                (2,625
                )
                
                (1,395
                )
                
                (1,652
                )Other
                    (income) expense
                
                
                (813
                )
                
                -
                
                
                (327
                )Write-down
                    of other than temporary decline in the value ofmarketable
                    securities available-for-sale
                
                
                719
                
                
                -
                
                
                -Write-down
                    of equity investments
                
                
                -
                
                
                -
                
                
                4,268Loss
                    before income tax expense
                
                
                (48,304
                )
                
                (28,233
                )
                
                (22,525
                )Income
                    tax expense
                
                
                -
                
                
                287
                
                
                2,246Net
                    loss
                
                $
                (48,304
                )
                $
                (28,520
                )
                $
                (24,771
                )Basic
                    and diluted net loss per share
                
                $
                (1.52
                )
                $
                (0.91
                )
                $
                (0.82
                )Shares
                    used in computing basic and diluted net loss per share
                
                
                31,744
                
                
                31,493
                
                
                30,112




See
      accompanying notes.




F-5




**GENELOGIC
        INC.**
 
 **Consolidated
        Statements of Stockholder’s Equity**
 **For
        the Years Ended December 31, 2003, 2004 and 2005**
 **(in
        thousands, except number of shares)**
 **Stockholders'
                    Equity****Accumulated****Common
                    Stock**
                
                **Additional**
                
                **Other****Number**
                
                **Par**
                
                **Paid-In**
                
                **Comprehensive**
                
                **Accumulated**
                
                **Comprehensive****of
                    Shares**
                
                **Value**
                
                **Capital**
                
                **Income
                    (Loss)**
                
                **Defecit**
                
                **Loss**Balance
                    at January 1, 2003
                
                
                27,056,487
                
                $
                271
                
                $
                363,294
                
                $
                248
                
                $
                (159,375
                )
                $
                -Issuance
                    of common stock in connection withexercise
                    of stock options
                
                
                28,425
                
                
                -
                
                
                118
                
                
                -
                
                
                -
                
                
                -Issuance
                    of common stock in connection withEmployee
                    Stock Purchase Plan
                
                
                119,072
                
                
                1
                
                
                604
                
                
                -
                
                
                -
                
                
                -Issuance
                    of common stock in connection withTherImmune
                    acquisition
                
                
                3,927,214
                
                
                39
                
                
                19,361
                
                
                -
                
                
                -
                
                
                -Net
                    change in unrealized gains frommarketable
                    securities
                
                
                -
                
                
                -
                
                
                -
                
                
                (201
                )
                
                -
                
                $
                (201
                )Net
                    loss
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                (24,771
                )
                
                (24,771
                )Comprehensive
                    loss
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                $
                (24,972
                )Balance
                    at December 31, 2003
                
                
                31,131,198
                
                $
                311
                
                $
                383,377
                
                $
                47
                
                $
                (184,146
                )
                $
                -Issuance
                    of common stock in connection withexercise
                    of stock options
                
                
                255,479
                
                
                3
                
                
                948
                
                
                -
                
                
                -
                
                
                -Issuance
                    of common stock in connection withEmployee
                    Stock Purchase Plan
                
                
                120,215
                
                
                1
                
                
                445
                
                
                -
                
                
                -
                
                
                -Issuance
                    of common stock in connection withDrug
                    Repositioning technologies acquisition
                
                
                147,521
                
                
                2
                
                
                543
                
                
                -
                
                
                -
                
                
                -Net
                    change in unrealized gains frommarketable
                    securities
                
                
                -
                
                
                -
                
                
                -
                
                
                (183
                )
                
                -
                
                $
                (183
                )Net
                    loss
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                (28,520
                )
                
                (28,520
                )Comprehensive
                    loss
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                $
                (28,703
                )Balance
                    at December 31, 2004
                
                
                31,654,413
                
                $
                317
                
                $
                385,313
                
                $
                (136
                )
                $
                (212,666
                )
                $
                -Issuance
                    of common stock in connection withexercise
                    of stock options
                
                
                54,609
                
                
                -
                
                
                111
                
                
                -
                
                
                -
                
                
                -Issuance
                    of common stock in connection withEmployee
                    Stock Purchase Plan
                
                
                62,813
                
                
                1
                
                
                162
                
                
                -
                
                
                -
                
                
                -Net
                    change in unrealized gains frommarketable
                    securities
                
                
                -
                
                
                -
                
                
                -
                
                
                58
                
                
                -
                
                $
                58Net
                    loss
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                (48,304
                )
                
                (48,304
                )Comprehensive
                    loss
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                $
                (48,246
                )Balance
                    at December 31, 2005
                
                
                31,771,835
                
                $
                318
                
                $
                385,586
                
                $
                (78
                )
                $
                (260,970
                )




See
      accompanying notes.




F-6


**GENELOGIC
      INC.**


**Consolidated
        Statements of Cash Flows**
 **For
        the Years Ended December 31, 2005, 2004 and 2003**
 **(in
        thousands)**
 **2005**
                
                **2004**
                
                **2003**Cash
                    flows from operating activities:Net
                    loss
                
                $
                (48,304
                )
                $
                (28,520
                )
                $
                (24,771
                )Adjustments
                    to reconcile net loss to net cash flows from operating
                    activities:Depreciation
                    and amortization
                
                
                14,038
                
                
                16,626
                
                
                16,778Goodwill
                    impairment loss
                
                
                32,794
                
                
                -
                
                
                -Non-cash
                    purchased research and development
                
                
                -
                
                
                7,908
                
                
                -Write-down
                    of other than temporary decline in the value of marketable securities
                    available-for-sale
                
                
                719
                
                
                -
                
                
                -Write-down
                    of equity investments
                
                
                -
                
                
                -
                
                
                4,268Loss
                    on abandonment of patents
                
                
                52
                
                
                275
                
                
                257Loss
                    on disposal of property and equipment
                
                
                186
                
                
                335
                
                
                56Accrued
                    interest relating to acquired technologies payable
                
                
                145
                
                
                63
                
                
                -Changes
                    in operating assets and liabilities:Accounts
                    receivable and unbilled services
                
                
                36
                
                
                1,870
                
                
                (2,532
                )Inventory
                
                
                (1,434
                )
                
                3,297
                
                
                3,956Prepaids
                    and other assets
                
                
                528
                
                
                (930
                )
                
                (150
                )Accounts
                    payable
                
                
                374
                
                
                (100
                )
                
                (157
                )Accrued
                    expenses and deferred rent
                
                
                3,062
                
                
                988
                
                
                (3,223
                )Deferred
                    revenue
                
                
                (1,788
                )
                
                (2,092
                )
                
                (2,282
                )Net
                    cash flows from operating activities
                
                
                408
                
                
                (280
                )
                
                (7,800
                )Cash
                    flows from investing activities:Purchases
                    of property and equipment
                
                
                (14,577
                )
                
                (5,211
                )
                
                (4,157
                )Purchases
                    of licenses and patent costs
                
                
                (813
                )
                
                (569
                )
                
                (710
                )Software
                    development costs
                
                
                (2,070
                )
                
                (3,327
                )
                
                (6,596
                )Database
                    upgrade costs
                
                
                (4,168
                )
                
                (569
                )
                
                -Repayments
                    of notes receivable from employees
                
                
                -
                
                
                -
                
                
                37Cash
                    paid to acquire TherImmune, net of cash acquired
                
                
                -
                
                
                -
                
                
                (30,433
                )Proceeds
                    from sale and maturity of marketable securities
                    available-for-sale
                
                
                59,414
                
                
                83,372
                
                
                140,219Purchase
                    of marketable securities available-for-sale
                
                
                (47,576
                )
                
                (70,128
                )
                
                (143,380
                )Net
                    cash flows from investing activities
                
                
                (9,790
                )
                
                3,568
                
                
                (45,020
                )Cash
                    flows from financing activities:Proceeds
                    from issuance of common stock to employees
                
                
                274
                
                
                1,397
                
                
                723Cash
                    used to repay TherImmune debt
                
                
                -
                
                
                -
                
                
                (6,017
                )Repayments
                    of capital lease obligations and equipment loan
                
                
                (183
                )
                
                (166
                )
                
                (125
                )Net
                    cash flows from financing activities
                
                
                91
                
                
                1,231
                
                
                (5,419
                )Net
                    increase (decrease) in cash and cash equivalents
                
                
                (9,291
                )
                
                4,519
                
                
                (58,239
                )Cash
                    and cash equivalents, beginning of year
                
                
                53,237
                
                
                48,718
                
                
                106,957Cash
                    and cash equivalents, end of year
                
                $
                43,946
                
                $
                53,237
                
                $
                48,718Supplemental
                    disclosure:Taxes
                    paid
                
                $
                -
                
                $
                569
                
                $
                2,209Interest
                    paid
                
                $
                35
                
                $
                49
                
                $
                48Non-cash
                    financing and investing transactions:In
                    connection with the acquisition of the Drug Repositioning
                    technologies:Purchase
                      of research and development and purchase of laboratory equipment,
                      in
                      exchange for issuance of common stock, acquired technology
                      payable and a
                      ToxExpress subscription license
                
                $
                -
                
                $
                7,971
                
                $
                -Issuance
                    of common stock in TherImmune acquisition
                
                $
                -
                
                $
                -
                
                $
                19,400Equity
                    investment received as payment for BioExpress subscription
                
                $
                -
                
                $
                -
                
                $
                3,186See
                    accompanying notes.


F-7




**GENELOGIC
        INC.**
 **Notes
        to Consolidated Financial Statements**
 **December
        31, 2005, 2004 and 2003**
 **(in
        thousands, except share and per share data)**
 
 **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. (our United Kingdom
        subsidiary) and Gene Logic K.K. (our Japan subsidiary), (collectively “Gene
        Logic” or the “Company”), provides innovative drug discovery and development
        services and solutions to pharmaceutical and biotechnology companies
        worldwide and United States Government agencies. From April 1, 2003 to December
        31, 2004, the Company’s services were organized into two business segments:
        genomics and toxicogenomics services (“Genomics Division”) and preclinical
        contract research services ( “Preclinical Division”). Beginning in 2005, the
        Company added a third business segment: drug repositioning and selection
        services (“Drug Repositioning Division”).
 
 The
        Genomics Division consists of proprietary reference 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 efficacy of specific compounds. The
        Preclinical Division consists of *in
        vivo* (in life)
        research studies and related laboratory services to help customers in the
        United
        States to assess the safety and pharmacologic effects of candidate compounds
        for
        the purpose of gaining regulatory approval to proceed with human trials.
        The
        Drug Repositioning Division, which resulted from the acquisition of certain
        technologies in 2004 that continue to be developed (see Note 2), currently
        consists of a series of molecular pharmacology technologies used to assist
        customers in (i) identifying alternative indications for failed, stalled
        or
        deprioritized compounds, and, in the future, potentially to assist
        customers in (ii) expanding indications for currently marketed drugs, and
        (iii)
        prioritizing and identifying indications for compounds entering preclinical
        development.
 
 *Basis
        of Presentation and Principles of Consolidation*
 
 On
        April
        1, 2003, TherImmune Research Corporation (“TherImmune”) was merged into Gene
        Logic’s wholly owned subsidiary, GLA II Corp., subsequently renamed Gene Logic
        Laboratories Inc.  The acquisition of TherImmune has been accounted for
        under the purchase method of accounting, and consolidated financial statements
        herein reflect the inclusion of Gene Logic Laboratories' operating results
        since
        the acquisition date. In 2004, Gene Logic Ltd. was formed in the United Kingdom
        to provide sales support and customer service support in Europe and Gene
        Logic
        K.K. was formed in Japan to provide customer service support in Japan. All
        material intercompany accounts and transactions have been eliminated in
        consolidation.
 
 *Use
        of
        Estimates*
 
 The
        preparation of consolidated financial statements in conformity with accounting
        principles generally accepted in the United States requires management to
        make
        estimates and assumptions that affect the reported amounts of assets and
        liabilities and disclosure of contingent assets and liabilities at the date
        of
        the consolidated financial statements and the reported amounts of revenue
        and
        expenses during the reporting period. Actual results could differ from those
        estimates.
 
 *Comprehensive
        Loss*
 
 The
        Company accounts for comprehensive loss as prescribed by Statement of Financial
        Accounting Standards No. 130, “Reporting Comprehensive Income”. Comprehensive
        loss is the total net loss plus all changes in equity during the period except
        those changes resulting from investment by owners and distribution to owners.
        Total comprehensive loss was $48,246, $28,703 and $24,972 for the years ended
        December 31, 2005, 2004 and 2003, respectively.
 
 *Concentration
        of Credit Risk*
 
 Cash,
        cash
        equivalents and marketable securities available-for-sale are financial
        instruments that potentially subject the Company to concentrations of credit
        risk. The estimated fair value of financial instruments approximates the
        carrying value based on available market information. The Company primarily
        invests its excess available funds in money market funds, commercial paper,
        corporate bonds and securities issued by the United States Government and
        its
        agencies and, by policy, seeks to ensure both liquidity and safety of principal.
        The policy also limits investments to certain types of instruments issued
        by
        institutions with strong investment grade credit ratings and places restrictions
        on their terms, geographic origin and concentrations by type and issuer.
  F-8




*Cash
        and Cash Equivalents*
 
 Cash
        and
        cash equivalents are defined as liquid investments with maturities of 90
        days or
        less when purchased. All other investments are reported as marketable securities
        available-for-sale. Cash and cash equivalents as of December 31 are comprised
        of:
  **2005**
                
                **2004**Cash
                
                $
                2,326
                
                $
                4,363Money
                    market funds
                
                
                6,949
                
                
                5,172Commercial
                    paper
                
                
                34,671
                
                
                43,702Total
                
                $
                43,946
                
                $
                53,237




*Marketable
        Securities Available-for-Sale*
 
 All
        marketable securities are classified as available-for-sale. Available-for-sale
        securities are carried at fair value, with unrealized gains and temporary
        losses
        reported as accumulated other comprehensive income (loss) included in
        stockholders’ equity. Realized gains and losses and declines in value judged to
        be other than temporary for available-for-sale securities are included in
        the
        Consolidated Statements of Operations. The cost of securities sold is based
        on
        the specific identification method. In 2005 and 2004, realized gains and/or
        losses resulting from the sale of marketable securities were immaterial.
        In
        2003, marketable securities were sold for total proceeds of $65,114, resulting
        in net realized gains of $327.
 
 As
        of
        December 31, 2005, the Company’s investment portfolio consisted of commercial
        paper, corporate bonds, equity securities and mortgage-backed securities
        of U.S.
        Government agencies. All marketable securities had original maturities greater
        than 90 days, but less than two years. All investments in corporate bonds
        mature
        in 2006 and 2007. All marketable securities with a gross unrealized loss
        as of
        December 31, 2005 have been in an unrealized loss position for less than
        12
        months. The Company reviews marketable securities for impairment based on
        criteria that include the extent to which the investment’s carrying value
        exceeds its related market value, the duration of the market decline, the
        Company’s ability to hold the investment to recovery and the financial strength
        and specific prospects of the issuer of the security. During 2005, the Company
        determined that one of its marketable securities had an other than temporary
        decline in its value and accordingly, recorded a loss of $719. As of December
        31, 2005, all of the Company’s investments were classified as current because
        the Company may not hold its investments until maturity in order to take
        advantage of market conditions. Marketable securities available-for-sale
        as of
        December 31 are comprised of:
  **2005**
                
                **2004**Gross
                
                Gross
                
                
                
                
                
                Gross
                
                GrossAmortized
                
                Unrealized
                
                Unrealized
                
                Fair
                
                Amortized
                
                Unrealized
                
                Unrealized
                
                FairCost
                
                Gains
                
                Losses
                
                Value
                
                Cost
                
                Gains
                
                Losses
                
                ValueCommercial
                    paper
                
                $
                22,455
                
                $
                -
                
                $
                (14
                )
                $
                22,441
                
                $
                16,670
                
                $
                -
                
                $
                (5
                )
                $
                16,665Corporate
                    bonds
                
                
                13,501
                
                
                -
                
                
                (53
                )
                
                13,448
                
                
                7,037
                
                
                1
                
                
                (12
                )
                
                7,026Equity
                    securities
                
                
                281
                
                
                -
                
                
                -
                
                
                281
                
                
                -
                
                
                -
                
                
                -
                
                
                -U.S.
                    Governmentmortgage-backedsecurities
                
                
                2,020
                
                
                -
                
                
                (11
                )
                
                2,009
                
                
                26,107
                
                
                -
                
                
                (120
                )
                
                25,987Total
                
                $
                38,257
                
                $
                -
                
                $
                (78
                )
                $
                38,179
                
                $
                49,814
                
                $
                1
                
                $
                (137
                )
                $
                49,678
  *Allowances
            for Doubtful Accounts Receivable*
 
 The
            Company uses estimates to determine the amount of the allowance for doubtful
            accounts necessary to reduce accounts receivable and unbilled services
            to their
            expected net realizable value. The Company estimates the amount of the
            required
            allowance by reviewing the status of past-due receivables and by establishing
            general provisions for estimated losses by analyzing current customer
            credit
            worthiness and historical bad debt trends. Actual collection experience
            has not
            varied significantly from the Company’s estimates, due primarily to collection
            policies and the financial strength of the Company’s customers. Receivables that
            are ultimately deemed uncollectible are written-off as a reduction of
            accounts
            receivable and the allowance for doubtful accounts.
  F-9




*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 the 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. Inventory as of December 31 is comprised
        of:
 **2005**
                
                **2004**Microarrays
                
                $
                2,199
                
                $
                501Laboratory
                    reagents
                
                
                324
                
                
                306Tissue
                    samples
                
                
                2,248
                
                
                2,3654,771
                
                
                3,172Less
                    -- tissue sample reserves
                
                
                (1,654
                )
                
                (1,489
                )Inventory,
                    net
                
                $
                3,117
                
                $
                1,683
  *Property
            and Equipment*
 
 Property
            and equipment is carried at cost, less accumulated depreciation and
            amortization. Depreciation and amortization is recorded using the straight-line
            method over the estimated useful lives of the assets as follows:
  Furniture
                    10
                        yearsComputer
                        and office equipment
                    1-5
                        yearsLaboratory
                        equipment
                    5-10
                        yearsLeasehold
                        improvements
                    Lesser
                        of the lease term or the useful
                        life
  *Long-Term
                Investments*
 
 The
                Company has made equity investments in companies whose shares are
                not publicly
                traded and whose businesses may be complementary to the Company’s business. All
                of the Company’s current equity investments are accounted for under the cost
                method of accounting, as the Company holds less than 20% of the voting
                stock
                outstanding under such arrangements and does not exert significant
                influence
                over these companies.
 
 *Goodwill*
 
 The
                goodwill on the Company’s Consolidated Balance Sheets resulted from the
                acquisitions of TherImmune in 2003 and Oncormed, Inc. ("Oncormed") in 1998
                and represents the excess of the purchase price over the fair value
                of the net
                assets acquired.
 
 The
                Company accounts for goodwill under the provisions of Statement of
                Financial
                Accounting Standards No. 142, “Goodwill and Other Intangible Assets” (“SFAS
                142”). Under SFAS 142, the Company is required to perform an annual impairment
                test of its goodwill. In addition, the Company is required to test
                for
                impairment at any point at which it has an indication that impairment may
                exist. The Company’s annual impairment test is performed October 1.
 
 The
                goodwill impairment test involves a two-step approach. Under the
                first step, the
                Company determines the fair value of each reporting unit to which
                goodwill has
                been assigned. Reporting units are defined as the Company’s business segments.
                The Company then compares the fair value of each reporting unit to
                its carrying
                value, including goodwill. The Company estimates the fair value of
                each
                reporting unit by estimating the present value of the reporting unit’s future
                cash flows. If the fair value exceeds the carrying value, no impairment
                loss is
                recognized. If the carrying value exceeds the fair value, the goodwill
                of the
                reporting unit is considered potentially impaired and the second
                step is
                completed in order to measure the impairment loss. Under the second
                step, the
                Company calculates the implied fair value of goodwill by deducting
                the fair
                value of all tangible and intangible net assets, including any unrecognized
                intangible assets, of the reporting unit from the fair value of the
                reporting
                unit, as determined in the first step. The Company then compares
                the implied
                fair value of goodwill to the carrying value of goodwill. If the
                implied fair
                value of goodwill is less than the carrying value of goodwill, the
                Company
                recognizes an impairment loss equal to the difference.
  F-10




During
        September 2005, the Company determined, in conjunction with its annual strategic
        planning process and as part of its annual testing for impairment of goodwill,
        that the carrying value of the goodwill that resulted from the April 1, 2003
        acquisition of TherImmune (now Gene Logic Laboratories Inc.) 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, the Company obtained an appraisal from
        an
        independent valuation firm. As a result of the Company’s review, the Company
        recorded a non-cash expense of $32,794 representing the implied impairment
        of
        goodwill of the Company’s Preclinical Division. Subsequent to the impairment
        loss, goodwill related to the acquisition of TherImmune amounted to
        $10,236.
 
 Based
        on
        the results of the Company’s annual impairment test, no impairment was
        identified in the carrying value of the $2,677 of goodwill of the Company’s
        Genomics Division related to the acquisition of Oncormed.
 
 *Other
        Intangibles and Other Assets*
 
 Other
        intangibles and other assets consist primarily of licenses, patent costs,
        software development costs, customer relationships and database upgrade
        costs.
 
 The
        Company has licensed from third parties the proprietary rights and technical
        information covered by various patents and patent applications. These licenses
        will continue for the term of the agreement or the life of the respective
        patent, whichever is shorter. License costs are being amortized over their
        expected useful lives, but not greater than the lesser of the term of the
        agreement or the life of the respective patent. Certain agreements call for
        the
        payment of royalties and maintenance fees.
 
 Patent
        costs include issued patents and patent applications and are stated at cost.
        Amortization of issued patent costs is recorded using the straight-line method
        over the shorter of their expected useful life or the legal lives of the
        patents, generally for periods ranging up to 20 years. The Company wrote
        off
        certain patent costs in the amount of $52, $275 and $257 during 2005, 2004
        and
        2003, respectively, after determining that the technologies underlying such
        patents and applications would no longer be utilized in the Company’s
        business.
 
 In
        accordance with the provisions of the Financial Accounting Standards Board
        Statement No. 86, “Accounting for the Costs of Computer Software to be Sold,
        Leased or Otherwise Marketed,” the Company has capitalized certain software
        development costs incurred in developing software upon the demonstration
        of
        technological feasibility. The Company ceases capitalizing such costs when
        the
        software is available for general release to its customers. Software development
        costs are being amortized over their expected useful life of three years,
        commencing upon release of the software or upgrades.
 
 In
        connection with the TherImmune acquisition, the Company recorded the estimated
        fair value of acquired customer relationships as an intangible asset, and
        such
        intangible asset was amortized on a straight-line basis over two years, which
        was the Company’s estimate of the average expected term of its customer
        relationships at the date of acquisition.
 
 Database
        upgrade costs include purchases of data to integrate into the Company’s gene
        expression databases and upgrades of existing gene expression data utilizing
        Affymetrix’s most recent microarrays. Costs capitalized from upgrades are
        primarily microarrays and related reagents. These costs are capitalized and
        amortized over their expected useful life of two years, commencing upon release
        of the update.
 
 *Impairment
        of Long-Lived Assets*
 
 Long-lived
        assets, consisting principally of property and equipment, long-term investments
        and other intangible assets (including licenses, patent costs, software
        development costs, customer relationships and database upgrade costs), are
        evaluated for possible impairment. If an impairment loss is indicated, the
        Company will measure the amount of the impairment by comparing the carrying
        value of the asset to the present value of the expected future cash flows
        associated with the use of the asset.
 
 *Research
        and Development*
 
 Research
        and development costs, including those costs incurred in acquiring and
        developing the Drug Repositioning technologies, are charged to operations
        when
        incurred or acquired.
 
 *Database
        Production*
 
 Except
        for
        database upgrade costs, costs related to the acquisition and processing of
        tissues and overhead expenses needed to generate additional content
        for the Company’s databases are expensed as incurred. These costs include
        labor, microarrays, tissues, licensing agreements, reagents, outside consultants
        and overhead.
  F-11




*Revenue
        Recognition*
 
 The
        majority of Genomics Division services revenue consists of fees earned under
        subscription agreements for all or parts of the Company’s gene expression
        reference databases, the BioExpress System and ToxExpress System, which are
        for
        a specific multi-year term. The Company has also granted to some customers
        perpetual licenses to certain data from the Company’s BioExpress and ToxExpress
        System databases and software. In addition, the Company derives 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
        such
        subscription agreements is recognized ratably over the period during which
        the
        customer has access to the databases. Such agreements provide for termination
        in
        the event of a breach of the agreement by either party or a bankruptcy or
        insolvency of either party. Certain subscription agreements have included
        a
        right of early termination (which, in some instances, was 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 would be 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 would be 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 or software has been delivered. Revenue
        for
        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. Agreements with the Company’s customers, other than its Japanese
        customers, are dollar-denominated. Agreements with the Company’s Japanese
        customers, since 2005, have been denominated in Japanese Yen and may be subject
        to fluctuations in value due to changes in currency exchange rates.
 
 Preclinical
        Division services revenue is primarily derived from fixed price contracts
        with
        pharmaceutical and biotechnology companies. In addition, the Company derives
        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. The Company believes
        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.
 
 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 the Company’s analysis of objective
        evidence from comparable sales of the individual element. If the Company
        is
        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.
 
 During
        2005, the Company entered into several contractual arrangements with multiple
        deliverables, such as licenses to access its BioExpress and ToxExpress System
        databases and microarray data generation and analysis and other professional
        services. For some of these arrangements, the Company was unable to determine
        objectively and reliably the fair value of some undelivered elements, and
        in
        such arrangements, the Company recognizes all revenue using the revenue
        recognition method appropriate to the predominant undelivered element. The
        Company also defers the direct and incremental expenses associated with the
        delivery of services for which revenue has been deferred and recognizes these
        expenses as the Company recognizes the related revenue. These types of
        arrangements have resulted in an increase in the Company’s deferred costs and
        deferred revenue as of December 31, 2005. The timing of revenue recognition
        associated with agreements the Company enters into in future periods may
        also be
        dependent on its ability to objectively and reliably determine the fair value
        of
        deliverables included in those agreements.
 
 Unbilled
        services are recorded for revenue recognized to date that has not been billed
        to
        the customer pursuant to the contractual terms. Typically, the Company’s
        arrangements require that payments be made in advance, upon the achievement
        of
        milestones or in accordance with predetermined payment schedules. Deferred
        revenue is recorded for cash received from customers for whom services have
        not
        yet been performed as of the balance sheet date.
 
 *Foreign
        Currency Transactions*
 
 Foreign
        currency transaction gains and losses are included in the Company’s Consolidated
        Statements of Operations. During 2005, foreign currency gains totaled $813
        and
        are included in Other Income (Expense) on the Company’s Consolidated Statements
        of Operations. Prior to 2005, the Company was not subject to foreign currency
        transactions as its agreements were dollar denominated.
  F-12




*Income
        Taxes*
 
 The
        Company accounts for income taxes under the provisions of Statement of Financial
        Accounting Standards No. 109, “Accounting for Income Taxes” (“SFAS 109”). Under
        the asset and liability method of SFAS 109, deferred tax assets and liabilities
        are recognized for the future tax consequences attributable to differences
        between the financial statement carrying amounts of existing assets and
        liabilities and their respective tax bases and net operating loss and tax
        credit
        carryforwards. Deferred tax assets and liabilities are measured using enacted
        tax rates expected to apply to taxable income in the years in which those
        temporary differences are expected to be recovered or settled. Under SFAS
        109,
        the effect on deferred tax assets and liabilities of a change in tax rates
        is
        recognized in operations in the period that includes the enactment
        date.
 
 *Basic
        and Diluted Net Loss Per Share*
 
 Net
        loss
        per share is computed using the weighted average number of shares of Common
        Stock outstanding. Common equivalent shares from all outstanding stock options
        and warrants are excluded from the computation, as their effect is
        anti-dilutive.
 
 *Stock-Based
        Compensation Plans*
 
 At
        December 31, 2005, the Company has three stock-based compensation plans:
        the
        1997 Equity Incentive Plan (the “Stock Plan”), the 1997 Non-Employee Directors’
Stock Option Plan (the “Directors’ Plan”) and the Employee Stock Purchase Plan
        (the “ESPP”). The Company accounted for these plans under the recognition and
        measurement principles of Accounting Principles Board Opinion No. 25,
“Accounting for Stock Issued to Employees” (“APB 25”), and related
        interpretations. Under APB 25, compensation expense for grants that are
        compensatory are recorded over the vesting period only to the extent that
        the
        fair value of the underlying stock on the date of grant exceeds the exercise
        or
        acquisition price of the stock or stock-based award. Stock options granted
        under
        the Company’s Stock Plan and Directors’ Plan were considered compensatory and
        were granted with an exercise price equal to the fair value on the grant
        date.
        Common stock issued under the ESPP was considered non-compensatory under
        APB 25
        and was purchased at 85% of the lesser of the market price of the shares
        at the
        time of purchase or the market price on the beginning date of an offering,
        as
        defined under the plan (or, if later, the date during the offering when the
        employee was first eligible to participate). In 2005, purchases under the
        ESPP
        were suspended after the January 31, 2005 purchase.
 
 The
        following table illustrates the effect on net loss and loss per share as
        if the
        Company had applied the fair value recognition provisions of Statement of
        Financial Accounting Standards No. 123, “Accounting for Stock-Based
        Compensation” (“SFAS 123”), to stock-based employee compensation for the years
        ended December 31:
  **2005**
                
                **2004**
                
                **2003**Net
                    loss, as reported
                
                $
                (48,304
                )
                $
                (28,520
                )
                $
                (24,771
                )Add:
                    Stock-based employee compensation expenseincluded
                    in reported net loss
                
                
                -
                
                
                -
                
                
                -Deduct:
                    Stock-based employee compensation expensedetermined
                    under fair value based method for all awards
                
                
                (2,010
                )
                
                (2,513
                )
                
                (8,290
                )Pro
                    forma net loss
                
                $
                (50,314
                )
                $
                (31,033
                )
                $
                (33,061
                )Basic
                    and diluted net loss per share:As
                    reported
                
                $
                (1.52
                )
                $
                (0.91
                )
                $
                (0.82
                )Pro
                    forma
                
                $
                (1.58
                )
                $
                (0.99
                )
                $
                (1.10
                )
  The
            fair
            value of each option grant is estimated on the date of grant using the
            Black-Scholes option pricing model for the years ended December 31, 2005,
            2004
            and 2003, with the following assumptions:
  **2005**
                    
                    **2004**
                    
                    **2003**Expected
                        volatility
                    
                    
                    52%
                    
                    
                    60%
                    
                    
                    69%Risk-free
                        interest rate
                    
                    
                    3.41%
                        to 4.42%
                    
                    
                    2.02%
                        to 3.26%
                    
                    
                    1.61%
                        to 2.58%Expected
                        lives
                    
                    
                    3
                        years
                    
                    
                    3
                        years
                    
                    
                    3
                        yearsDividend
                        rate
                    
                    
                    0%
                    
                    
                    0%
                    
                    
                    0%




F-13




*Reclassifications*
 
 Certain
        reclassifications have been made to the prior years’ financial statements to
        conform to the current year presentation.
 
 *New
        Accounting Pronouncements*
 
 In
        2004,
        the Financial Accounting Standards Board issued SFAS No. 123(R), “Share-Based
        Payment,” (“SFAS 123(R)”) and in 2005, the SEC approved a new rule that required
        an adoption date of January 1, 2006 for the Company. The new statement requires
        all share-based payments to employees be recognized in the financial statements
        based on their fair values. Prior to the Company’s adoption of FAS123(R), the
        Company historically accounted for its share-based payments to employees
        under
        the intrinsic value method of accounting set forth in Accounting Principles
        Board Opinion No. 25, “Accounting for Stock Issued to Employees.” Additionally,
        the Company complied with the stock-based employee compensation disclosure
        requirements of SFAS No. 148, “Accounting for Stock-Based
        Compensation-Transition and Disclosure”.
 
 SFAS
        123(R) permits companies to adopt its requirements using one of two
        methods:
 
 ·
            A
                “modified prospective” method in which compensation cost is recognized
                beginning with the effective date (a) based on the requirements of
                SFAS
                123(R) for all share-based payments granted or modified after the
                effective date and (b) based on the requirements of SFAS 123(R) for
                all
                awards granted to employees prior to the effective date of SFAS 123(R)
                that remain unvested on the effective
                date. 
 ·
            A
                “modified retrospective” method which includes the requirements of the
                modified prospective method described above, but also permits companies
                to
                restate based on the amounts previously recognized under SFAS 123(R)
                for
                purposes of pro forma disclosures for either (a) all prior periods
                presented or (b) prior interim periods of the year of
                adoption. 
 On
        January
        1, 2006, the Company adopted SFAS 123(R) using the modified-prospective method.
        The effects on stock compensation expense in periods after adoption will
        be
        dependent on the number and type of share-based payments issued to employees.
        Based on outstanding share-based payments as of December 31, 2005, the Company
        estimates that non-cash stock compensation expense in 2006 will increase
        by
        approximately $700 to $1,000 to reflect the continued vesting of outstanding
        stock option grants that remain unvested as of December 31, 2005. This estimate
        does not include the impact of other possible stock-based awards that may
        be made during 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 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 and is effective for reporting periods
          after
          December 15, 2005. The
          Company believes that its current approach of determining whether investment
          losses are "other than temporary" is generally consistent with the provisions
          of
          FSP FAS 115-1, thus upon adoption the
          Company does not expect FSP FAS115-1 to have a material impact on its
          financial position, results of operations or cash flows.
  **Note** **2
        - Drug Repositioning technologies acquisition**
 
 In
        July
        2004, the Company acquired certain drug repositioning technologies and related
        assets (the “Drug Repositioning technologies”) and hired a research team from
        Millennium Pharmaceuticals, Inc. (“Millennium”). The Drug Repositioning
        technologies, which are currently under development, include: *in
        vivo* compound
        imaging, *in
        vitro* pathway
        screening, predictive and genetic ADME capabilities and metabolomics
        technologies for use in preclinical and clinical drug development. In addition,
        the Company has a drug development agreement with Millennium under which
        the Company uses the acquired Drug Repositioning technologies to reposition
        a
        Millennium compound in exchange for up-front fees. If the compound re-enters
        Millennium’s drug development pipeline, the Company could receive milestone
        payments and royalties on commercial sales.
 
 Consideration
        for this acquisition from the Company included: (i) $3,500 payable in cash
        or stock, at the Company’s election, to Millennium in 2006 (recorded net of
        discount of $8 at December 31, 2005); (ii) $1,000 paid and issued in cash
        and
        stock to certain employees who left Millennium and joined the Company; (iii)
        limited grant-back licenses to certain technologies acquired from Millennium;
        and (iv) approximately $488 in transaction costs. In addition, Millennium
        received a license to use the Company’s ToxExpress System database for three
        years (subsequently amended to terminate on December 30, 2005), valued at
        $4,500, for which the Company recorded $4,048 and $452 in revenue in 2005
        and
        2004, respectively. The Company also contractually agreed to spend at least
        $8,500 over the eighteen months following the acquisition to develop and
        commercialize the acquired technologies and, subject to achieving certain
        performance milestones by the end of the first eighteen months, an additional
        $6,000 over the subsequent twelve months.  As
        of
        December 31, 2005, the Company met the first commitment to spend $8,500 and
        has
        recorded $4,122 in expenditures related to the second commitment to spend
        an
        additional $6,000. After completing its evaluation of the Drug
        Repositioning technologies and purchased in-process research and development
        activities, and in order to reflect the cost of acquiring the Drug Repositioning
        technologies, the Company recorded an $8,817, one-time, purchased research
        and
        development expense within Operating Expenses in the Company’s Consolidated
        Statements of Operations for the year ended December 31, 2004.
  F-14




**Note** **3
        - Acquisition of TherImmune**
 
 On
        April
        1, 2003, the Company acquired by merger 100% of the outstanding common stock
        of
        TherImmune for a total purchase price of $51,081, which consisted of cash
        paid
        of $30,405 to TherImmune securityholders, 3,927,214 shares of Gene Logic
        Common
        Stock, valued at $19,400, issued to TherImmune shareholders, and approximately
        $1,276 in transaction costs. The value of the shares issued was based on
        the
        average market price of the Company’s Common Stock surrounding the measurement
        date. The approximately 5% of the total consideration that was held in escrow
        to
        satisfy potential indemnification obligations of the TherImmune securityholders
        was paid in 2004.
 
 The
        acquisition was recorded using the purchase method of accounting and the
        Consolidated Statements of Operations reflect the inclusion of TherImmune’s
        operating results since the acquisition date. The total purchase price was
        allocated as follows:
 Current
                    assets
                
                $
                8,103Property
                    and equipment
                
                
                11,130Customer
                    relationships (estimated useful life, 2 years)
                
                
                2,500Liabilities
                    assumed
                
                
                (13,682
                )Goodwill
                    (allocated to Preclinical Division)
                
                
                43,030$
                51,081
 The
            following unaudited pro forma financial information gives effect to Gene
            Logic’s
            acquisition by merger of TherImmune as if the transaction had occurred
            at
            January 1, 2003 and is based on the historical statements of Gene Logic
            and
            TherImmune during the year ended December 31:
 **2003**Total
                      revenue
                  
                  $
                  75,218Net
                      loss
                  
                  
                  (26,080
                  )Basic
                      and diluted net loss per share
                  
                  $
                  (0.84
                  )Weighted
                      average shares outstanding
                  
                  
                  31,081
 The
              pro
              forma adjustments used herein are based upon available information
              and various
              assumptions that management believes are reasonable. These adjustments
              give
              effect to events directly attributable to the transaction and do not
              reflect any
              integration costs or other synergies that management expects to realize
              as a
              result of the transaction. Such unaudited pro forma financial information
              is not
              necessarily indicative of what the actual consolidated results of the
              operations
              might have been had the acquisition been effective at the beginning
              of
              2003.
 
 **Note
              4 - Property and equipment**
 
 Property
              and equipment includes the following as of December 31:
 **2005**
                    
                    **2004**Furniture
                    
                    $
                    2,322
                    
                    $
                    2,054Computer
                        and office equipment
                    
                    
                    15,174
                    
                    
                    13,664Laboratory
                        equipment
                    
                    
                    23,096
                    
                    
                    16,400Leasehold
                        improvements
                    
                    
                    24,552
                    
                    
                    19,41165,144
                    
                    
                    51,529Less
                        -- accumulated depreciation and amortization
                    
                    
                    (34,462
                    )
                    
                    (28,495
                    )Property
                        and equipment, net
                    
                    $
                    30,682
                    
                    $
                    23,034
 Depreciation
                expense was $6,743, $6,174 and $6,094 for the years ended December
                31, 2005,
                2004 and 2003, respectively.
 
 **Note
                5 - Long-term investments**
 
 The
                Company accounts for its investment in Neuralstem, Inc. (“Neuralstem”) under the
                cost method of accounting. During 2003, the Company recorded a $4,268
                write-down
                of its investment in Neuralstem due to a permanent decline in Neuralstem’s
                estimated market value, which represented the remaining book value
                of this
                investment.
  F-15




In
        November 2003, the Company’s subsidiary then named MetriGenix, Inc. (which has
        since been dissolved), sold substantially all of its assets for cash to a
        privately held company (the “Buyer”, referred to herein as “MetriGenix”). The
        proceeds of sale were used to satisfy then known liabilities of the former
        MetriGenix, Inc. In connection with the sale, MetriGenix received a fully
        paid
        BioExpress System subscription with a term through December 31, 2006, which
        thereafter renews automatically on an annual basis unless either party elects
        not to renew; under that agreement, no additional fees are payable for the
        subscription so long as the Company owns 15% of the outstanding stock of
        Buyer.
        In consideration for the consent to the assignment, the Company received
        convertible preferred stock of MetriGenix, valued at $2,911, representing
        15.3%
        of the equity of MetriGenix, and a warrant, valued at $275, exercisable at
        $0.0001 per additional share, intended to enable the Company to maintain
        a 15%
        equity interest in MetriGenix. If the Company’s equity interest is diluted below
        15%, MetriGenix must either terminate the subscription agreement or pay fees
        for
        the subscription. The Company may not terminate the subscription prior to
        December 31, 2006, except in the event of a breach by MetriGenix. The Company
        also received the right to appoint a person to the Board of Directors of
        the
        Buyer. The Company accounts for its investment in MetriGenix using the cost
        method of accounting and is recording the investment value, $3,186, as revenue
        over the initial term of the subscription agreement of three years. During
        2005,
        2004 and 2003, the Company recorded $1,027, $1,060 and $96, respectively,
        in
        revenue relating to this subscription agreement.
 
 During
        2004, the Company accounted for its investment in Avalon Pharmaceuticals,
        Inc.
        (“Avalon”) under the cost method of accounting. During 2005, Avalon completed an
        initial public offering and the Company reclassified its $1,000 investment
        to
        marketable securities available-for-sale. Subsequently, the Company recorded
        a
        $719 write-down of its investment in Avalon due to an other than temporary
        decline in Avalon’s estimated market value. The remaining investment in Avalon
        was $281 at December 31, 2005 and is included in Marketable Securities
        Available-for-Sale in the Company’s Consolidated Balance Sheets.
 
 **Note
        6 - Other intangible assets**
 
 Information
        regarding the Company’s other intangible assets at December 31 is as
        follows:
 **2005**
                
                **2004**Carrying
                    amount:Licenses
                
                $
                1,600
                
                $
                7,765Patent
                    costs
                
                
                3,185
                
                
                2,693Software
                    development costs
                
                
                13,170
                
                
                19,738Customer
                    relationships
                
                
                -
                
                
                2,500Database
                    upgrade costs
                
                
                4,737
                
                
                569Total
                    carrying amount
                
                $
                22,692
                
                $
                33,265Accumulated
                    amortization:Licenses
                
                $
                993
                
                $
                6,183Patent
                    costs
                
                
                272
                
                
                212Software
                    development costs
                
                
                7,432
                
                
                10,871Customer
                    relationships
                
                
                -
                
                
                2,187Database
                    upgrade costs
                
                
                596
                
                
                117Total
                    accumulated amortization
                
                $
                9,293
                
                $
                19,570Net
                    carrying value:Licenses
                
                $
                607
                
                $
                1,582Patent
                    costs
                
                
                2,913
                
                
                2,481Software
                    development costs
                
                
                5,738
                
                
                8,867Customer
                    relationships
                
                
                -
                
                
                313Database
                    upgrade costs
                
                
                4,141
                
                
                452Total
                    net carrying value
                
                $
                13,399
                
                $
                13,695
  F-16




Amortization
        expense for the years ended December 31, 2005, 2004 and 2003 was $7,295,
        $10,452
        and $10,684, respectively, including amortization of software development
        costs
        of $5,197, $6,600 and $5,680, respectively. Estimated amortization expense
        for
        existing other intangible assets for each of the five succeeding years ending
        December 31 will be as follows:
 2006
                
                $
                6,3182007
                
                
                3,3882008
                
                
                8152009
                
                
                1582010
                
                
                102
 **Note
            7 - Other accrued expenses**
 
 Other
            accrued expenses consist of the following as of December 31:
 **2005**
                  
                  **2004**Property
                      additions
                  
                  $
                  779
                  
                  $
                  1,355Professional
                      and consulting fees
                  
                  
                  1,717
                  
                  
                  1,268Other
                  
                  
                  1,773
                  
                  
                  2,006Other
                      accrued expenses
                  
                  $
                  4,269
                  
                  $
                  4,629
 **Note
              8 - Long-term debt**
 
 Long-term
              debt as of December 31 consists of the following:
 **2005**
                    
                    **2004**Loan
                        for facility -- bearing interest at 5.0% per annum and due
                        inquarterly
                        installments through September 2009
                    
                    $
                    174
                    
                    $
                    218Loan
                        for facility -- bearing interest at 4.5% and due upon
                        demand
                    
                    
                    450
                    
                    
                    450624
                    
                    
                    668Less
                        -- current portion
                    
                    
                    (497
                    )
                    
                    (494
                    )Long-term
                        debt
                    
                    $
                    127
                    
                    $
                    174


As
      of
      December 31, 2005, future principal payments on long-term debt for the years
      ending December 31 are as follows:


2006
              
              $
              4972007
              
              
              492008
              
              
              512009
              
              
              27$
              624
 Interest
          expense was $35, $49 and $48 for the years ended December 31, 2005, 2004
          and
          2003, respectively.
  F-17




**Note
        9 - Income taxes**
 
 Income
        tax
        expense reflected in the Company’s 2004 and 2003 Consolidated Statements of
        Operations represents withholding taxes on certain payments by Japanese
        customers. During 2004, the United States and Japan entered into a new tax
        treaty eliminating this withholding tax effective July 1, 2004. The actual
        income tax expense for the years ended December 31, 2005, 2004 and 2003 is
        different from the amount computed by applying the statutory federal income
        tax
        rates to loss before income tax expense. The reconciliation of these differences
        for the years ended December 31 is as follows:
 **2005**
                
                **2004**
                
                **2003**Tax
                    benefit at federal statutory rate
                
                $
                (16,433
                )
                $
                (9,599
                )
                $
                (7,658
                )State
                    income taxes, net of federal income tax effect
                
                
                (2,233
                )
                
                (1,304
                )
                
                (1,041
                )Goodwill
                    impairment loss
                
                
                12,665
                
                
                -
                
                
                -Other
                
                
                (2,973
                )
                
                (2,314
                )
                
                (400
                )Increase
                    in valuation allowance
                
                
                8,974
                
                
                13,504
                
                
                11,345Income
                    tax expense
                
                $
                -
                
                $
                287
                
                $
                2,246




The
        tax
        effect of cumulative temporary differences at December 31 is as
        follows:
 **2005**
                
                **2004**Deferred
                    tax assets:NOL
                    and tax credit carryforwards
                
                $
                97,147
                
                $
                88,054Contract
                    revenue
                
                
                404
                
                
                2,509Net
                    loss in unconsolidated investee
                
                
                3,483
                
                
                3,483Purchased
                    research and development
                
                
                3,065
                
                
                3,292Depreciation
                
                
                2,649
                
                
                2,231Accrued
                    vacation
                
                
                587
                
                
                492Other
                
                
                4,035
                
                
                3,652111,370
                
                
                103,713Less
                    -- valuation allowance
                
                
                (109,055
                )
                
                (100,082
                )Net
                    deferred tax assets
                
                $
                2,315
                
                $
                3,631Deferred
                    tax liabilities:Capitalized
                    software costs
                
                $
                2,217
                
                $
                3,425Other
                
                
                98
                
                
                206Net
                    deferred tax liabilities
                
                $
                2,315
                
                $
                3,631
 At
            December 31, 2005, net operating loss carryforwards (“NOLs”) for income tax
            purposes were $228,365, including approximately $1,300 and $30,000 related
            to
            the acquisitions of TherImmune and Oncormed, respectively. The Company
            also has
            research and development tax credit carryforwards of $8,952 as of December
            31,
            2005. The carryforwards, if not utilized, will expire in increments from
            2008
            through 2025. Utilization of the net operating losses and credits may
            be subject
            to an annual limitation as provided by the Internal Revenue Code of 1986,
            and
            there can be no guarantee that such NOLs and tax credits will ever be
            fully
            utilized. As a result of cumulative losses, the Company has recorded
            a full
            valuation allowance against its net deferred tax assets as management
            believes
            it is more likely than not that the assets will not be
            realizable.
  F-18




**Note
        10 - Commitments and contingencies**
 
 *Operating
        Leases*
 
 The
        Company conducts its operations from leased facilities in Gaithersburg,
        Maryland, Cambridge, Massachusetts and Berkeley, California, under operating
        leases with varying terms expiring through 2013. These leases obligate the
        Company to pay building operating costs and also contain renewal provisions
        which may extend their term. Future minimum lease payments under all operating
        lease agreements for the years ending December 31 are as follows:
 2006
                
                $
                6,2302007
                
                
                6,1432008
                
                
                4,3132009
                
                
                3,9152010
                
                
                2,8712011
                    and thereafter
                
                
                3,018$
                26,490
 Rent
            expense for the years ended December 31, 2005, 2004 and 2003, was $5,333,
            $4,377
            and $4,476, respectively.
 
 The
            Company has sublease arrangements for which the income is recorded as
            reduction
            to rent expense. Future minimum payments to be received under all subleases
            for
            the years ended December 31 are as follows:
 2006
                  
                  $
                  3042007
                  
                  
                  268$
                  572
 *Capital
              Leases*
 
 The
              Company leases certain equipment under capital leases. Capital leases
              are
              recorded at the present value of the future minimum lease payments.
              Future
              minimum capital lease payments under all capital lease agreements for
              the years
              ending December 31 are as follows:
 2006
                    
                    $
                    1582007
                    
                    
                    61219Less
                        -- amounts representing interest (weighted average effective
                        rate of
                        8.9%)
                    
                    
                    (18
                    )Present
                        value of net minimum lease payments
                    
                    
                    201Less
                        -- current portion of capital lease obligations
                    
                    
                    (144
                    )Long-term
                        portion of capital lease obligations
                    
                    $
                    57
 *Contingencies*
 
 The
                Company’s Preclinical Division is required to comply with applicable United
                States Government regulations. Failure to comply could result in
                the
                disqualification of data for submission to regulatory authorities,
                the loss of
                ongoing or future studies, damage to the Company’s reputation and other
                sanctions. Further, if a study is improperly performed, the Company
                may have to
                repeat the study at its expense, reimburse the client for the cost
                of the study
                and/or provide other remedies. In 2005, the Company received a Warning
                Letter
                (the “FDA Letter”) from the FDA focusing on two preclinical studies conducted in
                2001 and 2002 by TherImmune Research Corporation, prior to its acquisition
                by
                the Company in 2003. The FDA Letter addressed issues relating to
                the conduct of
                and record keeping for these two studies. Since the receipt of the
                FDA Letter,
                the Company cooperated with the product sponsors to address the issues
                raised.
                The Company has submitted its response, addressing each of the violations
                cited
                and identifying corrective actions to be taken, for further consideration
                by the
                FDA. Although the Company believes that the issues raised in the
                FDA Letter have
                been resolved, there is no assurance that the FDA will not take further
                action.
                Such further action could range from requiring further work on the
                two studies
                at issue or FDA refusal to accept the results of those studies to
                support
                regulatory approval for the products involved to more extreme actions
                such as
                follow-up confirmatory inspections of the Company’s facilities which could
                potentially lead to disruptions on the Company’s ability to conduct preclinical
                research services. If this were to happen, the Company could incur
                material
                financial losses.
  F-19




*Commitments*
 
 The
        Company has agreed to purchase from Affymetrix a minimum of $7,625 in products
        and services during 2006 under its supply and license agreement with Affymetrix.
 
 *Litigation*
 
 The
        Company is not currently a party to any legal proceedings that would have
        a
        material adverse effect on the Company’s financial condition or results of
        operations.
 
 **Note
        11 - 401(k) retirement plan**
 
 During
        1996, the Company established the Gene Logic Inc. 401(k) Retirement Plan
        (the
“401(k) Plan”) for its employees under Section 401(k) of the Internal Revenue
        Code. Under the 401(k) Plan all employees 18 years of age or older are eligible,
        starting on the calendar quarter, to contribute up to 100% of their eligible
        compensation and in the case of employees age 50 or older make certain catch-up
        contributions, subject to maximum deferrals allowed under IRS regulations.
        Employee contributions are 100% vested. Prior to 2004, the Company was not
        required to and did not make any contributions to the 401(k) Plan. In 2004,
        the
        Company initiated a matching contribution in the amount of 25% of up to 3%
        of an
        employee’s eligible compensation. Employees hired before January 1, 2004 are
        fully vested in the Company matching contributions. Employees hired after
        December 31, 2003 vest ratably over three years. These matching contributions
        amounted to $192 and $152 in 2005 and 2004, respectively. Beginning in April
        2006, the Company’s matching contributions will increase to 50% of up to 6% of
        an employee’s eligible compensation.
 
 **Note
        12 - Segment Information**
 
 Prior
        to
        April 2003, the Company operated as one business segment, Genomics Division.
        From April 2003 to December 2004, the Company managed its business as two
        business segments: Genomics Division and Preclinical Division. Beginning
        in
        2005, the Company added a third business segment: Drug Repositioning Division.
        The prior period’s segment information has been restated to conform to the
        current period presentation.
 
 The
        following table presents revenue and operating income (loss) for each of
        these
        segments. Management uses these measures to evaluate segment performance.
        To
        arrive at operating income (loss) for each segment, management has included
        all
        direct costs for providing the segment’s services and an allocation for
        corporate overhead on a consistent and reasonable basis. Management has excluded
        goodwill impairment loss and purchased research and development expenses
        from
        operating income (loss) and could also exclude certain unusual or
        corporate-related costs in the future. In addition, while the Company’s
        Consolidated Statements of Operations include adjustments to reflect the
        elimination of inter-segment transactions, individual segments may include
        these
        types of transactions. Management does not believe these transactions are
        material and believes that their inclusion would not impact either management’s
        or shareholders’ understanding of the results of operations for the segments.
        For purposes of clarity, revenue is reported net of inter-segment transactions.
        The Company does not identify or allocate, nor does management evaluate,
        assets
        by segment.
  F-20




The
        following table sets forth information on reportable segments for the years
        ended December 31:
 **2005**
                
                **2004**
                
                **2003****Genomics
                    services**Revenue
                
                $
                56,602
                
                $
                52,171
                
                $
                51,960Operating
                    income (loss)
                
                
                7,213
                
                
                (6,887
                )
                
                (16,899
                )Depreciation
                    and amortization expense
                
                
                9,977
                
                
                12,837
                
                
                14,518**Preclinical
                    services**Revenue
                
                $
                22,180
                
                $
                23,766
                
                $
                17,559Operating
                    income (loss)
                
                
                (14,539
                )
                
                (11,434
                )
                
                (3,337
                )Depreciation
                    and amortization expense
                
                
                3,433
                
                
                3,716
                
                
                2,260**Drug
                    repositioning services**Revenue
                
                $
                588
                
                $
                -
                
                $
                -Operating
                    income (loss)
                
                
                (10,903
                )
                
                (2,490
                )
                
                -Depreciation
                    and amortization expense
                
                
                628
                
                
                73
                
                
                -
 A
            reconciliation of segment operating income (loss) to net loss before
            income tax
            expense for the years ended December 31 is as follows:
 **2005**
                  
                  **2004**
                  
                  **2003****Segment
                      operating income (loss)**Genomics
                      services
                  
                  $
                  7,213
                  
                  $
                  (6,887
                  )
                  $
                  (16,899
                  )Preclinical
                      services
                  
                  
                  (14,539
                  )
                  
                  (11,434
                  )
                  
                  (3,337
                  )Drug
                      repositioning services
                  
                  
                  (10,903
                  )
                  
                  (2,490
                  )
                  
                  -Purchased
                      research and development
                  
                  
                  -
                  
                  
                  8,817
                  
                  
                  -Goodwill
                      impairment loss
                  
                  
                  32,794
                  
                  
                  -
                  
                  
                  -(51,023
                  )
                  
                  (29,628
                  )
                  
                  (20,236
                  )Interest
                      (income), net
                  
                  
                  (2,625
                  )
                  
                  (1,395
                  )
                  
                  (1,652
                  )Other
                      (income) expense
                  
                  
                  (813
                  )
                  
                  -
                  
                  
                  (327
                  )Write-down
                      of other than temporary decline in thevalue
                      of marketable securities available-for-sale
                  
                  
                  719
                  
                  
                  -
                  
                  
                  -Write-down
                      of equity investments
                  
                  
                  -
                  
                  
                  -
                  
                  
                  4,268Loss
                      before income tax expense
                  
                  $
                  (48,304
                  )
                  $
                  (28,233
                  )
                  $
                  (22,525
                  )
 For
              2005,
              two Genomics Division customers each accounted for 10% or more of the
              Company’s
              revenue (Customer A-10.8% and Customer B-10.2%). For 2004 and 2003,
              no customer
              accounted for 10% or more of the Company’s revenue. The following is a breakdown
              of the Company’s total revenue by geographic region as determined by the
              location of the customer identified in the agreement:
 **North
                        America**
                    
                    **Pacific
                        Rim**
                    
                    **Europe**December
                        31, 2005
                    51%
                    
                    29%
                    
                    20%December
                        31, 2004
                    54%
                    
                    32%
                    
                    14%December
                        31, 2003
                    48%
                    
                    34%
                    
                    18%
 **Note
                13 - Stock-based compensation**
 
 The
                Company has a stock plan (the “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. At December 31, 2005, there were 2,005,593 shares available
                for issuance
                under the Stock Plan.
 
 The
                Company also has a Directors’ stock plan (the “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. At December 31, 2005, there
                were 332,500
                shares available for issuance under the Directors’ Plan. Stock options are to be
                granted at the fair market value of the Common Stock at the grant
                date.
 F-21




The
        stock
        options granted under the Stock Plan and the Directors’ 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 and vesting of such
        stock options typically occurs ratably over periods ranging from two to four
        years.
 
 The
        Company also has an Employee Stock Purchase Plan (the “ESPP”), which 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. At December 31, 2005, there were 447,978 shares available for issuance
        under the ESPP. The ESPP was suspended effective February 1, 2005.
 
 The
        following is a summary of option activity for the years ended December 31,
        2005,
        2004 and 2003:
 **Shares
                    Subject to****Outstanding
                    Options****Shares**
                
                
                
                **Weighted****Available**
                
                
                
                **Average****For
                    Grant**
                
                **Shares**
                
                **Exercise
                    Price****Balance
                    at January 1, 2003**
                
                
                4,227,274
                
                
                2,639,836
                
                $
                11.83Additional
                    authorization
                
                
                1,000,000
                
                
                -
                
                $
                -Options
                    granted
                
                
                (2,826,864
                )
                
                2,826,864
                
                $
                6.62Options
                    exercised
                
                
                -
                
                
                (28,425
                )
                $
                4.14Options
                    cancelled
                
                
                521,457
                
                
                (521,457
                )
                $
                15.82**Balance
                    at December 31, 2003**
                
                
                2,921,867
                
                
                4,916,818
                
                $
                8.46Options
                    granted
                
                
                (1,928,623
                )
                
                1,928,623
                
                $
                3.92Options
                    exercised
                
                
                -
                
                
                (255,479
                )
                $
                3.72Options
                    cancelled
                
                
                947,824
                
                
                (947,824
                )
                $
                7.74**Balance
                    at December 31, 2004**
                
                
                1,941,068
                
                
                5,642,138
                
                $
                7.03Additional
                    authorization
                
                
                325,000
                
                
                -
                
                $
                -Options
                    granted
                
                
                (530,450
                )
                
                530,450
                
                $
                3.66Options
                    exercised
                
                
                -
                
                
                (54,609
                )
                $
                2.03Options
                    cancelled
                
                
                602,475
                
                
                (602,475
                )
                $
                6.12**Balance
                    at December 31, 2005**
                
                
                2,338,093
                
                
                5,515,504
                
                $
                6.86
 Options
            to
            purchase a total of 4,287,254, 3,829,996 and 3,988,802 at December 31,
            2005,
            2004 and 2003, respectively, were exercisable. The weighted-average grant-date
            fair value of options granted during the years ended December 31, 2005,
            2004 and
            2003 was $1.40, $1.67 and $3.14, respectively.
 
 During
            2002, the Company initiated a tender offer for outstanding stock options
            held by
            employees of the Company. Under the terms of the tender offer, eligible
            employees could tender stock options that were granted with an exercise
            price
            equal to or greater than $11.00 per share, subject to additional requirements
            for any stock option granted after May 4, 2002. Once tendered and accepted,
            the
            old stock options were cancelled and each employee who tendered stock
            options
            was entitled, subject to meeting certain conditions, to receive new stock
            options for 80% of the number of shares available under the cancelled
            stock
            options at the fair market value on the date of grant. One of the conditions
            to
            receiving the new stock options was that the individual was required
            to be
            employed by the Company on the date of grant. Of the eligible stock options,
            options for 2,290,207 shares were tendered and cancelled, and on June
            13, 2003,
            the Company granted new options for 1,794,847 shares with an exercise
            price of
            $7.21, the fair value on the date of grant.
  F-22




The
        following table summarizes information about stock options outstanding at
        December 31, 2005:
 **Options
                    Outstanding**
                
                **Options
                    Exercisable****Weighted****Number**
                
                **Average**
                
                **Weighted**
                
                **Number**
                
                **Weighted****Outstanding
                    at**
                
                **Remaining**
                
                **Average**
                
                **Exercisable
                    at**
                
                **Average****Range
                    of**
                
                **December
                    31,**
                
                **Contractual**
                
                **Exercise**
                
                **December
                    31,**
                
                **Exercise****Exercise
                    Price**
                
                **2005**
                
                **Life**
                
                **Price**
                
                **2005**
                
                **Price**$0.15--$4.50
                
                
                2,366,755
                
                
                7.0
                    Years
                
                $
                3.56
                
                
                1,330,712
                
                $
                3.51$4.51--$6.00
                
                
                1,086,472
                
                
                5.4
                    Years
                
                $
                5.17
                
                
                931,983
                
                $
                5.18$6.01--$7.20
                
                
                109,306
                
                
                4.7
                    Years
                
                $
                6.58
                
                
                96,523
                
                $
                6.58$7.21--$62.88
                
                
                1,952,971
                
                
                5.1
                    Years
                
                $
                11.81
                
                
                1,928,036
                
                $
                11.82$0.15--$62.88
                
                
                5,515,504
                
                
                6.0
                    Years
                
                $
                6.86
                
                
                4,287,254
                
                $
                7.68
 **Note
            14 - Related party transactions**
 
 In
            2003,
            the Company had an agreement with MetriGenix to provide certain
            administrative services and subleased space that resulted in fees totaling
            $678 for the year ended December 31, 2003; such fees were accounted for as
            a reduction to operating expenses.
 
 During
            2005 and 2004, the Company did not enter into any related party
            transactions.
 
 **Note
            15 - Quarterly results of operations (unaudited)**
 
 The
            following is a summary of the quarterly results of operations for the
            years
            ended December 31, 2005 and 2004.
 **March
                      31**
                  
                  **June
                      30**
                  
                  **September
                      30**
                  
                  **December
                      31****2005**Revenue
                  
                  $
                  19,740
                  
                  $
                  20,133
                  
                  $
                  17,078
                  
                  $
                  22,419Cost
                    of preclinical services
                  
                  
                  7,190
                  
                  
                  6,618
                  
                  
                  7,174
                  
                  
                  6,523Database
                    production
                  
                  
                  8,182
                  
                  
                  8,021
                  
                  
                  7,340
                  
                  
                  8,146Net
                      loss
                  
                  $
                  (4,101
                  )
                  $
                  (2,610
                  )
                  $
                  (39,480
                  )
                  $
                  (2,113
                  )Basic
                      and diluted net loss per share
                  
                  $
                  (0.13
                  )
                  $
                  (0.08
                  )
                  $
                  (1.24
                  )
                  $
                  (0.07
                  )**2004**Revenue
                  
                  $
                  20,221
                  
                  $
                  18,622
                  
                  $
                  17,030
                  
                  $
                  20,068Cost
                    of preclinical services
                  
                  
                  6,490
                  
                  
                  6,115
                  
                  
                  6,905
                  
                  
                  6,617Database
                    production
                  
                  
                  12,231
                  
                  
                  10,498
                  
                  
                  9,971
                  
                  
                  9,916Net
                      loss
                  
                  $
                  (5,510
                  )
                  $
                  (4,392
                  )
                  $
                  (14,609
                  )
                  $
                  (4,009
                  )Basic
                      and diluted net loss per share
                  
                  $
                  (0.18
                  )
                  $
                  (0.14
                  )
                  $
                  (0.46
                  )
                  $
                  (0.13
                  )
  F-23




**GENE
        LOGIC INC.**
 
 **Schedule
        II - Valuation and Qualifying Accounts**
 **December
        31, 2005, 2004 and 2003**
 **(in
        thousands)**
 **Inventory** **Reserve
          for Tissue Samples:**
 **Balance
                    at****Beginning**
                
                **New**
                
                **Reserves**
                
                **Balance
                    at****of
                    Year**
                
                **Reserves**
                
                **Used**
                
                **End
                    of Year**December
                    31, 2005
                
                $
                1,489
                
                $
                383
                
                $
                (218
                )
                $
                1,654December
                    31, 2004
                
                
                994
                
                
                495
                
                
                -
                
                
                1,489December
                    31, 2003
                
                
                580
                
                
                414
                
                
                -
                
                
                994
 **Allowance
            for Doubtful Accounts** **:**
  **Balance
                        at**
                    
                    
                    
                    **Reserves****Beginning**
                    
                    **New**
                    
                    **Due
                        to**
                    
                    **Accounts**
                    
                    **Collected**
                    
                    **Adjustment**
                    
                    **Balance
                        at****of
                        Year**
                    
                    **Reserves**
                    
                    **Acquisition
                        (1)**
                    
                    **Written-Off**
                    
                    **Amounts**
                    
                    **to
                        Reserves**
                    
                    **End
                        of Year**December
                        31, 2005
                    
                    $
                    436
                    
                    $
                    591
                    
                    $
                    -
                    
                    $
                    -
                    
                    $
                    (318
                    )
                    $
                    -
                    
                    $
                    709December
                        31, 2004
                    
                    
                    57
                    
                    
                    379
                    
                    
                    -
                    
                    
                    -
                    
                    
                    -
                    
                    
                    -
                    
                    
                    436December
                        31, 2003
                    
                    
                    -
                    
                    
                    28
                    
                    
                    449
                    
                    
                    (334
                    )
                    
                    -
                    
                    
                    (86
                    )
                    
                    57
 Notes:
 (1)
                Reserve recorded in connection with the acquisition of TherImmune
                Research
                Corporation.