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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION


Washington, D.C. 20549




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Form 10-K

|           |  |                                                                                             
|---------- |  | --------------------------------------------------------------------------------------------
|(Mark One) |  |                                                                                             
|þ          |  | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
    OF THE SECURITIES EXCHANGE ACT OF 1934    
|           |  | For the fiscal year ended December 31,
    2003                                             
|or        
|          
|o          |  | TRANSITION REPORT PURSUANT TO SECTION 13 OR
    15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|           |  | For the transition period
    from          to                                              

Commission File No. 0-23317



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GENE LOGIC INC.

(Exact name of registrant as specified in its
charter)


|                                |  |                    
|------------------------------- |  | -------------------
|Delaware                        |  | 06-1411336         
|(State or other jurisdiction of |  | (I.R.S. Employer   
|Incorporation or organization)  |  | Identification No.)

610 Professional Drive

Gaithersburg, Maryland 20879


(Address of principal executive
offices)


Registrants telephone 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 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 þ          No o

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 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.

Indicate by check mark whether the registrant is
an accelerated filer (as defined in Exchange Act
Rule 12b-2).     Yes þ          No o

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, 2003 was
approximately $138,761,000, based on the closing price on that
date of Common Stock on the Nasdaq National Stock Market.*

The number of shares outstanding of the
Registrants Common Stock, $.01 par value, was 31,362,318
as of February 29, 2004.



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|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|* | Excludes 7,820,184 shares of Common Stock held by
    directors and executive officers and stockholders whose
    beneficial ownership exceeds 10% of the shares outstanding on
    June 30, 2003. 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.



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PART I

Item
1.     Business


General

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, but are not limited to,
those discussed in this Form 10-K under the section
entitled Risks Related to Our Business and Industry.
Gene Logic undertakes no obligation to revise or update publicly
any forward-looking statements to reflect any change in
managements expectations with regard thereto or any change
in events, conditions, or circumstances on which any such
statements are based.

Unless the context otherwise requires, references
in this Form 10-K to Gene Logic, the
Company, we, us, and
our refer to Gene Logic Inc. GeneExpress® and
ToxExpress® are registered trademarks of Gene Logic.
BioExpressTM, ASCENTATM and GenesisTM Enterprise System are
trademarks of Gene Logic. GeneChip® is a registered
trademark of Affymetrix, Inc.

Included at the end of Item I:
Business is a glossary of technical terms.

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 an ownership interest. In 2003, we
purchased TherImmune Research Corporation.

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

We provide services to organizations involved in
the drug discovery and development business. Our services
consist of information services (gene expression-based
databases, toxicogenomics databases and technologies to access,
use and analyze the information in such databases) and contract
study services (primarily preclinical toxicity and pharmacology
studies and related laboratory services and, to a lesser extent,
Phase I clinical trial services) for drug discovery and
development. Our customers include pharmaceutical and
biotechnology companies worldwide, as well as U.S. Government
agencies. In 2003, our revenue was $69.5 million.

On April 1, 2003, we completed our
acquisition of TherImmune Research Corporation
(TherImmune), a privately held contract study
services company, now renamed Gene Logic Laboratories Inc.
(Gene Logic Labs). The purpose of the acquisition
was to expand our drug discovery and development services,
enhance our revenue growth and accelerate our time to
profitability. We paid $51.1 million for the acquisition,
including transaction costs of $1.3 million. Of the total
purchase price, $30.4 million was paid in cash and the
balance in 3,927,214 shares of Common Stock. Approximately 5% of
the total consideration is being held in escrow at least through
October 1, 2004 to satisfy potential indemnification
obligations of the former TherImmune securityholders. The
transaction has been accounted for under the purchase method of
accounting.

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Drug development companies are under increasing
pressure today to accelerate the time-line for drug development
and improve the efficiency of the drug development process. To
assist them in the drug discovery and development process, drug
development companies regularly seek outside services in
specialized areas such as target discovery, target validation,
compound prioritization, preclinical safety and pharmacology
studies and clinical trials. We believe that the demand for
these services will continue to grow in the future due to
various factors, including pressures to: contain costs, meet
needs exceeding internal capacity, speed the process of
evaluating and developing new drug targets and lead compounds,
adjust to and overcome stringent government regulation, and take
advantage of leading technologies, expertise and capabilities.

Gene Logic is uniquely positioned to help meet
this growing need by providing several services from one source.
We believe our expertise in genomics, including our extensive
gene expression analysis capabilities, combined with our
preclinical testing abilities, uniquely position us to provide
our customers additional insights into drug safety evaluation.
Our broad services allow customers not only to discover drug
targets and confirm potential toxicity in animal models but to
predict such effects in advance and to explain the actual
mechanism of action of toxicity demonstrated by the candidate
drug. This combination of services allows our customers to save
time, effort and cost in their drug development process by
eliminating, earlier in the process, those drugs with least
likelihood of success.

With our unique combination of services,
significant scientific and professional expertise and strong
cash position, we plan to continue to grow our share of the
research and development outsourcing market.

Business Segments

The services we provide are organized into two
business segments: 1) information services, which include
genomic-based databases and bioinformatics tools for early stage
drug discovery research and later stage development and testing;
and 2) contract study services, which include primarily
preclinical safety and pharmacology study services and related
laboratory services and, to a lesser extent, Phase I clinical
trial services. Of our 2003 revenue, revenue from information
services and revenue from contract study services accounted for
75% and 25%, respectively. We expect the relative share of
revenue from our contract study services business to grow in
2004.

Information Services

The foundation of our information services
business is the GeneExpress System, which is based on the use of
genomic processes and technologies (including microarrays) to
obtain gene expression data from over 27,000 human and animal
tissues and cells. We then compile the data into databases using
sophisticated bioinformatics and data management techniques. We
have two genomic-based databases: BioExpress System and
ToxExpress System. Researchers use our information services to
investigate human diseases and other human health conditions and
to determine potential toxicity of drug candidates (i.e. is the
drug safe to use or will it have toxic or other adverse effects)
through understanding gene expression patterns, genetic
abnormalities, disease pathways, disease mechanisms of action
and mechanisms of toxicity.

Our databases are based on information about the
human genome. A genome is the complete set of genetic material
of a human, animal, plant or other living thing. Genomics is the
investigation of the way the genetic make-up of humans, other
animals and plants are translated into biological functions; in
other words, it is the study of genes and their DNA and the
functional role they play. Genomics includes genome mapping,
gene sequencing and the study of how genes function (referred to
as gene expression because genes produce
(express) proteins). Gene expression analysis can tell
researchers which genes are turned on or
turned off in a particular cell or tissue sample
under specific conditions. Expressed genes determine which cell
proteins are produced and to what extent. Specific expression
patterns determine cell type, as well as physiological
conditions within the cell, including disease. Understanding
changes in gene expression provides researchers evidence of
which genes and proteins play a role in a specific disease or
physiological state. This new understanding of the human genome
is the foundation of our information services business. When
genes are subjected to drug compounds or other chemicals, this
may affect gene expression, causing effects which may be
beneficial or may be adverse, including toxicity. Thus, our
databases can also help to understand when drugs may be toxic or
otherwise unsafe.

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Our information services, based on the
GeneExpress System, enable detailed examination of the
interrelationships between the human genome, mechanisms of
disease and toxicity and complex clinical data, and can be
widely applied in drug development research. In basic research,
they can enable the discovery and prioritization of gene
targets. Once drug candidates have been identified, they can
enable the prioritization of compounds based on their potential
for human toxicity. In clinical development, they have the
potential to stratify patient populations to identify those
patients that might be best suited for, and most responsive to,
particular drugs and therapies.

We expect to continue to increase the content of
the GeneExpress System, focusing on tissues and cells of
particular interest to our customers. We also plan to continue
to upgrade and develop our proprietary software tools to
facilitate the use and analysis of the information in our
databases and integration of third-party software and content.

BioExpress
System

The BioExpress System is a database of gene
expression data derived from a broad survey of normal and
diseased human and animal tissues and a limited number of
studies of pharmaceutically relevant disease models. Our
BioExpress System presently covers more than 400 clinical
indications. The primary areas of focus include extensive
diseased tissue samples representing different stages of
oncology, cardiovascular, central nervous system and
inflammatory diseases, developmental biology and samples of
normal (non-diseased) tissue as well as associated clinical data
on the samples from which the gene expression data is derived.
The BioExpress System provides researchers with gene expression
information to study normal physiology, explore the mechanisms
of disease, identify disease-associated pathways and select and
prioritize potential drug targets. Customers generally use the
BioExpress System in basic discovery research to identify and
prioritize novel disease-associated gene targets or to confirm
targets found through other means.

The BioExpress System can be divided into
disease-specific subsets, collectively known as BioExpress
Suites. These disease subsets consist of comprehensive gene
expression, genetic and clinical information from a set of
normal and diseased tissue samples focused on a particular type
of disease system or condition, including oncology,
cardiovascular, central nervous system, inflammation, normal
human biology and womens health.

Additional BioExpress services utilize the
proprietary gene expression data of the BioExpress System and
our capabilities in sample handling, preparation and curation,
microarray analysis and software and database development. These
services include BioExpress Reports, which provide customers
with an analysis of the activity of one or more specific genes
in diseased and normal states, and Sample Processing Services,
in which we provide gene expression data from samples provided
by customers.

In 2003, we launched the ASCENTA System, a
separate, web-accessible research tool containing selected,
curated gene expression data and associated clinical information
from over 8,000 human, rat and mouse tissues contained in the
BioExpress System. The ASCENTA System was designed for broader
use in a more intuitive format. The data is organized into
sample sets related to relevant therapeutic areas, including
inflammation, oncology, central nervous system disorders,
cardiovascular disease and metabolic disease. The ASCENTA System
facilitates use by a broader group of scientists who may not
have the resources or experience to effectively use the full
BioExpress System, but who can effectively use the organized
summary data present in the ASCENTA System. As a result, it
enables customers to give researchers, on a company-wide basis,
access to important summary target discovery information.

ToxExpress
System

The ToxExpress System is a database consisting of
gene expression profiles of rat tissues and cells treated with
drugs and other compounds associated with known types of
toxicity. From this gene expression data, we have developed
models to predict acute and chronic human toxicity. The
ToxExpress System consists of data derived from treatments with
benchmark compounds or drugs with well-known toxicity profiles.
These treatments, which result in gene expression data or
toxicity profiles, include time-course, dose and
classical toxicology study information. These profiles are
stored in a database and supplemented with data derived from
studies on primary human liver tissues and cells and other
animal model tissues. These data enable

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mechanism of action studies of such compounds and
form the basis of the predictive models of the ToxExpress System.


Customers use our ToxExpress System as a primary
tool to assess potential single- or multi-organ toxicity of
proprietary drug candidates using gene expression information.
Although liver tissue has been the primary focus of the
ToxExpress System, additional toxicology studies have been
performed and, in some cases, predictive models are under
development, based on other organ systems, primarily kidney and
heart and, to a lesser extent, bone marrow and blood.

The ToxExpress System can be divided into cell
type-specific subsets collectively known as ToxSuites. ToxSuites
consist of comprehensive gene expression and clinical
information focused on a specific area of interest or toxic
end-point, such as in vivoliver. Such cell type-specific
studies allow researchers to screen compound classes suspected
of causing a particular type of toxicity.

We also offer researchers a broad range of
toxicogenomics-related services that provide additional tools
based on the predictive models of the ToxExpress System and our
capabilities using in-life studies, microarray analysis and
software and database development. These services include
ToxScreen Reports, which provide predictive results based on
proprietary validated cell type-specific predictive models for
accessing toxicity of lead compounds, Molecular Mechanism of
Toxicity (MOT) Services, which consist of in-depth analyses
of gene expression changes to explain toxic events in specific
compounds, and Custom ToxExpress Services, which consist of
applying the technologies of the ToxExpress System to
customer-specific, compound-related questions and database needs
related to resolving toxicity-based issues.

Contract Study Services

Our contract study services consist primarily of
preclinical testing and related laboratory services to evaluate
drug candidates and other compounds as part of the drug
development process, as well as limited Phase I clinical
studies. After drug candidates are identified, they must be
tested in laboratory animals to determine if they are likely to
be safe and beneficial for human use and to identify any
potential adverse effects. Information gained from preclinical
studies in laboratory animals is used by our customers to help
them determine which drug candidates have the greatest potential
for success and to eliminate candidates which are unsafe or
ineffective. Information from such studies may be submitted to
appropriate regulatory agencies to gain approval for performing
clinical testing of a particular drug in humans. Once approval
for human testing is obtained, drugs are tested in humans in
several phases. Phase I studies are designed to test only for
safety in a small number of humans. Later phases of clinical
testing involve testing in larger groups and testing for
efficacy as well as safety.

The goal for companies developing new drugs is to
meet all necessary regulatory testing requirements to bring a
drug candidate to market as quickly and cost-effectively as
possible. A major part of the cost of drug development is the
time and effort spent on drug candidates that ultimately fail
due to toxicity or other problems. The early elimination of
unsuccessful drug candidates can substantially reduce the cost
of drug development. Many pharmaceutical and biotechnology
companies and other organizations, including U.S. Government
research facilities, choose to outsource preclinical testing and
analysis work. We offer a broad scope of drug development study
services, primarily ranging from general toxicology and
pharmacology testing to more specialized studies. We also offer
related laboratory services consisting of analytical,
immunological and pathology related services, primarily in
support of the preclinical studies. Laboratory services may also
be used by clients to support studies from other laboratories or
as stand-alone services, providing data on candidate drugs and
compounds prior to preclinical testing.

Contract study services are performed at our
facilities in Gaithersburg Maryland. Our staff scientists assist
clients with development of testing protocols that meet
regulatory requirements prior to performing any testing and our
laboratory employees, through specific procedures, conduct the
preclinical testing studies and provide periodic feedback and
reports to customers, including evaluation and interpretation of
results at the end of each study.

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Customers

Nearly all of our customers for information
services are top-50 pharmaceutical companies (as measured by
annual revenue). Customers for our contract study services are
more diverse and include pharmaceutical companies, biotechnology
companies and U.S. Government agencies. During 2003, no single
customer accounted for ten percent (10%) or more of our revenue.

Total revenue by geographic region for each of
the last three fiscal years was as follows:

|                   |  |               |    |             |  |        |    |   |  |  |    |  
|------------------ |  | ------------- | -- | ----------- |  | ------ | -- | - |  |  | -- | -
|For the year ended |  | North America |    | Pacific Rim |  | Europe
|                   |  |               |    |             |  |       
|December 31, 2003  |  |               | 48 | %           |  |        | 34 | % |  |  | 18 | %
|December 31, 2002  |  |               | 46 | %           |  |        | 34 | % |  |  | 20 | %
|December 31, 2001  |  |               | 63 | %           |  |        | 22 | % |  |  | 15 | %

Suppliers

For our gene expression data generation
operations we have entered into collaboration agreements from
time to time with hospitals, medical schools, research
institutions, individual physicians and, in a few cases,
commercial providers that provide us particular types of tissue
and blood samples and cell lines and associated clinical data.
In return, in the case of non-commercial providers, we may
provide access to software, access to the gene expression data
we obtain from that partys samples for use in its
research, financial support for such collaborators
research and other consideration. The non-commercial
collaboration agreements typically have a term of two to three
years; thereafter, many renew automatically on an annual basis
unless either party elects not to renew. In many agreements, we
have the right to terminate during the term after specified
notice, and payment of periodic amounts accrued to the date of
termination. In others, termination is only allowed in the event
of a breach by either party and failure to cure. Generally, such
agreements include an initial payment and then equal periodic
payments during the agreement term. We believe that none of
these collaboration agreements is material to our operations
because any one can be replaced on comparable terms with another
provider.

In 2003, the annual amounts payable pursuant to
each non-commercial collaboration agreement generally ranged
from less than $25,000 to $300,000, depending generally on the
amount and types of tissues requested, the difficulty of
obtaining such tissues, the nature of the research being
conducted and other services provided by either party. The
collaboration costs of such tissues are included in our database
production expenses; in 2003, these costs in the aggregate
comprised approximately 7% of our total operating expenses.

To generate our gene expression data, we use
Affymetrix, Inc. (Affymetrix) microarrays,
instrumentation and software. Our current supply and license
agreement with Affymetrix expires in December 2005, but may
be terminated earlier in the event of a breach of the agreement
by either party. After December 2005, we would continue to
have the right to use up our supply of previously purchased
microarrays, subject to the license terms. After expiration or
termination, certain restrictions currently applicable to our
use of data generated by these microarrays would continue to
apply and we would continue to be obligated to grant back to
Affymetrix rights related to certain inventions resulting from
the use of the Affymetrix microarrays. Under the terms of the
agreement, we pay Affymetrix annual subscription fees of $4.0
million for access to their microarrays and a license to use
their technology. We purchase microarrays and related
instrumentation and software and will pay royalties, anticipated
largely to begin in 2005, upon meeting certain revenue
thresholds from subscriptions to our GeneExpress System.

We also have purchased reagents from Affymetrix,
including a reagent made by Enzo BioChem (Enzo). In
late 2003, Enzo terminated its distribution agreement with
Affymetrix and filed suit against Affymetrix alleging in part
that Affymetrix had agreements with Gene Logic and other named
customers to supply the reagent for use in potential violation
of their rights. Subsequently, Affymetrix denied Enzos
claims and also introduced a new alternative reagent. In future
periods, we will have to determine which reagent to use and
arrange for supply of that product.

For our contract study services, we purchase the
animals used from a number of different suppliers. We do not
have long-term contracts with any of these suppliers. However,
we believe that we will continue to be

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able to purchase animals from our current
suppliers or others to meet the needs of our contract study
operations.


Biorepository

Our information services are based on gene
expression data derived from analysis of tissue and blood
samples and cell lines acquired through our Biorepository. The
Biorepository is a collection of diseased and normal human
tissue, diseased and normal tissue from animal models and
primary cells and cell cultures. These samples, together with
relevant pathological and clinical data, are collected from
clinical centers, teaching hospitals, academic medical centers
and, in limited instances, commercial providers. The samples
represent more than 350 separate clinical disease indications
with focused collection programs in critical areas of greatest
market interest, including oncology, cardiovascular, central
nervous system, inflammatory and metabolic diseases. Human
tissue acquisition is designed to ensure patient confidentiality
while at the same time permitting disclosure of relevant
clinical data. We work with each institution to establish
Institutional Review Board-approved protocols, including patient
informed consents, to ensure proper acquisition of the tissues
and relevant clinical information, without disclosure of the
name or other information identifying the donors, in compliance
with regulations promulgated under HIPAA (Health Insurance
Portability and Accountability Act of 1996) and other
privacy-related regulations. Tissues are obtained according to
specific handling protocols that preserve their quality. The
samples are shipped to our laboratories and, together with
pathology reports and slides and detailed clinical data
abstracted from patient records, are reviewed by our clinical
data coordinators and pathologists. The Biorepository sample
collection process is managed by a group of senior scientific
directors who work closely with our pharmaceutical and
biotechnology customers to create a prioritized plan for
acquiring normal and diseased tissue samples that are aligned
with their research interests.

Contractual Arrangements

Nearly all of the revenue from our information
services is derived from subscription agreements. Typically, our
customers enter into multi-year agreements to obtain
non-exclusive access to all or parts of our information services
based on the GeneExpress System. These agreements may be for the
full database or tailored to a customers needs by
providing specific content, consisting of clinical and gene
expression data from samples representing specific normal and
diseased states, and content updates that are most relevant to
their drug development strategy. Certain customers also have an
option, for additional consideration, upon expiration of their
subscription, to elect to retain and use certain information,
but without any right to further updates or services. Pricing
for our information services subscriptions is generally
dependent upon a broad set of issues, including the service
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,
data management or software development services. Contracts for
our information services may be terminated by either party if
the other party breaches the agreement or in the event of a
bankruptcy of either party. In addition, certain subscription
agreements for our information services include a right of early
termination (which, in some instances, is subject to conditions)
by a customer, without penalty, on a specified date prior to the
normal expiration of the term.

The revenue from our contract study services is
predominantly derived from fixed price contracts. The balance of
our contract study services revenue is derived from cost plus
contracts, most of which are with U.S. Government entities.
Under fixed price contracts, we bear the cost of overruns but we
benefit if the costs are lower than anticipated. Cost plus
contracts contain a budget for the study based on labor and
other cost estimates and we are reimbursed for our costs within
specified limits, subject to periodic audit, and receive a fixed
fee. If our costs are lower than anticipated, the entity keeps
the savings. If our costs are higher than estimated, we are
required to work only up to the maximum contract value. If our
costs are reduced upon audit by the U.S. Government, we may have
to reimburse amounts paid to us.

Contracts may range in duration from a few weeks
to several years. For most fixed price contracts, a portion of
the contract price is due at the time the study starts, with the
balance payable upon the achievement of milestones over the
studys duration. Costs under cost plus contracts are
reimbursed monthly along with a pro rata portion of the
fixed fee. Most of our contract study services contracts may be
terminated by the customer at any time, subject to payment to us
of any direct costs plus applicable indirect costs incurred

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prior to termination, plus direct and indirect
costs incurred to terminate a study and, in some instances, a
portion of our profit or fixed fee, or a cancellation fee.


Research & Development

Our research and development staff focuses on
improving the productivity of our operations, primarily related
to our information services. Our approach to developing new or
improved information services is to extend our base technologies
into new applications and to license or acquire technologies to
serve as platforms for the development of new information sets
that benefit our existing customer base. We continue to research
methods to improve the production of our gene expression data
using microarray technology and decreasing the size requirements
for tissue samples. We will continue to review other technology
platforms and monitor related industry trends. Research and
development expenses for the years ended 2003, 2002 and 2001
were $2.1 million, $2.4 million and $3.6 million,
respectively.

Sales, Marketing and Customer
Support

We sell our information services and contract
study services principally through our direct sales force to
customers in North America, Western Europe, and portions of
Asia. In 2004, for the first time, we plan to build
organizations to service the markets in Europe and Japan and
staff them with employees who reside in each of those markets.

We have contracts directly with our customers in
Japan. We also have an exclusive product sales and support
agreement in Japan with Amersham Biosciences K.K.
(Amersham). Amersham acts as an authorized
distributor in Japan, assisting us in making sales, providing
support and collecting payments from customers. The Amersham
agreement is due to expire in July 2004, subject to transitional
arrangements through mid-2005, which are currently being
negotiated. Amersham collects payments from sales in Japan,
retains a percentage for its services and remits the balance to
us, less the Japanese government withholding tax. The agreement
may be terminated by either party for breach. Mutual obligations
of confidentiality and indemnification and certain Amersham
obligations to assist us in obtaining and protecting our
intellectual property rights in Japan survive termination of the
agreement.

We maintain both customer support and technical
assistance departments, which address our customers
routine and more specialized needs. Staffed with scientists and
professionals, these departments provide the following support:
1) For our information services customers: technical
demonstrations, planning and implementation of initial
deployment and training for new customers, regular content
updates, software upgrades, on-going support and follow-on
training; 2) For our contract study services customers:
development of initial testing protocols, periodic feedback and
interaction during the study.

Competition

Our strategy is to become a leader in each of the
markets in which we participate. Our competitors are generally
different in each of our business and geographic areas.

In our information services business, we are the
dominant company working in and generating information databases
derived from analysis of human gene expression data. However, to
a certain extent we compete with in-house departments of
pharmaceutical and biotechnology companies and universities, who
may choose to utilize genomics technologies to generate similar
sets of gene expression data themselves. To a lesser extent, we
also compete with commercial providers of less extensive
offerings. As of December 31, 2003, we believe there are no
gene expression databases of comparable size and scale to that
of our GeneExpress System. In addition, there are commercial
entities developing and offering other technologies, including
alternative microarray platforms, that could in the future cause
us to reevaluate the technologies needed to provide our
information services.

In our contract study services business, we
compete with entities working in and providing preclinical
safety evaluation and toxicology services. The dominant
companies providing contract study services include Covance
Inc., Charles River Laboratories International Inc., Inveresk
Research Group Inc., Life Sciences Research, and MDS Inc. Other
providers include mid to small, privately held contract service
companies and in-house departments of pharmaceutical companies
and universities. As a consequence, at December 31, 2003,
we believe our market share of outsourced preclinical testing
services is small relative to our primary competition but that
our unique combination of services will enable us to increase
our share of this market.

8



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Across both of our business areas, there is
competition for customers on the basis of many factors,
including the following:



| |   |                                                                                                                                                                                       
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | scope of services offering;                                                                                                                                                           
|
| |  | size of information services database;                                                                                                                                                
|
| |  | reputation for on-time, quality performance;                                                                                                                                          
|
| |  | expertise and experience in specific areas;                                                                                                                                           
|
| |  | how well service offerings are integrated;                                                                                                                                            
|
| |  | strengths in geographic locations;                                                                                                                                                    
|
| |  | price;                                                                                                                                                                                
|
| |  | alternative technologies;                                                                                                                                                             
|
| |  | efficient drug development processes and gene
    expression data generation processes;                                                                                               
|
| |  | the quality and capacity of research facilities;                                                                                                                                      
|
| |  | ability to acquire, handle, process, analyze and
    present complex gene expression data and clinical annotation
    information in a timely, quality controlled and accurate manner;
|
| |  | ability to manage large volumes of complex,
    interrelated gene expression and clinical information;                                                                                
|
| |  | ability to integrate proprietary gene expression
    data with publicly available and other third-party generated
    data sets; and                                                  
|
| |  | size.                                                                                                                                                                                 

Backlog

In our contract study services business, studies
and projects are performed over periods ranging from a few weeks
to several years. As a result, an order backlog exists, which
comprises commitments under signed task orders (or other written
firm commitments) excluding any amounts thereunder recognized as
revenue to date. Cancelled or terminated contracts are removed
from backlog. Based on the foregoing, as of January 31,
2004 our backlog was $22 million.

We believe our backlog as of any date is not
necessarily a meaningful indicator of future revenue from our
contract study services business for a variety of reasons,
including the following. 1) Studies vary in duration. For
instance, some studies that are included in January 31,
2004 backlog may be completed in 2004, while others may be
completed in later years. 2) The scope of studies may change,
which may either increase or decrease their value. 3) The
success or failure of a study may affect the future development
of a product or may result in cancellation of subsequent
studies. 4) Studies may be terminated, reduced in scope or
delayed at any time by the customer. Delayed but scheduled
contracts remain in our backlog until a determination has been
made as to whether to continue, modify or cancel the study.

MetriGenix

In 2003, MetriGenix evaluated available financing
and strategic alternatives and, in November 2003, sold
substantially all of its assets for cash to a privately held
company (the Buyer). The proceeds of sale were used
to satisfy MetriGenixs then known liabilities. In
connection with the sale, we consented to the assignment to
Buyer of a fully paid BioExpress subscription. In consideration
for the consent to the assignment, we received preferred stock
of Buyer, representing 15.3% of the equity of the Buyer, and a
warrant intended to enable us to maintain a 15% equity interest
in Buyer. If our equity interest is diluted below 15%, the Buyer
must either terminate the subscription agreement or begin paying
fees for the subscription. We also received the right to appoint
a person to the Board of Directors of the Buyer. We account for
our investment in the Buyer using the cost method of accounting
and are recording the investment value, $3.2 million, as
revenue over the estimated term of the subscription agreement of
approximately three years.

9



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Intellectual Property Rights

Although our intellectual property rights are
important to our freedom to operate, we believe that such
factors as the technical expertise, knowledge, ability and
experience of our professionals are more important and that,
overall, these capabilities provide significant benefits to our
customers. We primarily seek patents only for major components
of our technology platform, including elements of our genomics
and bioinformatics technologies and technologies that allow us
to obtain the information we use. We rely on trade secret
protection for certain of our confidential and proprietary
information, and we use license agreements to access external
technologies and assets and to provide others with rights to use
certain intellectual property.

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. The applications may also cover
claims to methods of identifying and using gene expression
profiles and genetic markers, including toxicity markers and
disease-specific markers, claims to novel genes and gene
fragments and to novel uses for known genes or gene fragments.
As of December 31, 2003, we had exclusive rights to 50
issued patents, 20 of which are United States patents, and 138
patent applications, 77 of which are United States patent
applications or United States provisional patent applications.
We believe that these patents and applications are important to
preserving our freedom to operate our business and facilitating
our sales efforts. However, we do not 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. Our genomic information
services and our index of gene and gene fragment sequences
involve proprietary know-how, technology or data. While some of
these will be the subject of patent applications, others will be
maintained as trade secrets. 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 the case of arrangements with our customers or
suppliers that require the sharing of data, our policy is to
make available only such data as is relevant to our agreements
with such customers and suppliers, subject to appropriate
restrictions, including confidentiality. However, such measures
may not adequately protect our data.

We have a world-wide, nonexclusive, fully paid,
non-transferable license for the life of the respective patents
from Incyte Corporation (formerly Incyte Genomics, Inc.),
obtained in connection with the settlement of certain litigation
in 2001, to 1) use a process that Affymetrix, Inc.
recommends we use in the preparation of samples for use with the
Affymetrix GeneChip platform; and 2) to use certain patent
rights related to the development and use of certain types of
databases (the Layton Patents and Incyte
Patents as defined in the License Agreement). The samples
and process may only be used to generate gene expression data
for use in research and development. The license may be
terminated under certain limited circumstances if we use certain
patents outside of the permitted field of use, or induce another
party to do so, violate certain agreements regarding any future
disputes between the parties involving these patents or 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 agreement with Affymetrix
described above under Suppliers, we also have a
non-exclusive worldwide limited license to use Affymetrix
software and systems and database patent rights to generate and
use databases, license the data in such databases to third
parties and to provide sample processing services to generate
and analyze data for a customers internal use for research
and development.

Government Regulation

Our information services business is dependent
upon our continued access to and use of tissue samples and
related clinical data. Our processes are designed to avoid
receipt or disclosure of information that would enable
identification of tissue donors. Recently, both the United
States and foreign governments have become more concerned about
the disclosure of confidential personal data. The Department of
Health and Human Services recently promulgated final regulations
under the Health Insurance Portability and Accountability Act

10



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of 1996 (HIPAA), which will govern
the disclosure of confidential medical information in the United
States. In addition, the European Union now prohibits the
disclosure of personal confidential information, including
medical information, to any entity that does not comply with
certain safeguards. We will continue to monitor our procedures
to ensure that such procedures comply as these and other privacy
regulations come into effect.


Our contract study services are 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 the Good Laboratory Practice (GLP)
regulations promulgated by the U.S. Food and Drug Administration
(FDA). GLP compliance is required by the FDA, the
U.S. Environmental Protection Agency (EPA), the
Japanese Ministry of Health, Labor and Welfare
(MHLW) and, in Europe, the Organisation for Economic
Co-operation and Development (OECD). GLP regulations
specify requirements for facilities, equipment and professional
staff. The regulations require standardized procedures for
conducting studies, including procedures for recording and
reporting data and for managing study materials and records. To
help satisfy our compliance obligations, we have established
quality assurance and quality control programs at our
laboratories and a quality control department that monitors
ongoing compliance with GLP regulations by auditing test data
and conducting inspections of testing procedures.

Our animal research facilities are 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 and handling of animals
by dealers and research facilities. Our facilities maintain
standard operating procedures and the documentation necessary to
comply with such regulations. In addition, our animal research
facilities are accredited by the American Association for
Assessment and Accreditation of Laboratory Animal Care
(AAALAC) and are registered with the United States
National Institutes of Health Office of Protection for Research
Risks (OPRR).

The limited portion of our contract study
services business related to Phase I clinical studies is subject
to industry standards for the conduct of clinical research and
development studies that are embodied in the regulations for
Good Clinical Practice (GCP). The FDA and other
regulatory authorities require that test results submitted to
such authorities be based on studies conducted in accordance
with GCP regulations.

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.

In addition to its comprehensive regulation of
safety in the workplace, the Occupational Safety and Health
Administration (OSHA) has established extensive
requirements relating to workplace safety for health care
employers, whose workers may be exposed to blood-borne pathogens
such as HIV and the hepatitis B virus. 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 testing for
drugs with a potential for abuse is regulated in the United
States by the U.S. Drug Enforcement Administration
(DEA). All of our laboratories using controlled
substances for testing purposes are licensed by the DEA.

Human Resources

As of December 31, 2003, we had 391
employees, all of whom were employed within the United States. A
significant number of our management and professional employees
have had prior experience with pharmaceutical, biotechnology,
diagnostic, medical products, computer software and electronics
companies and contract research services organizations. None of
our employees is covered by collective bargaining agreements,
and management considers relations with our employees to be good.

11



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Executive Officers

The names and ages of all executive officers as
of March 1, 2004 and their respective positions and offices
with us are set forth below.

|                          |  |     |    |          |  |                                                         
|------------------------- |  | --- | -- | -------- |  | --------------------------------------------------------
|Name                      |  | Age |    | Position
|                          |  |     |    |         
|Mark D. Gessler           |  |     | 42 |          |  | Chairman, Chief Executive Officer and President         
|Philip L. Rohrer, Jr.     |  |     | 47 |          |  | Chief Financial Officer                                 
|Y. Douglas Dolginow, M.D. |  |     | 49 |          |  | Executive Vice President                                
|Robert R. Proulx          |  |     | 46 |          |  | Senior Vice President, Marketing                        
|F. Dudley Staples, Jr.    |  |     | 56 |          |  | Senior Vice President, Secretary and General
    Counsel

Mark D. Gesslerhas
served as our Chairman of the Board of Directors since
April 2001, as our Chief Executive Officer since
June 2000 and as our President since January 1999.
Mr. Gessler served as our Chief Operating Officer from
January 1999 until June 2000. From prior to
March 1997 to October 1999, Mr. Gessler served as our
Chief Financial Officer. From prior to March 1997 to
January 1999, Mr. Gessler served as our Senior Vice
President, Corporate Development. Mr. Gessler holds an MBA
from the University of Tennessee.

Philip L. Rohrer,
Jr.has served as our Chief Financial
Officer since October 1999. Since prior to March 1997
until August 1999, Mr. Rohrer served as Chief
Financial Officer of BioWhittaker Inc., a biotechnology supply
company. Prior thereto, he held other operations positions with
that company. Mr. Rohrer holds an A.B. in biology from Hood
College and an M.S.M. from Frostburg State University.

Y. Douglas Dolginow, M.D.has served as our Executive Vice
President since August 2003 and as our Senior Vice
President, Pharmacogenomics from September 1998 until
August 2003. Prior to September 1998,
Dr. Dolginow served as President, Chief Operating Officer
and as a director of Oncormed, Inc., a gene therapy
biotechnology company. Prior thereto, Dr. Dolginow served
as medical director for several clinical laboratories, and since
prior to March 1997, he has been an active member of the
Clinical Faculty at the University of California, San Francisco.
Dr. Dolginow received a M.D. degree from the University of
Kansas.

Robert R. Proulxhas
served as our Senior Vice President, Marketing since
July 2003. From prior to 2000 to July 2003,
Mr. Proulx served as General Manager, Life Sciences of IGEN
International, Inc., a technology company that provides
biological and detection and measurement systems. Prior to 2000,
Mr. Proulx held numerous management positions with Packard
Instrument Company, Inc., a subsidiary of Packard Bioscience, a
leading global provider of laboratory instruments and reagents.
Mr. Proulx holds an M.A. and B.A. from The State University
of New York, Albany.

F. Dudley Staples, Jr.has served as our Senior Vice
President, Secretary and General Counsel since May 2002.
From September 1999 to June 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. From prior to March 1997 until
September 1998, Mr. Staples served as General Counsel
and Corporate Secretary of BioWhittaker Inc., a biotechnology
supply company. Mr. Staples holds a J.D. degree from the
University of Virginia School of Law and a B.A. from Williams
College.

Glossary of Terms

Throughout this Form 10-K, we use a number
of technical terms. Following is a list of such technical terms
and their definitions; definitions are based on publicly
available dictionary resources.



| |   |                                                                                 
| | - | --------------------------------------------------------------------------------
| |  | Bioinformatics: the
    use of computers to study biological systems.           
|
| |  | Cell culture: a
    population of cells grown on a medium for research purposes.

12



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| |   |                                                                                                                                                                                                                                                                                                                                                                                 
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Gene expression: the
    process by which a coded information is converted into the
    structures present and operating in the cell. Expressed genes
    include those that are into and then translated into and those
    that are transcribed into but not translated into protein (e.g.,
    transfer and Ribosomal RNAs).                                                 
|
| |  | Genetic marker: a
    gene which has an easily identifiable phenotype so that one can
    tell apart cells or individuals which have the gene and those
    which do not have it; such a gene can also be used as a probe to
    mark cell nuclei or chromosomes so that they can easily be
    identified from other nuclei or chromosomes later.                              
|
| |  | Genome: the genetic
    endowment of a species; all the genetic material in the
    chromosomes of a particular organism; its size is generally
    given as its total number of base pairs.                                                                                                                                                                                    
|
| |  | Genomics: a branch
    of biotechnology concerned with applying the techniques of
    genetics and molecular biology to the genetic mapping and DNA
    sequencing of sets of genes or the complete genomes of selected
    organisms using high-speed methods, with organizing the results
    in databases, and with applications of the data (as in medicine
    or biology).
|
| |  | In vitro:literal
    translation is in glass; a biologic or biochemical
    process occurring outside a living organism.                                                                                                                                                                                                                                                      
|
| |  | In vivo:literal
    translation is in life; a biologic or biochemical
    process occurring within a living organism.                                                                                                                                                                                                                                                         
|
| |  | Microarray: a
    microscopic spot containing identical single-stranded polymeric
    molecules of deoxyribonucleotides (DNAs), usually
    oligonucleotides or complementary DNAs, attached to a solid
    support (such as a membrane, a polymer, or glass) used to
    simultaneously analyze the expression levels of the
    corresponding genes.                          
|
| |  | Pharmacogenomics:
    the study of interactions among drugs, the genome (the complete
    set of genes in an organism), and the proteome (the complete set
    of proteins encoded by an organism.                                                                                                                                                                              
|
| |  | Pharmacology: the
    science of the properties and reactions of drugs especially with
    relation to their therapeutic value.                                                                                                                                                                                                                                                 
|
| |  | Toxicogenomics: the
    application of genomics technologies to the study of chemicals
    which can damage the structure of living organisms (including
    humans) and thus cause problems such as mututations, cancer and
    birth defects.                                                                                                                                 
|
| |  | Toxicology: the
    scientific study of the chemistry, effects and treatments of
    poisonous substances.                                                                                                                                                                                                                                                                      

Available Information

Gene Logic makes available free of charge on its
Internet site at www.genelogic.com, its Annual Report on
Form 10-K, Quarterly Reports on Form 10-Q, Current
Reports on Form 8-K and amendments to those reports filed
or furnished 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). The
SEC maintains an Internet site (http://www.sec.gov) that
contains reports, proxy and information statements and other
information regarding issuers that file electronically with the
SEC.

Risk Related to Our Business and
Industry

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 and that could cause actual results to
differ materially from the results contemplated by the forward
looking statements contained in this Form 10-K. If the
events outlined below were to occur individually or in the
aggregate, our business, results of operations, financial
condition and cash flows could be materially adversely affected.

13



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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 $24.8 million in
2003, $24.1 million in 2002 and $33.2 million in 2001. At
December 31, 2003, we had an accumulated deficit of $184.1
million. Our losses to date have resulted principally from costs
incurred in the development of databases comprising the
GeneExpress System, the cornerstone of our information services
business, as well as selling, general and administrative costs
associated with our operations. We expect to incur additional
losses in the future and cannot assure if or when we will
achieve profitability.

Our Revenue
Is Derived Primarily From, And Is Subject To Risks Faced By, The
Pharmaceutical And Biotechnology Industry In the U.S., Japan,
Europe And Other Foreign Countries.

We expect that our information services revenue
will continue to be derived primarily from contractual
agreements for subscriptions for genomic-based information
resources derived from our GeneExpress System by pharmaceutical
and biotechnology customers and our contract study services
revenue will continue to be derived primarily from contractual
agreements for study services by pharmaceutical and
biotechnology companies, as well as U.S. Government entities. As
a consequence, our results of operations may fluctuate
substantially due to fluctuations or delays in our
customers research and development expenditures. Factors
potentially creating these fluctuations or delays include:



| |   |                                                                                                                                                                                                             
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | fluctuations in our pharmaceutical and
    biotechnology customers revenue;                                                                                                                                
|
| |  | changes in national or international economic
    conditions;                                                                                                                                               
|
| |  | access to capital markets by current or potential
    biotechnology customers;                                                                                                                              
|
| |  | changes in the regulatory environment, including
    health care reform and rules protecting personal information,
    affecting our information services or the products and services
    of our customers;
|
| |  | the ability of our customers to get their drugs
    approved in a timely manner;                                                                                                                            
|
| |  | market-driven pressures on our current or
    potential customers to improve productivity efficiencies through
    consolidation, cost reduction and overall research and
    development effectiveness;    
|
| |  | budgetary resources, budgetary timing cycles and
    product sales delays by our pharmaceutical and biotechnology
    customers;                                                                            
|
| |  | additional regulation of the drug discovery and
    development process; and                                                                                                                                
|
| |  | a decision to purchase new, improved and/or
    alternative technology.                                                                                                                                     

None of these factors is within our control.

The
Acquisition, Integration And Value Of TherImmune Creates Risks
And Uncertainties.

On April 1, 2003, we completed the
acquisition of TherImmune Research Corporation. As a result of
this transaction, we continue to spend considerable time and
effort in integrating into our Company the TherImmune employees,
organization, customers and operations. There can be no
assurance that we will succeed in realizing the anticipated
economic benefits of this acquisition, including anticipated
business synergies and increased revenue in the contract study
services business. We may also not be able to build or acquire
adequate capacity to maintain adequate revenue growth in our
contract study services business. The acquisition of this
business subjects us to additional governmental regulation and
new risks of liability. Further, as a result of the acquisition
of TherImmune, we recorded significant goodwill in our financial
statements, which may be subject to future impairment in the
event, among others, that revenue and gross margins fail to
materialize at anticipated levels. Such impairment could
materially adversely affect our financial performance and stock
price.

Also, in connection with the acquisition, we
issued 3,927,214 shares of our Common Stock to the stockholders
of TherImmune. In accordance with the merger agreement with
TherImmune, we registered the shares (excluding escrow shares)
with the Securities and Exchange Commission for resale under
which 1,108,351 shares were sold. The remainder of shares not
previously sold can be sold under SEC Rule 144,

14



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beginning in April, 2004, subject to compliance
with the requirements of that Rule and, if sold, could depress
our stock price.


We Operate In
A Competitive Industry.

Competitors providing technologies and services
that enable improvements to pharmaceutical and biotechnology
research and development include a broad range of private and
public, global companies. Across both of our business segments,
there is competition for customers on the basis of many factors,
including the following:



| |   |                                                                                                                                                                                       
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | scope of services offered;                                                                                                                                                            
|
| |  | size of information services database;                                                                                                                                                
|
| |  | technologies used to develop and provide the
    services offered;                                                                                                                    
|
| |  | reputation for on-time, quality performance;                                                                                                                                          
|
| |  | expertise and experience in specific areas and
    technologies;                                                                                                                      
|
| |  | how well service offerings are integrated;                                                                                                                                            
|
| |  | strengths in geographic markets;                                                                                                                                                      
|
| |  | price;                                                                                                                                                                                
|
| |  | technological expertise;                                                                                                                                                              
|
| |  | efficiency of drug discovery capabilities and
    gene expression data generation processes;                                                                                          
|
| |  | the quality and capacity of research facilities;                                                                                                                                      
|
| |  | ability to acquire, handle, process, analyze and
    present complex gene expression data and clinical annotation
    information in a timely, quality controlled and accurate manner;
|
| |  | ability to integrate proprietary gene expression
    data with publicly available and other third-party generated
    data sets; and                                                  
|
| |  | size.                                                                                                                                                                                 

To Generate
Significant Revenue, We Must Retain Existing And Obtain
Additional Customers For Our Information Services.

Our strategy depends, in part, on the continued
growth in revenue from our information services business, which
is based on genomic-based information resources derived from our
GeneExpress System. We must continue to establish subscription
agreements with new customers for our information services, as
well as renew subscriptions and expand into additional services
with existing customers for our information services. Each of
the subscription agreements that we have with our information
services customers is for a specific term. Contracts for our
information services may be terminated by either party if the
other party breaches the agreement or in the event of a
bankruptcy of either party. In addition, certain subscription
agreements for our information services include a right of early
termination (which, in some instances, is subject to conditions)
by a customer, without penalty, on a specified date prior to the
normal expiration of the term. If subscription agreements with
major customers are terminated or expire and are not renewed, or
existing customers fail to buy additional services, or if we
fail to enter into subscription agreements with new customers,
our business could suffer. For 2004, subscription agreements
with seven customers are up for renewal, which accounted for 27%
of our 2003 revenue. To date, of these seven customers, two have
renewed their subscription agreement.

If Our Access
To Necessary Tissue Samples, Information Or Licensed
Technologies Is Restricted, We May Not Be Able To Continue to
Develop Our Information Services Business.

To continue to build our information services
business, we need access to normal and diseased human and animal
tissue samples, other biological materials and related clinical
and other information. However, government regulation in the
United States and foreign countries could restrict access to, or
use of, human and

15



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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 information
services business may suffer.




| |                                                                                                                                                                
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The Genomics Industry Is Competitive And
    Evolving Rapidly, And Our Information Services Business May
    Become Obsolete Or Fail To Be Sufficiently Useful.

Competition exists among entities attempting to
identify genes associated with specific diseases and to develop
products and services based on these discoveries. Our
information services business directly competes in these areas
with pharmaceutical, biotechnology and diagnostic companies,
academic and non-profit institutions and government or other
publicly funded agencies, both in the United States and abroad.
We are aware that many of these entities are using a variety of
gene expression analysis methodologies, including the use of
microarrays, to attempt to identify disease-related genes. In
addition, certain pharmaceutical companies are developing
genomic research programs, either alone or in partnership with
our competitors. 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 information services business and,
specifically the GeneExpress System, are superior to competing
technologies and/or information resources.

The information services we offer could become
less valuable compared to other drug discovery technologies. We
may not be 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 fail to find genomic information useful or such
information becomes obsolete as a viable drug discovery tool,
our existing and potential customers may lose confidence in our
Company and our information services business and our business
may suffer as a result.



| |                                                                                                                                                                                                      
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Our Information Services Sales Cycle Is
    Lengthy And We May Spend Considerable Resources On Unsuccessful
    Sales Efforts Or May Not Be Able To Complete Deals On The
    Schedule We Anticipate.

Our ability to obtain new customers, retain
existing customers through subscription renewal, and sell
additional services to existing information services customers
depends upon our existing and potential customers belief
that the content and capabilities of the underlying data of our
GeneExpress System can increase productivity for their drug
discovery and development efforts. Our sales cycle for
multi-year subscriptions to any of our information services is
estimated at 12 to 15 months, and in certain circumstances
could be longer. This is caused by a number of factors,
including our need to educate our existing and potential
customers and sell the benefits of our information services to a
variety of groups within such companies. In addition, each
subscription agreement may involve the negotiation of unique
terms. We may expend substantial effort with no assurance that a
subscription 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 information services sales efforts. Accordingly,
our results will fluctuate due to the fact it is not always
possible to effectively time the initiation of new subscription
agreements, as well as predict the timing of any potential
resulting revenue from such subscription agreements.



| |                                                                                                                                         
| | ----------------------------------------------------------------------------------------------------------------------------------------
| | We Rely On Microarrays And Other Products
    Supplied By Affymetrix To Build The Underlying Genomic Data Of
    Our GeneExpress System.

Our continuing ability to build and update the
gene expression data underlying the GeneExpress System will
depend in part on the ability of Affymetrix to supply adequate
quantities of high quality microarrays and other products.
Affymetrix provides us with microarrays and related
instrumentation and software under an agreement that expires on
December 31, 2005. This agreement provides us with
nonexclusive access to GeneChip microarrays and instrumentation
and software. We also have purchased a reagent kit from
Affymetrix made by Enzo BioChem. In late 2003, Enzo terminated
the distribution agreement with Affymetrix and filed suit
against Affymetrix claiming that Affymetrix had agreements with
Gene Logic and other named customers to supply the reagent for
use in potential violation of their rights. Subsequently
Affymetrix denied Enzos claims and also introduced a new
alternative reagent. Although we currently have a limited supply
of reagent available, we have not determined what reagent we
will use in the future or that we can obtain a supply thereof on
acceptable terms.

16



---



##### 



Affymetrix or other providers may develop new or
improved technologies that may necessitate changes to the
current GeneExpress System in order to remain competitive, which
could be costly and time consuming. If Affymetrix is unable or
unwilling to supply us with GeneChip microarrays and the related
instrumentation, software and kits, or if such products are not
available or are defective, 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
information services business to suffer by delaying or
increasing the cost to populate and maintain the GeneExpress
System, as well as causing us to be delayed or unable to meet
content update obligations under existing information services
subscription agreements.

Failure To
Comply With Existing Regulations Could Result In A Loss Of
Revenue, Earnings Or Increased Costs From Our Contract Study
Services.

Our contract study services business is subject
to extensive regulation and we are subject to periodic audit for
compliance by regulatory authorities, including the FDA. 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, we could be
contractually required to repeat a study at no further cost to
our customer or to refund the cost of the study and customers
might choose not to enter into or to renew contracts for
contract study services in the future.

We May Bear
Financial Losses If Contract Study Services Are Delayed Or
Reduced In Scope Or Terminated Or If Contracts Are Not Priced
Properly.

All of our contracts for study services 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 cover our costs or to realize
profit on the affected contract and could have a material
adverse effect on our contract study services business.

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 U.S.
Government agencies, there is the risk of disallowance by such
agencies of certain costs as a result of specific regulations
and audits. Although our study services 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.

Contract
Study 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

17



---



##### 



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.

Certain aspects of our contract study services
business requires the use of animals in preclinical testing of
the safety and efficacy of drugs. Acts of vandalism and other
acts by animal rights extremists who object to the use of
animals in drug development could have a material adverse effect
on our business.

Our
Activities Involve Hazardous Materials And May Subject Us To
Environmental Liability.

Certain activities of both our information
services and contract study services 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, we
could be held liable for damages or penalized with fines, and
such liabilities could deplete our resources.

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.

We May Be
Subject To Future Litigation And Patent Infringement
Claims.

Our success will depend in part on our ability to
obtain intellectual property rights and licenses sufficient to
preserve our freedom to operate. Our patent position involves
complex legal and factual questions. Legal standards relating to
the validity and scope of claims in our technology field are
still evolving. Therefore, the degree of future protection for
our proprietary rights is uncertain. In addition, other
organizations, including companies, academic and non-profit
institutions and governmental organizations are developing
technology in this field. The risks and uncertainties that we
face in this area include:



| |   |                                                                                                                                                                                                 
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | the pending patent applications we have filed, or
    to which we have exclusive 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 may
    not provide commercially meaningful protection;                                                                                              
|
| |  | the patents licensed or issued to us may not
    allow us to preserve our freedom to operate;                                                                                                   
|
| |  | other companies may challenge patents issued or
    licensed to us; and                                                                                                                         
|
| |  | patents issued to other organizations may
    restrict our ability to do business and we may be unable to
    obtain or maintain licenses on acceptable terms.                                  

We also 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. Any material leak of
confidential data into the public domain, or to third parties,
could cause our business, financial condition and results of
operations to suffer. It may be necessary for us to initiate
litigation to protect and enforce our intellectual property
rights. Such litigation may involve substantial costs, diversion
of managements time and attention from the operations of
our business and the risk of an adverse outcome.

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

18



---



##### 



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. The risk of additional litigation may
increase as the genomics, biotechnology and software industries
expand, more patents are issued and other companies engage in
genomic-related businesses. Therefore, we could be sued by third
parties alleging patent infringement.


We could incur substantial litigation costs to
defend ourselves in patent suits brought by other companies or
to initiate such suits. Substantial litigation costs and
potential adverse outcomes could cause our business, financial
condition and results of operations to suffer. In addition,
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 BioChem. In late 2003,
Enzo terminated the agreement under which Affymetrix distributed
that reagent and filed suit against Affymetrix alleging that
Affymetrix had agreements with Gene Logic and other named
customers to supply the reagent for use in potential violation
of their rights. Subsequently, Affymetrix denied Enzos
claims. We have not been made a party to that suit; we cannot
predict the outcome of such litigation, its effect on us or the
potential, if any, for claims being made against us, in addition
to the requirement to identify an appropriate source for an
acceptable reagent.



|        |           
|------- | ----------
|Item 2. | Properties

Our headquarters consist of approximately 28,000
square feet of office space located in Gaithersburg, Maryland
under a lease through 2013. We lease approximately 107,000
square feet of laboratory and office space, devoted to our
information services business, in two buildings located in
Gaithersburg, Maryland under leases through 2011. We also lease
approximately 77,000 square feet of laboratory and office space,
devoted to our contract study services business, in three
buildings located in Gaithersburg, Maryland under leases through
2012.



|        |                  
|------- | -----------------
|Item 3. | Legal Proceedings

We are not currently a party to any legal
proceedings which would have a material adverse effect on our
financial condition or results of operations.



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

None.

PART II

Item 5.     Market
for the Registrants Common Equity and Related Stockholder
Matters



Price Range of Common Stock


Our Common Stock is traded on the Nasdaq National
Market under the symbol GLGC. The following table sets forth,
for the periods indicated, the high and low closing prices for
our Common Stock, as reported by the Nasdaq National Market.

|                             |  |      |       |     |  |   |       | 
|---------------------------- |  | ---- | ----- | --- |  | - | ----- | 
|                             |  | High |       | Low
|                             |  |      |       |    
|Year ended December 31, 2002 |  |      |       |     |  |   |       | 
|First Quarter                |  | $    | 19.70 |     |  | $ | 14.30 | 
|Second Quarter               |  |      | 18.99 |     |  |   | 11.55 | 
|Third Quarter                |  |      | 12.85 |     |  |   | 7.39  | 
|Fourth Quarter               |  |      | 8.41  |     |  |   | 5.80  | 
|Year ended December 31, 2003 |  |      |       |     |  |   |       | 
|First Quarter                |  |      | 7.14  |     |  |   | 4.38  | 
|Second Quarter               |  |      | 8.00  |     |  |   | 4.72  | 
|Third Quarter                |  |      | 6.38  |     |  |   | 4.55  | 
|Fourth Quarter               |  | $    | 5.30  |     |  | $ | 4.68  | 

19



---



##### 



On March 1, 2004, the last reported sale
price of our Common Stock on the Nasdaq National Market was
$5.82. As of March 1, 2004, there were approximately 384
holders of record of our Common Stock, including one company
acting as holder of record for all investors whose stock is held
in street name.

We have never declared or paid any cash dividends
on our capital stock. We currently intend to retain earnings, if
any, to support the development of our business and do not
anticipate paying cash dividends for the foreseeable future.

Item
6.     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, 2003, 2002 and
2001 and with respect to the consolidated balance sheets as of
December 31, 2003 and 2002 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, 2000 and 1999 and the balance sheet data
as of December 31, 2001, 2000 and 1999 are derived from
audited financial statements not included in this
Form 10-K. The following selected consolidated financial
data includes, for 2003 only, the results for our contract study
services business, Gene Logic Laboratories Inc. (Gene
Logic Labs) (formerly known as TherImmune Research
Corporation), from its April 1, 2003 acquisition date, and
should be read in conjunction with the consolidated financial
statements and notes thereto included elsewhere in this Annual
Report on Form 10-K.

|                                                                                                                                                   |                                                                         |                                       |         |       |        |      |         |       |        |      |         |       |        |   |         |       |        |   |         |       |        |  
|-------------------------------------------------------------------------------------------------------------------------------------------------- | ----------------------------------------------------------------------- | ------------------------------------- | ------- | ----- | ------ | ---- | ------- | ----- | ------ | ---- | ------- | ----- | ------ | - | ------- | ----- | ------ | - | ------- | ----- | ------ | -
|                                                                                                                                                   |                                                                         |                                      
|                                                                                                                                                   |                                                                         | Years Ended December 31,             
|                                                                                                                                                   |                                                                         |                                      
|                                                                                                                                                   |                                                                         | 2003                                  |         | 2002  |        | 2001 |         | 2000  |        | 1999
|                                                                                                                                                   |                                                                         |                                       |         |       |        |      |         |       |        |     
|                                                                                                                                                   |                                                                         |                                      
|                                                                                                                                                   |                                                                         | (in thousands, except per share data)
|Consolidated Statements of Operations
    Data:                                                                                                    |                                                                         |                                       |         |       |        |      |         |       |        |      |         |       |        |   |         |       |        |   |         |      
|Revenue:                                                                                                                                           |                                                                         |                                       |         |       |        |      |         |       |        |      |         |       |        |   |         |       |        |   |         |      
|                                                                                                                                                   |                                                                         | Information services                  |         | $     | 51,960 |      |         | $     | 54,848 |      |         | $     | 43,328 |   |         | $     | 26,883 |   |         | $     | 19,202 |  
|                                                                                                                                                   |                                                                         | Contract study services               |         |       | 17,559 |      |         |       |       |      |         |       |       |   |         |       |       |   |         |       |       |  
|                                                                                                                                                   |                                                                         |                                       |         |       |        |      |         |       |        |      |         |       |        |   |         |       |        |   |         |      
|Total revenue                                                                                                                                      |                                                                         |                                       | 69,519  |       |        |      | 54,848  |       |        |      | 43,328  |       |        |   | 26,883  |       |        |   | 19,202  |      
|                                                                                                                                                   |                                                                         |                                       |         |       |        |      |         |       |        |      |         |       |        |   |         |       |        |   |         |      
|Expenses:                                                                                                                                          |                                                                         |                                       |         |       |        |      |         |       |        |      |         |       |        |   |         |       |        |   |         |      
|                                                                                                                                                   |                                                                         | Cost of contract study services       |         |       | 15,399 |      |         |       |       |      |         |       |       |   |         |       |       |   |         |       |       |  
|                                                                                                                                                   |                                                                         | Database production                   |         |       | 50,067 |      |         |       | 57,941 |      |         |       | 55,452 |   |         |       | 40,432 |   |         |       | 26,331 |  
|                                                                                                                                                   |                                                                         | Research and development              |         |       | 2,091  |      |         |       | 2,367  |      |         |       | 3,577  |   |         |       | 3,582  |   |         |       | 3,239  |  
|                                                                                                                                                   |                                                                         | Selling, general and administrative   |         |       | 22,198 |      |         |       | 19,734 |      |         |       | 19,323 |   |         |       | 17,770 |   |         |       | 9,194  |  
|                                                                                                                                                   |                                                                         | Amortization of goodwill              |         |       |       |      |         |       |       |      |         |       | 1,524  |   |         |       | 1,524  |   |         |       | 1,524  |  
|                                                                                                                                                   |                                                                         |                                       |         |       |        |      |         |       |        |      |         |       |        |   |         |       |        |   |         |      
|Total expenses                                                                                                                                     |                                                                         |                                       | 89,755  |       |        |      | 80,042  |       |        |      | 79,876  |       |        |   | 63,308  |       |        |   | 40,288  |      
|                                                                                                                                                   |                                                                         |                                       |         |       |        |      |         |       |        |      |         |       |        |   |         |       |        |   |         |      
|Loss from operations                                                                                                                               |                                                                         |                                       | (20,236 | )     |        |      | (25,194 | )     |        |      | (36,548 | )     |        |   | (36,425 | )     |        |   | (21,086 | )    
|Interest (income), net                                                                                                                             |                                                                         |                                       | (1,979  | )     |        |      | (3,139  | )     |        |      | (8,645  | )     |        |   | (13,706 | )     |        |   | (685    | )    
|Other (income) expense                                                                                                                             |                                                                         |                                       |        |       |        |      | (250    | )     |        |      | (83     | )     |        |   | (234    | )     |        |   | (30     | )    
|Write-down of equity investments                                                                                                                   |                                                                         |                                       | 4,268   |       |        |      | 753     |       |        |      | 2,495   |       |        |   |        |       |        |   |        |      
|                                                                                                                                                   |                                                                         |                                       |         |       |        |      |         |       |        |      |         |       |        |   |         |       |        |   |         |      
|Net loss before income tax expense, equity in net
    loss of unconsolidated investees and cumulative effect of change
    in accounting principle |                                                                         |                                       | (22,525 | )     |        |      | (22,558 | )     |        |      | (30,315 | )     |        |   | (22,485 | )     |        |   | (20,371 | )    
|Income tax expense                                                                                                                                 |                                                                         |                                       | 2,246   |       |        |      | 1,492   |       |        |      | 533     |       |        |   | 210     |       |        |   | 220     |      
|                                                                                                                                                   |                                                                         |                                       |         |       |        |      |         |       |        |      |         |       |        |   |         |       |        |   |         |      
|Net loss before equity in net loss of
    unconsolidated investees and cumulative effect of change in
    accounting principle                     |                                                                         |                                       | (24,771 | )     |        |      | (24,050 | )     |        |      | (30,848 | )     |        |   | (22,695 | )     |        |   | (20,591 | )    
|Equity in net loss of
    unconsolidated investees                                                                                                 |                                                                         |                                       |        |       |        |      |        |       |        |      | 2,322   |       |        |   |        |       |        |   |        |      
|                                                                                                                                                   |                                                                         |                                       |         |       |        |      |         |       |        |      |         |       |        |   |         |       |        |   |         |      
|Net loss before cumulative effect of change in
    accounting principle                                                                            |                                                                         |                                       | (24,771 | )     |        |      | (24,050 | )     |        |      | (33,170 | )     |        |   | (22,695 | )     |        |   | (20,591 | )    
|Cumulative effect of change in
    accounting principle                                                                                            |                                                                         |                                       |        |       |        |      |        |       |        |      |        |       |        |   | (1,322  | )     |        |   |        |      
|                                                                                                                                                   |                                                                         |                                       |         |       |        |      |         |       |        |      |         |       |        |   |         |       |        |   |         |      
|Net loss                                                                                                                                           |                                                                         | $                                     | (24,771 | )     |        | $    | (24,050 | )     |        | $    | (33,170 | )     |        | $ | (24,017 | )     |        | $ | (20,591 | )    
|                                                                                                                                                   |                                                                         |                                       |         |       |        |      |         |       |        |      |         |       |        |   |         |       |        |   |         |      
|Amounts per share, basic and diluted:                                                                                                              |                                                                         |                                       |         |       |        |      |         |       |        |      |         |       |        |   |         |       |        |   |         |      
|                                                                                                                                                   | Net loss before cumulative effect of change in
    accounting principle |                                       | $       | (0.82 | )      |      | $       | (0.89 | )      |      | $       | (1.25 | )      |   | $       | (0.90 | )      |   | $       | (1.04 | )     
|                                                                                                                                                   | Cumulative effect of change in
    accounting principle                 |                                       |         |      |        |      |         |      |        |      |         |      |        |   |         | (0.05 | )      |   |         |      |       
|                                                                                                                                                   |                                                                         |                                       |         |       |        |      |         |       |        |      |         |       |        |   |         |       |        |   |         |      
|                                                                                                                                                   |                                                                         | Net loss                              |         | $     | (0.82  | )    |         | $     | (0.89  | )    |         | $     | (1.25  | ) |         | $     | (0.95  | ) |         | $     | (1.04  | )
|                                                                                                                                                   |                                                                         |                                       |         |       |        |      |         |       |        |      |         |       |        |   |         |       |        |   |         |      
|Shares used in computing basic and diluted net
    loss per share                                                                                  |                                                                         |                                       | 30,112  |       |        |      | 26,948  |       |        |      | 26,540  |       |        |   | 25,209  |       |        |   | 19,833  |      
|                                                                                                                                                   |                                                                         |                                       |         |       |        |      |         |       |        |      |         |       |        |   |         |       |        |   |         |      

20



---



##### 



|                                                       |  |                |         |      |  |      |         |      |  |      |         |  |  |   |         |  |  |   |        | 
|------------------------------------------------------ |  | -------------- | ------- | ---- |  | ---- | ------- | ---- |  | ---- | ------- |  |  | - | ------- |  |  | - | ------ | 
|                                                       |  |               
|                                                       |  | December 31,  
|                                                       |  |               
|                                                       |  | 2003           |         | 2002 |  | 2001 |         | 2000 |  | 1999
|                                                       |  |                |         |      |  |      |         |      |  |     
|                                                       |  |               
|                                                       |  | (in thousands)
|Consolidated Balance Sheets Data:                      |  |                |         |      |  |      |         |      |  |      |         |  |  |   |         |  |  |   |        | 
|Cash, cash equivalents and
    marketable securities   |  | $              | 111,823 |      |  | $    | 167,102 |      |  | $    | 197,818 |  |  | $ | 229,482 |  |  | $ | 12,446 | 
|Working capital                                        |  |                | 111,015 |      |  |      | 163,681 |      |  |      | 187,184 |  |  |   | 211,300 |  |  |   | 5,423  | 
|Total assets                                           |  |                | 227,366 |      |  |      | 227,460 |      |  |      | 256,927 |  |  |   | 289,533 |  |  |   | 41,166 | 
|Total long-term debt and capital
    lease obligations |  |                | 1,174   |      |  |      | 750     |      |  |      | 338     |  |  |   | 2,966   |  |  |   | 4,590  | 
|Total stockholders equity                             |  |                | 199,589 |      |  |      | 204,438 |      |  |      | 226,027 |  |  |   | 253,715 |  |  |   | 23,068 | 



|        |                                                                                          
|------- | -----------------------------------------------------------------------------------------
|Item 7. | Managements Discussion and Analysis
    of Results of Operations and Financial Condition

Overview

We are a leading drug development services
company providing a wide range of discovery and development
services to pharmaceutical and biotechnology companies
worldwide, as well as U.S. Government entities. Our services are
designed to assist in improving the predictive value of research
activities and product success rates. We manage our business as
two segments: information services and contract study services.
Our information services business is based on our gene
expression reference database, the GeneExpress System, for
research related to drug discovery and optimization. These
services primarily consist of subscriptions to the GeneExpress
System. Our contract study services business consists of
services related to drug development, including primarily
preclinical safety and pharmacology studies and related
laboratory services and, to a lesser extent, Phase I clinical
trial services. In 2003, MetriGenix sold it assets to a
privately held company (renamed MetriGenix Corp.)
and we obtained an ownership interest in the successor.

Our information services revenue consists
primarily of subscription fees earned under subscription
agreements with pharmaceutical and biotechnology companies for
all or parts of our gene expression reference database, the
GeneExpress System. Each of the subscription agreements with our
GeneExpress System customers is typically for a specific
multi-year term. Certain subscription agreements include a right
of early termination (which, in some instances, is subject to
conditions) by the customer, without penalty, on a specified
date prior to the normal expiration of the term. Our revenue
from such subscription agreements is recognized ratably over the
period during which the customer has access to the GeneExpress
System.

Our contract study services revenue is primarily
derived from fixed price contracts with pharmaceutical and
biotechnology companies. In addition, we derive revenue from
cost plus contracts with U.S. Government entities. Revenue is
recognized on fixed price contracts as services are performed,
based primarily upon the percentage of hours worked (including
subcontractor hours) compared to the total estimated hours for
the contract. We believe that hours worked is the best measure
of proportional performance under fixed price contracts. Revenue
is recognized on cost plus contracts on the basis of the direct
costs incurred plus indirect costs and an allocable portion of
the fee earned.

During 2003, we faced challenges in our ability
to continue to grow revenue, improve our operating performance
and expand our market share for outsourced research and
development in the pharmaceutical and biotechnology industries.
Due to economic uncertainty and the reduced ability of smaller
companies to raise capital, we continued to experience cautious
spending by, and delays in purchase decisions among, a number of
our existing and potential customers which has slowed our rate
of revenue growth and reduced our renewal rate by our smaller
company customers. In response to these conditions, we
implemented a number of initiatives to increase revenue growth
and better align our business to meet market needs, including:



| |   |                                                                                                                                                                                                                                                                                       
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | acquiring TherImmune Research Corporation
    (TherImmune), a privately held contract study
    services company in order to 1) expand our drug discovery and
    development services capabilities; and 2) enhance our revenue
    growth and accelerate our time to profitability;
|
| |  | focusing on the successful renewal of GeneExpress
    System subscription agreements with our top-tier pharmaceutical
    company customers;                                                                                                                                          

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| |   |                                                                                                                      
| | - | ---------------------------------------------------------------------------------------------------------------------
| |  | rebalancing our workforce to strengthen our
    contract study services business;                                    
|
| |  | preparing for international expansion by
    establishing sales and customer support efforts in Europe and
    Japan;
|
| |  | improving gross margins on our contract study
    services business;                                                 
|
| |  | continuing our Company-wide cost-saving efforts;
    and                                                             
|
| |  | continuing to add capacity and build
    infrastructure to maintain revenue growth.                                  

Our future profitability will depend on: 1) the
continued development of our information services business
through the establishment, renewal or expansion of subscription
agreements with new and existing GeneExpress System customers;
and 2) the continued development of our contract study services
business. Revenue from our customers may be subject to
significant fluctuation in both timing and amount; therefore,
our results of operations for any period may not be comparable
to the results of operations for any other period or predictive
of any long term trend.

We have incurred operating losses in each year
since our inception, including losses of $24.8 million in
2003, $24.1 million in 2002 and $33.2 million in 2001. At
December 31, 2003, we had an accumulated deficit of $184.1
million. Our losses have resulted principally from costs
incurred in the development of our GeneExpress System and
selling, general and administrative costs associated with our
operations. These costs have exceeded our revenue and we expect
to incur additional operating losses in the future.

Results of Operations



| |                                           
| | ------------------------------------------
| | Years Ended December 31, 2003 And
    2002

Total Revenue.Total
revenue increased $14.7 million, or 27%, to $69.5 million
in 2003 from $54.8 million in 2002. During 2003 and 2002,
no customer accounted for 10% or greater of our revenue. During
2003 and 2002, 34% and 34% of our revenue, respectively, was
from customers in the Pacific Rim, and 18% and 20% of our
revenue, respectively, was from customers in Europe.

Information Services
Revenue.Revenue from our information
services business, which consisted primarily of subscription
fees from subscription agreements to our GeneExpress System, was
$52.0 million in 2003, a decrease of $2.9 million, or
5%, from $54.8 million in 2002. The decrease in revenue
consisted primarily of reduced revenue of $11.4 million in
subscription fees resulting from the conclusion or reduction in
scope of agreements with biotechnology and smaller
pharmaceutical companies and $2.2 million resulting from
certain service deliverables in 2002 which did not recur in
2003. These decreases were partially offset by increased revenue
of $7.3 million in subscription fees from new customers and
expanded agreements with and additional fees from existing
customers and $3.8 million reflecting a full period of
revenue from some existing customers in 2003 as compared to
2002. During the fourth quarter of 2003, we were notified by
Biogen Idec, following their merger, that they intended to
conclude their GeneExpress subscription agreement in 2004 and
replace it with a subscription to the ASCENTA System, resulting
in a net reduction to revenue in 2004 of approximately 1% of our
2003 information services revenue. We expect modest revenue
growth in 2004, as compared to 2003, from our information
services business, mainly due to the current economic
uncertainty causing cautious spending by, and delays in purchase
decisions among, a number of our existing and potential
customers and the reduced ability of smaller companies to raise
capital with which to purchase our services.

Contract Study Services
Revenue.Revenue from our contract
study services business for the period beginning April 2003
through December 2003 was $17.6 million as a result of
the acquisition of TherImmune on April 1, 2003. Such
revenue consisted of fees from services related to drug
development, including primarily preclinical safety and
pharmacology studies and related laboratory services and, to a
lesser extent, Phase I clinical trial services. Revenue from our
contract study services business was $23.3 million on a pro
forma basis in 2003 (assuming the acquisition occurred on
January 1, 2003 and excluding inter-company sales) as
compared to revenue reported by TherImmune of $24.5 million
on a pro forma basis in 2002 (excluding inter-company sales). We
expect revenue to grow in 2004, as compared to 2003, from our
contract study services business, mainly due to recognition of a
full years revenue in 2004, and to a lesser extent, due to
modest growth in 2004 in our preclinical safety and pharmacology
study services, which will offset a decline in Phase I clinical
trial services.

22



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Cost of Contract Study Services
Revenue.Cost of contract study
services revenue for the period beginning April 2003
through December 2003 was $15.4 million. Such costs
consisted primarily of direct costs, including direct labor and
study supplies, and indirect costs, including rent, utilities
and depreciation, related to conducting contract study services,
which resulted in a gross margin of 12%. We expect modest
improvements in our gross margin for 2004 resulting from
anticipated increases in sales volume and price and reduced
outsourcing expenses.

Database Production
Expense.Database production expenses,
which consisted primarily of costs related to the acquisition
and processing of tissues and overhead expenses needed to
support the content of the GeneExpress System, decreased to
$50.1 million in 2003 from $57.9 million in 2002. The
decrease in 2003, as compared to 2002, consisted primarily of an
$8.1 million reduction in database content generation
expenses, primarily resulting from more focused content
development of our GeneExpress System, partially offset by an
increase of $1.5 million in related employee costs. For
2004, as compared to 2003, we expect database production
expenses to remain at 2003 levels, reflecting our continuing
efforts to focus content development in areas of most interest
to our customers.

Research and Development
Expense.Research and development
expenses decreased to $2.1 million in 2003 from
$2.4 million in 2002. Such expenses included the costs
associated with our efforts to improve the processes currently
used in the production of our GeneExpress System, as well as
research on additional technology platforms.

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
$22.2 million in 2003 from $19.7 million in 2002.
Excluding the $5.5 million in selling, general and
administrative expenses associated with our contract study
services business, the resulting decrease in 2003 was due
primarily to continued cost savings efforts, including a
reduction in marketing expenses of $0.9 million, employee
costs of $0.7 million and travel expenses of $0.4 million.
For 2004, as compared to 2003, we expect selling, general and
administrative expenses to increase, mainly due to a full
years costs in 2004 associated with our contract study
services business and, to a lesser extent, anticipated costs in
establishing international sales and customer support efforts in
Europe and Japan.

Net Interest Income.Net interest income decreased to $2.0 million in 2003 from
$3.1 million in 2002, due primarily to a decline in our
balance of cash, cash equivalents and marketable securities
available-for-sale resulting from our use of cash to fund the
TherImmune acquisition completed on April 1, 2003, and, to
a lesser degree, a decline in the rates of return.

Write-down of Equity
Investments.We recorded a
$4.3 million write-down of our investment in Neuralstem,
Inc. (Neuralstem) in 2003 and a $0.8 million
write-down of our investment in Metabometrix, Ltd.
(Metabometrix) in 2002 due to declines in their
estimated market values that were deemed to be other than
temporary. These write-downs represented the remaining book
value of these investments.

Income Tax Expense.Income tax expense, which consisted of a Japanese government
withholding tax on certain payments by our Japanese customers,
increased to $2.2 million in 2003 from $1.5 million in
2002, as we recognized a full year of activity in 2003 from such
customers. The governments of the U.S. and Japan are proposing
legislative changes to the current tax treaty between the
countries; if such changes are enacted, the withholding tax may
be eliminated as early as mid-2004. However, if such proposed
legislative changes to the treaty are not enacted or their
effect is delayed, we expect income tax expense for 2004 to
remain at 2003 levels.

Years Ended December 31, 2002 And
2001

Total Revenue.Total
revenue, which consisted primarily of subscription fees from
subscription agreements to our GeneExpress System, increased
$11.5 million, or 27%, to $54.8 million in 2002 from
$43.3 million in 2001. The increase in revenue resulted
primarily from subscription fees related to new and existing
pharmaceutical and biotechnology GeneExpress System customers.
No one customer contributed 10% or more of our revenue for the
year 2002; however, revenue from Procter & Gamble and UCB
Research each accounted for 10% or more of revenue for 2001.

23



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Database Production
Expense.Database production expenses,
which consisted primarily of costs related to the acquisition
and processing of tissues and overhead expenses needed to
support the content of the GeneExpress System, increased to
$57.9 million in 2002 from $55.5 million in 2001. The
increase in 2002, as compared to 2001, consisted primarily of
higher employee and depreciation and amortization costs, offset
by lower expenses relating to microarray usage and agreements
with third parties.

Research and Development
Expense.Research and development
expenses decreased to $2.4 million in 2002 from
$3.6 million in 2001, caused primarily by lower employee
costs and laboratory supplies. Such expenses included the costs
associated with our efforts to improve the processes currently
used in the production of our GeneExpress System, as well as
research on additional technology platforms.

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
$19.7 million in 2002 from $19.3 million in 2001. The
increase in 2002, as compared to 2001, was due to normal
fluctuations in the costs of operations.

Amortization of
Goodwill.In accordance with Statement
of Financial Accounting Standards No. 142, Goodwill
and Other Intangible Assets (SFAS 142), which
we adopted January 1, 2002, we no longer amortize goodwill,
but instead apply annual impairment tests in accordance with the
Statement. Amortization of goodwill was $1.5 million in
2001, as a result of the acquisition of Oncormed, Inc. in
September 1998.

Net Interest Income.Net interest income decreased to $3.1 million in 2002 from
$8.6 million in 2001, primarily due to a decrease in the
rates of return for our investments in and, to a lesser degree,
a decline in our balance of cash, cash equivalents and
marketable securities available-for-sale.

Write-down of Equity
Investment.We recorded a write-down
of $0.8 million, representing our entire investment in
Metabometrix in 2002 and a write-down of $2.5 million in
our investment in Neuralstem in 2001 to reflect declines in
their estimated market values.

Income Tax.Income
tax expense, which consisted of a Japanese government
withholding tax on certain payments by our Japanese customers,
increased to $1.5 million in 2002 from $0.5 million in
2001, due to additional Japanese customers in 2002.

Equity in Net Loss of Unconsolidated
Investees.In 2001, we recorded our
share of losses relating to our unconsolidated investees,
Neuralstem and MetriGenix.

During 2001, we accounted for our investment in
Neuralstem, a privately held company in which we initially had a
voting stock interest of 26.7%, using the equity method of
accounting. We recognized non-cash losses of $1.5 million
in 2001. Effective April 30, 2001, we reduced our voting
stock interest to 14.8% and began accounting for our investment
using the cost method of accounting. Our financial statements do
not reflect any additional share of Neuralstems losses or
elimination of intercompany sales and expenses after such date.

During 2001, we recorded 100% of
MetriGenixs losses up to the book value of our
contribution, $0.9 million, using the equity method of
accounting. As our investment in MetriGenix was reduced to zero
at December 31, 2001 and we have no guarantees or
commitment to provide future funding, we do not expect to record
any additional losses to our investment in the future. We also
entered into certain agreements with MetriGenix including a
subscription to the GeneExpress System and to provide certain
administrative services and subleased space. No revenue was
recorded related to the subscription in 2002 and 2001. In 2002
and 2001, we received fees of $0.8 million and
$0.3 million, respectively, for the reimbursement of costs
associated with providing administrative services and subleased
space.

Liquidity and Capital Resources

From inception through December 31, 2003, we
have financed our operations and acquisitions through the
issuance and sale of equity securities and payments from
customers. As of December 31, 2003, we had approximately
$111.8 million in cash, cash equivalents and marketable
securities available-for-sale, compared to $167.1 million
as of December 31, 2002.

24



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Net cash used in operating activities decreased
to $7.8 million in 2003 from $20.1 million in 2002,
primarily due (after excluding the effect of non-cash
write-downs of equity investments and depreciation and
amortization expenses) to improved operating costs.

In 2003 and 2002, our investing activities
consisted primarily of purchases, sales and maturities of
available-for-sale securities, the acquisition of TherImmune,
capital expenditures and software development and database
upgrade costs. Capital expenditures in 2003 and 2002 amounted to
$4.2 million and $1.9 million, respectively. The increase
in capital expenditures was primarily due to approximately
$2.9 million in connection with the build-out and
furnishing of our expanded facilities, including those related
to our contract study services business. In 2004, we expect
capital expenditures to remain consistent with 2003 levels, due
to anticipated equipment purchases, as well as additional
facility build-out requirements.

We have capitalized software development costs of
$6.6 million and $7.1 million in 2003 and 2002,
respectively. These costs relate to ongoing efforts to enhance
the software platform of our GeneExpress System. In, 2002, we
capitalized $3.9 million of costs related to the upgrade of
the content in the BioExpress System, as a result of
Affymetrixs release of their GeneChip Human Genome U-133
Set. Software development and database upgrade costs are being
amortized over their expected useful lives of three and two
years, respectively. Additional software development and
database upgrade costs are expected to continue, but at a
reduced rate, as a result of ongoing efforts to further enhance
the software platform and certain content of our GeneExpress
System.

In connection with the acquisition of TherImmune,
we paid $30.4 million in cash to share and option holders
of TherImmune, paid $1.3 million in transaction costs
related to the acquisition and acquired $1.2 million in
cash from TherImmune. In addition, we issued 3,927,214 shares of
our Common Stock to such shareholders, with a value of
$19.4 million, based on the average market price of our
Common Stock surrounding the measurement date.

Our financing activities, other than the
repayment of capital lease obligations and equipment loans,
primarily consisted of the exercise of stock options and
participation in our employee stock purchase plan. In connection
with the TherImmune acquisition, we repaid $6.0 million in
debt of TherImmune.

To generate our gene expression data, we use
Affymetrix microarrays, instrumentation and software. Our
current supply and license agreement with Affymetrix expires in
December 2005, but may be terminated earlier in the event
of breach of the agreement by either party. After
December 2005, we would continue to have the right to use
up our supply of previously purchased microarrays. Under the
terms of the agreement, we pay Affymetrix annual subscription
fees of $4.0 million for access to their microarrays and a
license to use their technology. We purchase microarrays and
related instrumentation and software and will pay royalties
anticipated largely to begin in 2005, upon meeting certain
revenue thresholds from subscriptions to our GeneExpress System.
In 2003, we incurred payment obligations to Affymetrix in the
aggregate amount of $8.7 million. In 2004, we expect our
payment obligations to range from $6.0 to $8.0 million,
depending upon the quantities of microarrays purchased. Other
commitments under other research and license agreements do not
represent significant expenditures in relation to our total
expenses.

As discussed in Notes 7 and 9 to our Consolidated
Financial Statements, future minimum capital lease payments,
long-term debt payments, payment obligations under our
Affymetrix agreement and operating lease payments are listed
below:

|                          |  |       |        |      |  |             |       |             |  |             |        |  |  |   |       |  |  |   |       | 
|------------------------- |  | ----- | ------ | ---- |  | ----------- | ----- | ----------- |  | ----------- | ------ |  |  | - | ----- |  |  | - | ----- | 
|                          |  | Total |        | 2004 |  | 2005 & 2006 |       | 2007 & 2008 |  | Beyond 2008
|                          |  |       |        |      |  |             |       |             |  |            
|Capital lease obligations |  | $     | 537    |      |  | $           | 160   |             |  | $           | 316    |  |  | $ | 61    |  |  | $ |      | 
|Long-term debt            |  |       | 710    |      |  |             | 492   |             |  |             | 91     |  |  |   | 100   |  |  |   | 27    | 
|Payment obligations       |  |       | 8,000  |      |  |             | 4,000 |             |  |             | 4,000  |  |  |   |      |  |  |   |      | 
|Operating leases          |  |       | 31,579 |      |  |             | 4,690 |             |  |             | 9,711  |  |  |   | 8,042 |  |  |   | 9,136 | 
|                          |  |       |        |      |  |             |       |             |  |             |        |  |  |   |       |  |  |   |       | 
|Total                     |  | $     | 40,826 |      |  | $           | 9,342 |             |  | $           | 14,118 |  |  | $ | 8,203 |  |  | $ | 9,163 | 
|                          |  |       |        |      |  |             |       |             |  |             |        |  |  |   |       |  |  |   |       | 

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

25



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requirements and the adequacy of our available
funds will depend on many factors, including those discussed
under BusinessRisks Related to Our Business and
Industry.


Change in Accounting Principle

Effective January 1, 2002, we changed our
method of accounting for goodwill in accordance with SFAS 142.
Prior to 2002, we recognized amortization expense on goodwill in
the amount of $1.5 million per year. Under the new
accounting method, we no longer amortize goodwill, but are
subject to annual impairment tests in accordance with this
Standard. This accounting change resulted in a decrease in
amortization expense and net loss of $1.5 million for 2002 and
future years.

Critical Accounting Policies

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



| |                    
| | -------------------
| | Revenue Recognition

Information Services
Revenue.Information services revenue
consists primarily of subscription fees earned under
subscription agreements for all or parts of the Companys
gene expression reference database, the GeneExpress System. Each
of the subscription agreements with our GeneExpress System
customers is typically for a specific multi-year term. Our
revenue from such subscription agreements is recognized ratably
over the period during which the customer has access to the
GeneExpress System. 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 include a right of early termination (which, in some
instances, is subject to conditions) by the customer, without
penalty, on a specified date prior to the normal expiration of
the term. If an agreement has a right of early termination,
revenue is recognized ratably over the subscription term up to
the possible date of early termination, based on subscription
fees earned under the agreement through the possible date of
early termination. If such early termination does not occur, the
balance of the subscription fees earned under the agreement is
recognized as revenue ratably over the remaining term of the
agreement.

Revenue recognized for multiple element contracts
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
such evidence of fair value for any element of the arrangement
does not exist, revenue from such element is deferred until such
time that evidence of fair value does exist or is recognized
ratably over the longest performance period of the remaining
elements.

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

26



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Our revenue recognition policy is significant
because revenue is a key component of our results of operations.
Revenue is recognized in accordance with the Securities and
Exchange Commissions (SEC) Staff Accounting
Bulletin (SAB) No. 104, Revenue
Recognition (SAB 104). SAB 104 requires 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 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.



| |                                              
| | ---------------------------------------------
| | Goodwill and Intangible Assets
    Impairment

We have recently recorded goodwill of
$43.0 million and an intangible asset, customer
relationships, of $2.5 million as a result of the
acquisition of TherImmune. Prior to the acquisition, we had
recorded goodwill and other intangible assets, including
licenses to technologies or data, patent costs and software
development and database upgrade costs. The determination of
their estimated useful lives and whether or not any of these
assets are impaired involves significant judgment, including the
following:



| |   |                                                                                                                                
| | - | -------------------------------------------------------------------------------------------------------------------------------
| |  | our licenses and internally developed
    intellectual property may not provide valid and economical
    competitive advantage;
|
| |  | our services may become obsolete before we
    recover the costs incurred in connection with their development;                
|
| |  | our use of such assets; and                                                                                                    
|
| |  | the fair value of each business segment relative
    to its book value.                                                        

Under SFAS 142, we are required to perform
annual impairment tests of our goodwill and intangible assets
and more frequently in certain circumstances. We have elected to
test for goodwill impairment as of October 1 of each year. The
goodwill impairment test is a two-step process, which requires
management to make judgments in determining what assumptions to
use in the calculation. Our annual impairment assessment as of
October 1, 2003 did not indicate impairment of our
goodwill. The calculation includes managements assumptions
relating to projected growth in revenue and gross margins and
discount rates. Should conditions change in the future causing
management to determine that these rates should be reduced, the
resulting effect would be a reduction in the fair value of a
reporting unit. As such, this could adversely affect the
reported value of goodwill, and cause us to have an impairment
of goodwill.

The reported value of goodwill totaled
$45.7 million at December 31, 2003. Such value is based on
various assumptions, such as anticipated revenue and gross
margins. These assumptions could be adversely affected by
factors beyond our control, including those discussed under
BusinessRisks Related to Our Business and
Industry.



| |                                              
| | ---------------------------------------------
| | Accounts Receivable and Unbilled
    Services

Our ability to collect outstanding receivables
and unbilled services from our customers is critical to our
operating performance and cash flows. Typically, arrangements
with our customers require that the payments for our services be
made in advance, based upon the achievement of milestones or in
accordance with predetermined payment schedules. In the past, we
have not had a history of collectability problems with our
customers; however, we have recorded an allowance for doubtful
accounts at December 31, 2003 based on our estimate of
accounts receivable that are at risk of collection. Further, as
we continue to expand our customer base, the risk of
collectability may increase and management will continue to make
estimates as to collectability of such accounts. If the
financial condition of our customers were to deteriorate,
resulting in an

27



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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 GeneExpress System. 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 that might have a material
impact on our financial statements.



| |                   
| | ------------------
| | Equity Investments

We hold equity investments in several companies,
including MetriGenix Corp. and Avalon Pharmaceuticals, none of
which were publicly traded in 2003, whose businesses may be
complementary to our business. We record an investment
impairment charge when it is believed that an investment has
experienced a decline in value that is other than temporary.
Future adverse changes in market conditions or poor operating
results of the underlying investee could result in losses or an
inability to recover the carrying value of these investments
that may not be reflected in an investments current
carrying value, thereby possibly requiring an impairment charge
in the future.

Recently Issued Accounting
Pronouncements

In December 2003, the SEC issued SAB 104,
which supercedes SAB No. 101, Revenue Recognition in
Financial Statements (SAB 101). The primary
purpose of SAB 104 is to rescind accounting guidance contained
in SAB 101 related to multiple element revenue arrangements,
superceded as a result of the issuance of Emerging Issues Task
Force (EITF) Issue No. 00-21.
Additionally, SAB 104 rescinds the SECs Revenue
Recognition in Financial Statements Frequently Asked Questions
and Answers (the FAQ) issued with SAB 101 that
had been codified in SEC Topic 13, Revenue
Recognition. Selected portions of the FAQ have been
incorporated into SAB 104. The adoption of SAB 104 did not have
an impact on our consolidated financial position or results of
operations.

The EITF Issue No. 00-21, Accounting
for Revenue Arrangement with Multiple Deliverables
(Issue No. 00-21), addresses circumstances
involving the delivery or performance of multiple products,
services, and/or rights to use assets, and for which performance
may occur at different points in time or over different periods
of time. The issue also addresses whether the different
revenue-generating activities, or deliverables, are sufficiently
separable, and there exists sufficient evidence of their fair
values to separately account for some or all of the
deliverables. The issue applies to all contractual arrangements
under which a vendor will perform multiple revenue-generating
activities. Issue No. 00-21 is effective for all revenue
arrangements entered into in fiscal periods beginning after
June 15, 2003, with early adoption permitted. We adopted
this guidance prospectively for all revenue arrangements entered
into after January 1, 2003, and the impact of adoption was
not material to our results of operations.

In January 2003, the Financial Accounting
Standards Board issued Interpretation No. 46,
Consolidation of Variable Interest Entities
(Interpretation No. 46). The objective of
Interpretation No. 46 is to improve financial reporting by
companies involved with variable interest entities. The
Interpretation requires variable interest entities to be
consolidated by a company if that company is subject to a
majority of the risk of loss from the variable interest
entitys activities or is entitled to receive a majority of
the entitys residual returns or both. Interpretation No.
46 is effective immediately for arrangements entered into or
modified after January 31, 2003 and will be applied to all
arrangements entered into or modified before February 1,
2003 during the quarter ending March 31, 2004. The initial
adoption of Interpretation No. 46 for arrangements entered
into or modified after January 31, 2003 did not have any
impact on our financial position or results of operations. We
are still evaluating the impact of Interpretation No. 46
for all arrangements entered into prior to February 1,
2003; however, we do not anticipate that the impact of these
arrangements will have a material effect on our financial
position or results of operations.

28



---



##### 



In May 2003, the Financial Accounting
Standards Board issued Statement No. 150, Accounting for
Certain Financial Instruments with Characteristics of Both
Liabilities and Equity (Statement
No. 150). Statement No. 150 established
standards for how an issuer classifies and measures certain
financial instruments with characteristics of both liabilities
and equity. Statement No. 150 is effective for financial
instruments entered into or modified after May 31, 2003, and
otherwise is effective at the beginning of the first interim
period beginning after June 15, 2003. We adopted Statement
No. 150 on July 1, 2003, with no effect on our
financial position or results of operations.

Item 7A.     Quantitative and Qualitative Disclosure About Market
Risk

We have limited exposure to financial market
risks, including changes in interest rates. At December 31,
2003, we had cash and cash equivalents of approximately
$48.7 million and marketable securities available-for-sale
of an additional $63.1 million. We invest our excess cash
primarily in money market funds, obligations of the United
States government and its agencies and marketable debt
securities of companies with strong credit ratings. These
instruments have maturities of twenty-four months or less when
purchased. We do not utilize derivative financial instruments,
derivative commodity instruments or other market risk sensitive
instruments, positions or transactions in any material fashion.
Accordingly, we believe that, while the instruments we hold are
subject to changes in the financial standing of the issuer of
such securities, we are not subject to any material risks
arising from changes in foreign currency exchange rates,
commodity prices, equity prices or other market changes that
affect market risk sensitive instruments. Based on our cash and
cash equivalents and marketable securities available-for-sale
balances at December 31, 2003, a 100 basis point adverse
movement in interest rates would have resulted in an increase in
the net loss for the year ended December 31, 2003 of
approximately $1.1 million. Actual changes in rates may
differ from the hypothetical assumptions used in computing this
exposure.



|        |                                                
|------- | -----------------------------------------------
|Item 8. | Financial Statements and Supplementary
    Data

Our Consolidated Financial Statements and notes
thereto, together with the Report of Independent Auditors
thereon, appear on pages F-1 through F-24 of this Annual Report
on Form 10-K and are incorporated herein by reference.



|        |                                                                                         
|------- | ----------------------------------------------------------------------------------------
|Item 9. | Changes in and Disagreements With
    Accountants on Accounting and Financial Disclosure

None.



|         |                        
|-------- | -----------------------
|Item 9A. | Controls and Procedures

As of December 31, 2003, an evaluation was
performed under the supervision and with the participation of
our management, including the Chief Executive Officer and Chief
Financial Officer, of the effectiveness of the design and
operation of our disclosure controls and procedures. Based on
that evaluation, our management, including the Chief Executive
Officer and Chief Financial Officer, concluded that our
disclosure controls and procedures were effective as of
December 31, 2003.

PART III



|         |                                                       
|-------- | ------------------------------------------------------
|Item 10. | 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 2004
Annual Meeting of Stockholders to be filed with the Securities
and Exchange Commission within 120 days after the end of
the Companys fiscal year ended December 31, 2003 (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,
Item 1 of this Annual Report on Form 10-K.

29



---



##### 



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.



|         |                       
|-------- | ----------------------
|Item 11. | 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.



|         |                                                                                       
|-------- | --------------------------------------------------------------------------------------
|Item 12. | 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.



|         |                                                   
|-------- | --------------------------------------------------
|Item 13. | 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.



|         |                                           
|-------- | ------------------------------------------
|Item 14. | 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



|         |                                                                         
|-------- | ------------------------------------------------------------------------
|Item 15. | Exhibits, Financial Statements and
    Schedules and Reports on Form 8-K

(a) 1. Financial
Statements

|                                                                                                |  |      |     | 
|----------------------------------------------------------------------------------------------- |  | ---- | --- | 
|                                                                                                |  | Page
|                                                                                                |  |     
|Consolidated Financial Statements of Gene
    Logic Inc.                                        |  |      |     | 
|Report of Independent Auditors                                                                  |  |      | F-2 | 
|Consolidated Balance Sheets as of
    December 31, 2003 and 2002                                |  |      | F-3 | 
|Consolidated Statements of Operations for the
    three years ended December 31, 2003           |  |      | F-4 | 
|Consolidated Statements of Stockholders
    Equity for the three years ended December 31, 2003 |  |      | F-5 | 
|Consolidated Statements of Cash Flows for the
    three years ended December 31, 2003           |  |      | F-6 | 
|Notes to Consolidated Financial Statements                                                      |  |      | F-7 | 

(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.

30



---



##### 



(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.                                                                                                                                                                                                                                                                                      
|        | 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 | .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  | .62                     |  | Series A Preferred Stock Purchase Agreement,
    dated April 20, 2000, between Registrant and Neuralstem, Inc.
    (formerly Neuralstem Biopharmaceutical, Ltd.)(5)(A)                                                                                                                                                 
|        | *10 | .63                     |  | Employment Agreement, dated September 1, 1997,
    between Registrant and Victor M. Markowitz.(5)                                                                                                                                                                                                                      
|        | 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 | .76                     |  | Severance Pay Agreement and General Release,
    dated December 23, 2002, between Registrant and David S.
    Murray.(9)                                                                                                                                                                                               
|        | *10 | .77                     |  | Employment Agreement dated April 1, 2003, by and
    between Registrant and Stephen J. Trevisan.(14)                                                                                                                                                                                                                   
|        | 10  | .78                     |  | Settlement and Nonexclusive License Agreement,
    dated January 10, 2001, between Registrant and Incyte
    Corporation.(B) (filed herewith solely to modify redaction
    markings)                                                                                                                                  

31



---



##### 



|        |     |                         |  |                                                                                                                                                                                                                   
|------- | --- | ----------------------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |     |                        
|Number  |     | Description of Document
|        |     |                        
|        | 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.                                                                     
|        | *10 | .82                     |  | Employment Agreement, dated July 2, 2003, between
    Registrant and Robert R. Proulx.(16)                                                                                                                        
|        | 21  | .1                      |  | List of Subsidiaries.                                                                                                                                                                                             
|        | 23  | .1                      |  | Consent of Ernst & Young LLP, Independent
    Auditors.                                                                                                                                                           
|        | 31  |                         |  | Certifications pursuant to Rule
    13a-14(a)/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.                                                                                   



---

|     |  |                                                                                                                                                                                                                       
|---- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|*    |  | 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 Proxy
    Statement with respect to the Annual Meeting of Stockholders
    held on June 6, 2002, filed on April 12, 2002, 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
    Quarterly Report on From 10-Q for the quarter ended
    March 31, 2000, filed on May 15, 2000, 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.                             

32



---



##### 



|    |  |                                                                                                                                                                                                                                                                                  
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(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 August 24, 2000.  
|(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 December 12, 2003.

(b) Reports on Form 8-K

During the three months ended December 31,
2003, the Company filed the following reports:

The Current Report of Form 8-K, filed
October 1, 2003, with respect to the Companys
post-acquisition integration and market alignment strategy, as
well as the Companys plan to operate under a single brand
identity.

The Current Report of Form 8-K, filed
October 24, 2003, with respect to the Companys
financial results for the three months ended September 30,
2003.

33



---



##### 



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 15th day of
March, 2004.



| |                
| | ---------------
| | GENE LOGIC INC.



| |     |                    
| | --- | -------------------
| | By: | /s/ MARK D. GESSLER

| |                                                                 
| | ----------------------------------------------------------------
| |                                                                 
| | Mark D. Gessler                                                 
| | Chairman of the Board, 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(Mark D. Gessler)                    |  | Chairman of the Board, Chief Executive Officer
    and President(Principal Executive Officer) |  | March 15, 2004
|                                                       
|/s/ PHILIP L. ROHRER, JR.(Philip L. Rohrer, Jr.)        |  | Chief Financial Officer(Principal Financial and
    Accounting Officer)                       |  | March 15, 2004
|                                                       
|/s/ JULES BLAKE(Jules Blake, Ph.D.)                     |  | Director                                                                                      |  | March 15, 2004
|                                                       
|/s/ MICHAEL J. BRENNAN(Michael J. Brennan, M.D., Ph.D.) |  | Director                                                                                      |  | March 15, 2004
|                                                       
|/s/ CHARLES L. DIMMLER, III(Charles L. Dimmler III)     |  | Director                                                                                      |  | March 15, 2004
|                                                       
|/s/ G. ANTHONY GORRY(G. Anthony Gorry, Ph.D.)           |  | Director                                                                                      |  | March 15, 2004
|                                                       
|/s/ J. STARK THOMPSON(J. Stark Thompson, Ph.D.)         |  | Director                                                                                      |  | March 15, 2004

34



---



##### 



GENE LOGIC INC.

INDEX TO CONSOLIDATED FINANCIAL
STATEMENTS

|                                                                                                |  |      |     | 
|----------------------------------------------------------------------------------------------- |  | ---- | --- | 
|                                                                                                |  | Page
|                                                                                                |  |     
|Report of Independent Auditors                                                                  |  |      | F-2 | 
|Consolidated Balance Sheets as of
    December 31, 2003 and 2002                                |  |      | F-3 | 
|Consolidated Statements of Operations for the
    three years ended December 31, 2003           |  |      | F-4 | 
|Consolidated Statements of Stockholders
    Equity for the three years ended December 31, 2003 |  |      | F-5 | 
|Consolidated Statements of Cash Flows for the
    three years ended December 31, 2003           |  |      | F-6 | 
|Notes to Consolidated Financial Statements                                                      |  |      | F-7 | 

F-1



---



##### 



REPORT OF INDEPENDENT AUDITORS

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, 2003
and 2002, and the related consolidated statements of operations,
stockholders equity, and cash flows for each of the three
years in the period ended December 31, 2003. 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
auditing standards generally accepted in the 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, 2003 and 2002, and the consolidated results of
its operations and its cash flows for each of the three years in
the period ended December 31, 2003 in conformity with
accounting principles generally accepted in the United States.
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.

As discussed in Note 1 to the consolidated
financial statements, in 2002 the Company adopted Statement of
Financial Accounting Standards No. 142, Goodwill and
Other Intangibles.



| |                      
| | ---------------------
| | /s/ ERNST & YOUNG LLP

Baltimore, Maryland

February 13, 2004


F-2



---



##### 



GENE LOGIC INC.

CONSOLIDATED BALANCE SHEETS

as of December 31, 2003 and
2002

|                                                      |                                                                                                                                                                            |                                                |        |          |         |  |        |          |         | 
|----------------------------------------------------- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ---------------------------------------------- | ------ | -------- | ------- |  | ------ | -------- | ------- | 
|                                                      |                                                                                                                                                                            | 2003                                           |        | 2002    
|                                                      |                                                                                                                                                                            |                                                |        |         
|                                                      |                                                                                                                                                                            |                                               
|                                                      |                                                                                                                                                                            | (in thousands,                                
|                                                      |                                                                                                                                                                            | except share data)                            
|ASSETS                                               
|Current assets:                                       |                                                                                                                                                                            |                                                |        |          |         |  |        |         
|                                                      | Cash and cash equivalents                                                                                                                                                  |                                                | $      | 48,718   |         |  | $      | 106,957  |        
|                                                      | Marketable securities available-for-sale                                                                                                                                   |                                                |        | 63,105   |         |  |        | 60,145   |        
|                                                      | Accounts receivable, net of allowance of $57
    in 2003                                                                                                                   |                                                |        | 8,484    |         |  |        | 2,377    |        
|                                                      | Unbilled services                                                                                                                                                          |                                                |        | 4,745    |         |  |        | 2,416    |        
|                                                      | Inventory, net                                                                                                                                                             |                                                |        | 4,980    |         |  |        | 8,936    |        
|                                                      | Prepaid expenses                                                                                                                                                           |                                                |        | 1,966    |         |  |        | 1,610    |        
|                                                      | Other current assets                                                                                                                                                       |                                                |        | 1,480    |         |  |        | 1,117    |        
|                                                      |                                                                                                                                                                            |                                                |        |          |         |  |        |         
|                                                      |                                                                                                                                                                            | Total current assets                           |        |          | 133,478 |  |        |          | 183,558 | 
|Property and equipment, net                           |                                                                                                                                                                            |                                                | 23,911 |          |         |  | 14,770 |         
|Long-term investments                                 |                                                                                                                                                                            |                                                | 4,239  |          |         |  | 5,268  |         
|Goodwill                                              |                                                                                                                                                                            |                                                | 45,707 |          |         |  | 2,677  |         
|Intangibles, net                                      |                                                                                                                                                                            |                                                | 19,950 |          |         |  | 21,094 |         
|Other assets                                          |                                                                                                                                                                            |                                                | 81     |          |         |  | 93     |         
|                                                      |                                                                                                                                                                            |                                                |        |          |         |  |        |         
|                                                      |                                                                                                                                                                            | Total assets                                   |        | $        | 227,366 |  |        | $        | 227,460 | 
|                                                      |                                                                                                                                                                            |                                                |        |          |         |  |        |         
|LIABILITIES AND STOCKHOLDERS
    EQUITY             
|Current liabilities:                                  |                                                                                                                                                                            |                                                |        |          |         |  |        |         
|                                                      | Accounts payable                                                                                                                                                           |                                                | $      | 6,676    |         |  | $      | 8,225    |        
|                                                      | Accrued expenses                                                                                                                                                           |                                                |        | 6,541    |         |  |        | 5,187    |        
|                                                      | Current portion of capital lease obligations                                                                                                                               |                                                |        | 124      |         |  |        |         |        
|                                                      | Current portion of long-term debt                                                                                                                                          |                                                |        | 492      |         |  |        | 40       |        
|                                                      | Deferred revenue                                                                                                                                                           |                                                |        | 8,630    |         |  |        | 6,425    |        
|                                                      |                                                                                                                                                                            |                                                |        |          |         |  |        |         
|                                                      |                                                                                                                                                                            | Total current liabilities                      |        |          | 22,463  |  |        |          | 19,877  | 
|Deferred revenue                                      |                                                                                                                                                                            |                                                | 2,346  |          |         |  | 1,363  |         
|Capital lease obligations, net of
    current portion |                                                                                                                                                                            |                                                | 340    |          |         |  |       |         
|Long-term debt, net of current portion                |                                                                                                                                                                            |                                                | 218    |          |         |  | 710    |         
|Other noncurrent liabilities                          |                                                                                                                                                                            |                                                | 2,410  |          |         |  | 1,072  |         
|                                                      |                                                                                                                                                                            |                                                |        |          |         |  |        |         
|                                                      |                                                                                                                                                                            | Total liabilities                              |        |          | 27,777  |  |        |          | 23,022  | 
|                                                      |                                                                                                                                                                            |                                                |        |          |         |  |        |         
|Commitments and contingencies                         |                                                                                                                                                                            |                                                |       |          |         |  |       |         
|Stockholders equity:                                 |                                                                                                                                                                            |                                                |        |          |         |  |        |         
|                                                      | Preferred stock, $.01 par value; 10,000,000
    shares authorized; and no shares issued and outstanding as of
    December 31, 2003 and 2002                               |                                                |        |         |         |  |        |         |        
|                                                      | Common stock, $.01 par value; 60,000,000 shares
    authorized; 31,131,198 and 27,056,487 shares issued and
    outstanding as of December 31, 2003 and 2002, respectively |                                                |        | 311      |         |  |        | 271      |        
|                                                      | Additional paid-in capital                                                                                                                                                 |                                                |        | 383,377  |         |  |        | 363,294  |        
|                                                      | Accumulated other comprehensive income                                                                                                                                     |                                                |        | 47       |         |  |        | 248      |        
|                                                      | Accumulated deficit                                                                                                                                                        |                                                |        | (184,146 | )       |  |        | (159,375 | )      
|                                                      |                                                                                                                                                                            |                                                |        |          |         |  |        |         
|                                                      |                                                                                                                                                                            | Total stockholders equity                     |        |          | 199,589 |  |        |          | 204,438 | 
|                                                      |                                                                                                                                                                            |                                                |        |          |         |  |        |         
|                                                      |                                                                                                                                                                            | Total liabilities and
    stockholders equity |        | $        | 227,366 |  |        | $        | 227,460 | 
|                                                      |                                                                                                                                                                            |                                                |        |          |         |  |        |         

The accompanying notes are an integral part of
these consolidated financial statements.

F-3



---



##### 



GENE LOGIC INC.

CONSOLIDATED STATEMENTS OF
OPERATIONS

for the Years Ended December 31, 2003,
2002 and 2001

|                                                                  |                                     |                                                                                           |        |        |         |      |        |        |         |   |        |        |         |  
|----------------------------------------------------------------- | ----------------------------------- | ----------------------------------------------------------------------------------------- | ------ | ------ | ------- | ---- | ------ | ------ | ------- | - | ------ | ------ | ------- | -
|                                                                  |                                     | 2003                                                                                      |        | 2002   |         | 2001
|                                                                  |                                     |                                                                                           |        |        |         |     
|                                                                  |                                     |                                                                                          
|                                                                  |                                     | (in thousands, except per share data)                                                    
|Revenue:                                                          |                                     |                                                                                           |        |        |         |      |        |        |         |   |        |       
|                                                                  | Information services                |                                                                                           | $      | 51,960 |         |      | $      | 54,848 |         |   | $      | 43,328 |        
|                                                                  | Contract study services             |                                                                                           |        | 17,559 |         |      |        |       |         |   |        |       |        
|                                                                  |                                     |                                                                                           |        |        |         |      |        |        |         |   |        |       
|                                                                  |                                     | Total revenue                                                                             |        |        | 69,519  |      |        |        | 54,848  |   |        |        | 43,328  |  
|Expenses:                                                         |                                     |                                                                                           |        |        |         |      |        |        |         |   |        |       
|                                                                  | Cost of contract study services     |                                                                                           |        | 15,399 |         |      |        |       |         |   |        |       |        
|                                                                  | Database production                 |                                                                                           |        | 50,067 |         |      |        | 57,941 |         |   |        | 55,452 |        
|                                                                  | Research and development            |                                                                                           |        | 2,091  |         |      |        | 2,367  |         |   |        | 3,577  |        
|                                                                  | Selling, general and administrative |                                                                                           |        | 22,198 |         |      |        | 19,734 |         |   |        | 19,323 |        
|                                                                  | Amortization of goodwill            |                                                                                           |        |       |         |      |        |       |         |   |        | 1,524  |        
|                                                                  |                                     |                                                                                           |        |        |         |      |        |        |         |   |        |       
|                                                                  |                                     | Total expenses                                                                            |        |        | 89,755  |      |        |        | 80,042  |   |        |        | 79,876  |  
|                                                                  |                                     |                                                                                           |        |        |         |      |        |        |         |   |        |       
|                                                                  |                                     | Loss from operations                                                                      |        |        | (20,236 | )    |        |        | (25,194 | ) |        |        | (36,548 | )
|Interest (income), net                                            |                                     |                                                                                           | (1,979 | )      |         |      | (3,139 | )      |         |   | (8,645 | )     
|Other (income) expense                                            |                                     |                                                                                           |       |        |         |      | (250   | )      |         |   | (83    | )     
|Write-down of equity investments                                  |                                     |                                                                                           | 4,268  |        |         |      | 753    |        |         |   | 2,495  |       
|                                                                  |                                     |                                                                                           |        |        |         |      |        |        |         |   |        |       
|                                                                  |                                     | Net loss before income tax expense and equity in
    net loss of unconsolidated investees |        |        | (22,525 | )    |        |        | (22,558 | ) |        |        | (30,315 | )
|Income tax expense                                                |                                     |                                                                                           | 2,246  |        |         |      | 1,492  |        |         |   | 533    |       
|                                                                  |                                     |                                                                                           |        |        |         |      |        |        |         |   |        |       
|                                                                  |                                     | Net loss before equity in net loss of
    unconsolidated investees                        |        |        | (24,771 | )    |        |        | (24,050 | ) |        |        | (30,848 | )
|Equity in net loss of
    unconsolidated investees                |                                     |                                                                                           |       |        |         |      |       |        |         |   | 2,322  |       
|                                                                  |                                     |                                                                                           |        |        |         |      |        |        |         |   |        |       
|                                                                  |                                     | Net loss                                                                                  |        | $      | (24,771 | )    |        | $      | (24,050 | ) |        | $      | (33,170 | )
|                                                                  |                                     |                                                                                           |        |        |         |      |        |        |         |   |        |       
|Basic and diluted net loss per share                              |                                     | $                                                                                         | (0.82  | )      |         | $    | (0.89  | )      |         | $ | (1.25  | )     
|                                                                  |                                     |                                                                                           |        |        |         |      |        |        |         |   |        |       
|Shares used in computing basic and diluted net
    loss per share |                                     |                                                                                           | 30,112 |        |         |      | 26,948 |        |         |   | 26,540 |       
|                                                                  |                                     |                                                                                           |        |        |         |      |        |        |         |   |        |       

The accompanying notes are an integral part of
these consolidated financial statements.

F-4



---



##### 



GENE LOGIC INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS
EQUITY

for the Years Ended December 31, 2001,
2002 and 2003

|                                                                             |  |                                         |            |            |  |             |     |               |  |        |         |             |  |               |      |   |  |   |      |   |  |   |          |   |  |   |         |  
|---------------------------------------------------------------------------- |  | --------------------------------------- | ---------- | ---------- |  | ----------- | --- | ------------- |  | ------ | ------- | ----------- |  | ------------- | ---- | - |  | - | ---- | - |  | - | -------- | - |  | - | ------- | -
|                                                                             |  |                                         |            |           
|                                                                             |  | Stockholders Equity                    |            |           
|                                                                             |  |                                         |            |           
|                                                                             |  |                                         |            |            |  | Accumulated |     |               |  |       
|                                                                             |  | Common Stock                            |            |            |  | Other       |     |               |  |       
|                                                                             |  |                                         |            | Additional |  |             |     | Comprehensive |  |        |         |            
|                                                                             |  | Number                                  |            | Par        |  | Paid-In     |     | Deferred      |  | Income |         | Accumulated |  | Comprehensive
|                                                                             |  | of Shares                               |            | Value      |  | Capital     |     | Compensation  |  | (Loss) |         | Deficit     |  | Loss         
|                                                                             |  |                                         |            |            |  |             |     |               |  |        |         |             |  |              
|                                                                             |  |                                         |            |           
|                                                                             |  | (in thousands, except number of shares) |            |           
|Balance at January 1, 2001                                                   |  |                                         | 26,111,561 |            |  | $           | 261 |               |  | $      | 356,347 |             |  | $             | (738 | ) |  | $ |     |   |  | $ | (102,155 | ) |  |   |         |  
|Issuance of common stock in connection with
    exercise of stock options    |  |                                         | 515,857    |            |  |             | 6   |               |  |        | 2,222   |             |  |               |     |   |  |   |     |   |  |   |         |   |  |   |         |  
|Issuance of common stock in connection with
    Employee Stock Purchase Plan |  |                                         | 111,213    |            |  |             | 1   |               |  |        | 1,838   |             |  |               |     |   |  |   |     |   |  |   |         |   |  |   |         |  
|Issuance of common stock in connection with
    exercise of a warrant        |  |                                         | 29,206     |            |  |             |    |               |  |        | 533     |             |  |               |     |   |  |   |     |   |  |   |         |   |  |   |         |  
|Net change in unrealized gains from marketable
    securities                |  |                                         |           |            |  |             |    |               |  |        |        |             |  |               |     |   |  |   | 17   |   |  |   |         |   |  | $ | 17      |  
|Acceleration of vesting of stock options                                     |  |                                         |           |            |  |             |    |               |  |        | 127     |             |  |               |     |   |  |   |     |   |  |   |         |   |  |   |         |  
|Amortization of deferred compensation                                        |  |                                         |           |            |  |             |    |               |  |        |        |             |  |               | 738  |   |  |   |     |   |  |   |         |   |  |   |         |  
|Net loss                                                                     |  |                                         |           |            |  |             |    |               |  |        |        |             |  |               |     |   |  |   |     |   |  |   | (33,170  | ) |  |   | (33,170 | )
|                                                                             |  |                                         |            |            |  |             |     |               |  |        |         |             |  |               |      |   |  |   |      |   |  |   |          |   |  |   |         |  
|Comprehensive loss                                                           |  |                                         |           |            |  |             |    |               |  |        |        |             |  |               |     |   |  |   |     |   |  |   |         |   |  | $ | (33,153 | )
|                                                                             |  |                                         |            |            |  |             |     |               |  |        |         |             |  |               |      |   |  |   |      |   |  |   |          |   |  |   |         |  
|Balance at December 31, 2001                                                 |  |                                         | 26,767,837 |            |  |             | 268 |               |  |        | 361,067 |             |  |               |     |   |  |   | 17   |   |  |   | (135,325 | ) |  |   |         |  
|Issuance of common stock in connection with
    exercise of stock options    |  |                                         | 149,873    |            |  |             | 2   |               |  |        | 881     |             |  |               |     |   |  |   |     |   |  |   |         |   |  |   |         |  
|Issuance of common stock in connection with
    Employee Stock Purchase Plan |  |                                         | 138,777    |            |  |             | 1   |               |  |        | 1,346   |             |  |               |     |   |  |   |     |   |  |   |         |   |  |   |         |  
|Net change in unrealized gains from marketable
    securities                |  |                                         |           |            |  |             |    |               |  |        |        |             |  |               |     |   |  |   | 231  |   |  |   |         |   |  | $ | 231     |  
|Net loss                                                                     |  |                                         |           |            |  |             |    |               |  |        |        |             |  |               |     |   |  |   |     |   |  |   | (24,050  | ) |  |   | (24,050 | )
|                                                                             |  |                                         |            |            |  |             |     |               |  |        |         |             |  |               |      |   |  |   |      |   |  |   |          |   |  |   |         |  
|Comprehensive loss                                                           |  |                                         |           |            |  |             |    |               |  |        |        |             |  |               |     |   |  |   |     |   |  |   |         |   |  | $ | (23,819 | )
|                                                                             |  |                                         |            |            |  |             |     |               |  |        |         |             |  |               |      |   |  |   |      |   |  |   |          |   |  |   |         |  
|Balance at December 31, 2002                                                 |  |                                         | 27,056,487 |            |  |             | 271 |               |  |        | 363,294 |             |  |               |     |   |  |   | 248  |   |  |   | (159,375 | ) |  |   |         |  
|Issuance of common stock in connection with
    exercise of stock options    |  |                                         | 28,425     |            |  |             |    |               |  |        | 118     |             |  |               |     |   |  |   |     |   |  |   |         |   |  |   |         |  
|Issuance of common stock in connection with
    Employee Stock Purchase Plan |  |                                         | 119,072    |            |  |             | 1   |               |  |        | 604     |             |  |               |     |   |  |   |     |   |  |   |         |   |  |   |         |  
|Issuance of common stock in connection with
    TherImmune acquisition       |  |                                         | 3,927,214  |            |  |             | 39  |               |  |        | 19,361  |             |  |               |     |   |  |   |     |   |  |   |         |   |  |   |         |  
|Net change in unrealized losses from marketable
    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 | ) |  |   |         |  
|                                                                             |  |                                         |            |            |  |             |     |               |  |        |         |             |  |               |      |   |  |   |      |   |  |   |          |   |  |   |         |  

The accompanying notes are an integral part of
these consolidated financial statements.

F-5



---



##### 



GENE LOGIC INC.

CONSOLIDATED STATEMENTS OF CASH
FLOWS

for the Years Ended December 31, 2003,
2002 and 2001

|                                                   |                                                                                    |                                                          |                                          |          |        |         |         |         |        |         |          |         |        |         |  
|-------------------------------------------------- | ---------------------------------------------------------------------------------- | -------------------------------------------------------- | ---------------------------------------- | -------- | ------ | ------- | ------- | ------- | ------ | ------- | -------- | ------- | ------ | ------- | -
|                                                   |                                                                                    | 2003                                                     |                                          | 2002     |        | 2001   
|                                                   |                                                                                    |                                                          |                                          |          |        |        
|                                                   |                                                                                    |                                                         
|                                                   |                                                                                    | (in thousands)                                          
|Cash Flows From Operating Activities:              |                                                                                    |                                                          |                                          |          |        |         |         |         |        |         |          |        
|                                                   | Net loss                                                                           |                                                          | $                                        | (24,771  | )      |         | $       | (24,050 | )      |         | $        | (33,170 | )     
|                                                   | Adjustments to reconcile net loss to net cash
    flows from operating activities: |                                                          |                                          |          |        |         |         |         |        |         |          |         |       
|                                                   |                                                                                    | Depreciation and amortization                            |                                          |          | 16,778 |         |         |         | 13,535 |         |          |         | 11,034 |        
|                                                   |                                                                                    | Amortization of goodwill                                 |                                          |          |       |         |         |         |       |         |          |         | 1,524  |        
|                                                   |                                                                                    | Amortization of deferred compensation                    |                                          |          |       |         |         |         |       |         |          |         | 738    |        
|                                                   |                                                                                    | Net loss from investment in
    unconsolidated investees |                                          |          |       |         |         |         |       |         |          |         | 2,322  |        
|                                                   |                                                                                    | Gain from the sale of equity investment                  |                                          |          |       |         |         |         | (250   | )       |          |         |       |        
|                                                   |                                                                                    | Write-down of equity investments                         |                                          |          | 4,268  |         |         |         | 753    |         |          |         | 2,495  |        
|                                                   |                                                                                    | Loss on abandonment of patent costs                      |                                          |          | 257    |         |         |         | 1,147  |         |          |         |       |        
|                                                   |                                                                                    | Other non-cash expense                                   |                                          |          |       |         |         |         |       |         |          |         | 127    |        
|                                                   |                                                                                    | Loss on disposal of property and equipment               |                                          |          | 56     |         |         |         | 71     |         |          |         | 45     |        
|Changes in Operating Assets and Liabilities:       |                                                                                    |                                                          |                                          |          |        |         |         |         |        |         |          |        
|                                                   |                                                                                    | Accounts receivable, net and
    unbilled services       |                                          |          | (2,532 | )       |         |         | (2,333 | )       |          |         | 745    |        
|                                                   |                                                                                    | Inventory, net                                           |                                          |          | 3,956  |         |         |         | (2,839 | )       |          |         | (3,802 | )      
|                                                   |                                                                                    | Prepaids and other assets                                |                                          |          | (150   | )       |         |         | 3,140  |         |          |         | 2,345  |        
|                                                   |                                                                                    | Accounts payable                                         |                                          |          | (5,056 | )       |         |         | (254   | )       |          |         | 2,572  |        
|                                                   |                                                                                    | Litigation settlement payable                            |                                          |          |       |         |         |         |       |         |          |         | (9,000 | )      
|                                                   |                                                                                    | Accrued expenses and other
    noncurrent liabilities    |                                          |          | 1,676  |         |         |         | 213    |         |          |         | (3,370 | )      
|                                                   |                                                                                    | Deferred revenue                                         |                                          |          | (2,282 | )       |         |         | (9,249 | )       |          |         | 8,235  |        
|                                                   |                                                                                    |                                                          |                                          |          |        |         |         |         |        |         |          |        
|                                                   |                                                                                    |                                                          | Net Cash Flows From Operating Activities |          |        | (7,800  | )       |         |        | (20,116 | )        |         |        | (17,160 | )
|                                                   |                                                                                    |                                                          |                                          |          |        |         |         |         |        |         |          |        
|Cash Flows From Investing Activities:              |                                                                                    |                                                          |                                          |          |        |         |         |         |        |         |          |        
|                                                   | Purchases of property and equipment                                                |                                                          |                                          | (4,157   | )      |         |         | (1,944  | )      |         |          | (8,349  | )     
|                                                   | Sale (Purchase) of equity investments                                              |                                                          |                                          |         |        |         |         | 1,250   |        |         |          | (753    | )     
|                                                   | Purchases of licenses and patent costs                                             |                                                          |                                          | (710     | )      |         |         | (1,810  | )      |         |          | (995    | )     
|                                                   | Software development costs                                                         |                                                          |                                          | (6,596   | )      |         |         | (7,141  | )      |         |          | (6,200  | )     
|                                                   | Database upgrade costs                                                             |                                                          |                                          |         |        |         |         | (3,885  | )      |         |          | (167    | )     
|                                                   | Repayments of (Increase in) notes receivable
    from employees                    |                                                          |                                          | 37       |        |         |         | 57      |        |         |          | (30     | )     
|                                                   | Cash paid to acquire TherImmune Research
    Corporation, net of cash acquired     |                                                          |                                          | (30,433  | )      |         |         |        |        |         |          |        |       
|                                                   | Proceeds from sale and maturity of marketable
    securities available-for-sale    |                                                          |                                          | 140,219  |        |         |         | 79,870  |        |         |          |        |       
|                                                   | Purchase of marketable securities
    available-for sale                           |                                                          |                                          | (143,380 | )      |         |         | (70,239 | )      |         |          | (69,528 | )     
|                                                   |                                                                                    |                                                          |                                          |          |        |         |         |         |        |         |          |        
|                                                   |                                                                                    |                                                          | Net Cash Flows From Investing Activities |          |        | (45,020 | )       |         |        | (3,842  | )        |         |        | (86,022 | )
|                                                   |                                                                                    |                                                          |                                          |          |        |         |         |         |        |         |          |        
|Cash Flows From Financing Activities:              |                                                                                    |                                                          |                                          |          |        |         |         |         |        |         |          |        
|                                                   | Proceeds from issuance of Common Stock                                             |                                                          |                                          | 723      |        |         |         | 2,230   |        |         |          | 4,067   |       
|                                                   | Proceeds from exercise of warrant                                                  |                                                          |                                          |         |        |         |         |        |        |         |          | 534     |       
|                                                   | Proceeds from issuance of note payable                                             |                                                          |                                          |         |        |         |         | 450     |        |         |          |        |       
|                                                   | Cash used to repay TherImmune Research
    Corporation debt                        |                                                          |                                          | (6,017   | )      |         |         |        |        |         |          |        |       
|                                                   | Repayments of capital lease obligations and
    equipment loans                    |                                                          |                                          | (125     | )      |         |         | (38     | )      |         |          | (2,628  | )     
|                                                   |                                                                                    |                                                          |                                          |          |        |         |         |         |        |         |          |        
|                                                   |                                                                                    |                                                          | Net Cash Flows From Financing Activities |          |        | (5,419  | )       |         |        | 2,642   |          |         |        | 1,973   |  
|                                                   |                                                                                    |                                                          |                                          |          |        |         |         |         |        |         |          |        
|Net Decrease in Cash and Cash Equivalents          |                                                                                    |                                                          | (58,239                                  | )        |        |         | (21,316 | )       |        |         | (101,209 | )      
|Cash and Cash Equivalents, beginning
    of period |                                                                                    |                                                          | 106,957                                  |          |        |         | 128,273 |         |        |         | 229,482  |        
|                                                   |                                                                                    |                                                          |                                          |          |        |         |         |         |        |         |          |        
|Cash and Cash Equivalents, end of period           |                                                                                    | $                                                        | 48,718                                   |          |        | $       | 106,957 |         |        | $       | 128,273  |        
|                                                   |                                                                                    |                                                          |                                          |          |        |         |         |         |        |         |          |        
|Supplemental Disclosure:                           |                                                                                    |                                                          |                                          |          |        |         |         |         |        |         |          |        
|                                                   | Taxes paid                                                                         |                                                          | $                                        | 2,209    |        |         | $       | 1,316   |        |         | $        | 463     |       
|                                                   |                                                                                    |                                                          |                                          |          |        |         |         |         |        |         |          |        
|                                                   | Interest paid                                                                      |                                                          | $                                        | 48       |        |         | $       | 16      |        |         | $        | 153     |       
|                                                   |                                                                                    |                                                          |                                          |          |        |         |         |         |        |         |          |        
|Non-Cash Transactions:                             |                                                                                    |                                                          |                                          |          |        |         |         |         |        |         |          |        
|                                                   | Issuance of Common Stock in TherImmune Research
    Corporation acquisition        |                                                          | $                                        | 19,400   |        |         | $       |        |        |         | $        |        |       
|                                                   |                                                                                    |                                                          |                                          |          |        |         |         |         |        |         |          |        
|                                                   | Equity investments received as payments for
    GeneExpress subscriptions          |                                                          | $                                        | 3,186    |        |         | $       | 1,000   |        |         | $        |        |       
|                                                   |                                                                                    |                                                          |                                          |          |        |         |         |         |        |         |          |        
|                                                   | Promissory note received from sale
    of investment                               |                                                          | $                                        |         |        |         | $       |        |        |         | $        | 2,654   |       
|                                                   |                                                                                    |                                                          |                                          |          |        |         |         |         |        |         |          |        
|                                                   | Spin-off of assets to unconsolidated investee                                      |                                                          | $                                        |         |        |         | $       |        |        |         | $        | 871     |       
|                                                   |                                                                                    |                                                          |                                          |          |        |         |         |         |        |         |          |        

The accompanying notes are an integral part of
these consolidated financial statements.

F-6



---



##### 



GENE LOGIC INC.



NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS


December 31, 2003, 2002 and
2001


(in thousands, except share and per share
data)




|         |                                                                
|-------- | ---------------------------------------------------------------
|Note 1  | Organization and summary of significant
    accounting policies





| |                        
| | -----------------------
| | Description of Business

Gene Logic Inc. and its wholly owned subsidiary,
Gene Logic Laboratories Inc., formerly TherImmune Research
Corporation, (collectively the Company) is a leading
drug development services company providing a wide range of
discovery and development services to pharmaceutical and
biotechnology companies worldwide, as well as U.S. Government
entities. The Companys services are organized into two
business segments: information services and contract study
services. The information services business is based on the
Companys gene expression reference database, the
GeneExpress System, for research related to drug discovery and
optimization. The contract study services business consists of
services related to drug development, including primarily
preclinical toxicity and pharmacology studies and related
laboratory services and, to a lesser extent, Phase I clinical
trial services.



| |                                                          
| | ---------------------------------------------------------
| | 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., later
renamed Gene Logic Laboratories Inc. (Gene Logic
Labs). 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
Labs operating results since the acquisition date. The
consolidated financial statements for the year ended
December 31, 2001 include the accounts of Gene Logic Inc.
and its wholly owned subsidiary, Gene Logic Acquisition Corp.
(GLAC). The Company and GLAC were merged in the
fourth quarter of 2001. 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 income (loss) is the total net income
(loss) plus all changes in equity during the period except
those changes resulting from investment by owners and
distribution to owners. Total comprehensive loss was $24,972,
$23,819 and $33,153 for the years ended December 31, 2003,
2002 and 2001, 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 U.S. 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

F-7



---



##### 



GENE LOGIC INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

investment grade credit ratings and places
restrictions on their terms, geographic origin and
concentrations by type and issuer.



| |                          
| | -------------------------
| | 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:

|                   |  |      |        |      |  |   |         | 
|------------------ |  | ---- | ------ | ---- |  | - | ------- | 
|                   |  | 2003 |        | 2002
|                   |  |      |        |     
|Cash               |  | $    | 3,258  |      |  | $ | 2,306   | 
|Money market funds |  |      | 11,489 |      |  |   | 104,651 | 
|Commercial paper   |  |      | 33,971 |      |  |   |        | 
|                   |  |      |        |      |  |   |         | 
|Total              |  | $    | 48,718 |      |  | $ | 106,957 | 
|                   |  |      |        |      |  |   |         | 



| |                                             
| | --------------------------------------------
| | 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 losses reported as 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 2003, marketable securities were sold for total
proceeds of $65,114, resulting in realized gains and losses of
$364 and $37, respectively. In 2002 and 2001, realized gains
and/or losses resulting from the sale of marketable securities
were immaterial.

As of December 31, 2003, the Companys
investment portfolio consisted of commercial paper, corporate
bonds 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 2005. All marketable
securities with a gross unrealized loss as of December 31,
2003 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.
As of December 31, 2003, 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:

|                                           |  |           |        |            |  |            |    |            |  |           |     |            |  |            |        |            |  |   |        |  |  |   |     |  |  |   |   |  |  |   |        | 
|------------------------------------------ |  | --------- | ------ | ---------- |  | ---------- | -- | ---------- |  | --------- | --- | ---------- |  | ---------- | ------ | ---------- |  | - | ------ |  |  | - | --- |  |  | - | - |  |  | - | ------ | 
|                                           |  |           |        |           
|                                           |  | 2003      |        | 2002      
|                                           |  |           |        |           
|                                           |  |           |        | Gross      |  | Gross      |    |            |  |           |     | Gross      |  | Gross      |        |           
|                                           |  | Amortized |        | Unrealized |  | Unrealized |    |            |  | Amortized |     | Unrealized |  | Unrealized |        |           
|                                           |  | Cost      |        | Gains      |  | Losses     |    | Fair Value |  | Cost      |     | Gains      |  | Losses     |        | Fair Value
|                                           |  |           |        |            |  |            |    |            |  |           |     |            |  |            |        |           
|Commercial paper                           |  | $         | 29,964 |            |  | $          |   |            |  | $         | (30 | )          |  | $          | 29,934 |            |  | $ |       |  |  | $ |    |  |  | $ |  |  |  | $ |       | 
|Corporate bonds                            |  |           | 5,004  |            |  |            |   |            |  |           | (1  | )          |  |            | 5,003  |            |  |   | 7,769  |  |  |   | 63  |  |  |   |  |  |  |   | 7,832  | 
|U.S. Government securities                 |  |           |       |            |  |            |   |            |  |           |    |            |  |            |       |            |  |   | 4,998  |  |  |   | 53  |  |  |   |  |  |  |   | 5,051  | 
|U.S. Government mortgage-backed securities |  |           | 28,090 |            |  |            | 81 |            |  |           | (3  | )          |  |            | 28,168 |            |  |   | 47,130 |  |  |   | 132 |  |  |   |  |  |  |   | 47,262 | 
|                                           |  |           |        |            |  |            |    |            |  |           |     |            |  |            |        |            |  |   |        |  |  |   |     |  |  |   |   |  |  |   |        | 
|Total                                      |  | $         | 63,058 |            |  | $          | 81 |            |  | $         | (34 | )          |  | $          | 63,105 |            |  | $ | 59,897 |  |  | $ | 248 |  |  | $ |  |  |  | $ | 60,145 | 
|                                           |  |           |        |            |  |            |    |            |  |           |     |            |  |            |        |            |  |   |        |  |  |   |     |  |  |   |   |  |  |   |        | 

F-8



---



##### 



GENE LOGIC INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)





| |                                                
| | -----------------------------------------------
| | 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 receivables 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 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 receivables and the allowance
for doubtful accounts.



| |          
| | ---------
| | 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; 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:

|                              |  |      |       |      |  |   |       |  
|----------------------------- |  | ---- | ----- | ---- |  | - | ----- | -
|                              |  | 2003 |       | 2002
|                              |  |      |       |     
|Microarrays                   |  | $    | 1,243 |      |  | $ | 3,695 |  
|Laboratory reagents           |  |      | 866   |      |  |   | 803   |  
|Tissue samples                |  |      | 3,865 |      |  |   | 5,018 |  
|                              |  |      |       |      |  |   |       |  
|                              |  |      | 5,974 |      |  |   | 9,516 |  
|Less  tissue sample reserves |  |      | (994  | )    |  |   | (580  | )
|                              |  |      |       |      |  |   |       |  
|Inventory, net                |  | $    | 4,980 |      |  | $ | 8,936 |  
|                              |  |      |       |      |  |   |       |  



| |                       
| | ----------------------
| | 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 years                                   
|Computer and office equipment |  | 1-5 years                                  
|Laboratory equipment          |  | 5-10 years                                 
|Leasehold improvements        |  | Lesser of the lease term or the useful life



| |                      
| | ---------------------
| | Long-Term Investments

The Company has made equity investments in
companies whose businesses may be complementary to the
Companys business. Investments in which the Company has
the ability to exercise significant influence over the investee,
but less than a controlling voting interest, are accounted for
under the equity method of accounting. Under the equity method
of accounting, the Companys share of the investees
earnings or losses are included in operations to the extent the
Company has an investment in the investee recorded as an asset.
The Company accounts for its other investments 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.

F-9



---



##### 



GENE LOGIC INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



| |         
| | --------
| | Goodwill

Goodwill, from the acquisitions of TherImmune in
2003 and Oncormed, Inc. in 1998, represents the excess of the
purchase price over the fair value of the net assets acquired.

The Company adopted the provisions of Financial
Accounting Standards Board Statement No. 142,
Goodwill and Other Intangible Assets (SFAS
142) effective January 1, 2002 and, as a result,
discontinued the amortization of goodwill; therefore, since
January 1, 2002, no amortization has been recorded. Based
on the initial impairment test performed as of January 1,
2002 and the subsequent annual impairment tests at
October 1, 2003 and 2002, no impairment existed in the
carrying value of goodwill.



| |                             
| | ----------------------------
| | Intangibles and Other Assets

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 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 $257 and
$1,147 during 2003 and 2002, 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 our customers. Software
development costs are being amortized, over their expected
useful life of three years, 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 is being amortized on a straight-line basis
over 24 months, which is the Companys estimate of the
aggregate expected term of its customer relationships at the
date of acquisition.

Database upgrade costs include purchases of data
to integrate into the Companys GeneExpress System 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 three and two years, respectively, upon release
of the update.



| |                                    
| | -----------------------------------
| | Impairment of Long-Lived
    Assets

Long-lived assets, consisting principally of
property and equipment, long-term investments and intangible
assets (including licenses, patent costs, software development
costs, customer relationships and database upgrade costs), are
evaluated for possible impairment through a review of
undiscounted expected future cash flows. 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.

F-10



---



##### 



GENE LOGIC INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)





| |                         
| | ------------------------
| | Research and Development

Research and development costs are charged to
operations when incurred or acquired.



| |                    
| | -------------------
| | Database Production

Costs related to the acquisition and processing
of tissues and overhead expenses needed to support the
GeneExpress System are expensed as incurred. These costs include
direct labor, microarrays, tissues, licensing agreements,
reagents, outside consultants and overhead.



| |                    
| | -------------------
| | Revenue Recognition

Information services revenue consists primarily
of subscription fees earned under subscription agreements for
all or parts of the Companys gene expression reference
database, the GeneExpress System. Each of the subscription
agreements with our GeneExpress System customers is typically
for a specific multi-year term. The Companys revenue from
such subscription agreements is recognized ratably over the
period during which the customer has access to the GeneExpress
System. 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
include a right of early termination (which, in some instances,
is subject to conditions) by the customer, without penalty, on a
specified date prior to the normal expiration of the term. If an
agreement has a right of early termination, revenue is
recognized ratably over the subscription term up to the possible
date of early termination, based on subscription fees earned
under the agreement through the possible date of early
termination. If such early termination does not occur, the
balance of the subscription fees earned under the agreement is
recognized as revenue ratably over the remaining term of the
agreement.

Revenue recognized for multiple element contracts
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 such evidence of fair value for any element of the
arrangement does not exist, revenue from such element is
deferred until such time that evidence of fair value does exist
or is recognized ratably over the longest performance period of
the remaining elements.

Contract study 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 U.S. Government entities.
Revenue is recognized on fixed price contracts as services are
performed, based primarily upon the percentage of hours worked
(including subcontractor hours) compared to the total estimated
hours for the contract. 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 indirect costs and
an allocable portion of the fee earned. Billings under
government contracts are based on provisional billing rates
which permit recovery of fringe benefits, overhead and general
and administrative expenses not exceeding certain limits. These
indirect expense rates are subject to review by the U.S.
Government on an annual basis. When the final determination of
the allowable rates for any year has been made, billings may be
adjusted accordingly. Cost and profit estimates are reviewed
periodically as the work progresses, and adjustments, if needed,
are reflected in the period in which the estimates are revised.
Provisions for estimated losses on uncompleted contracts are
made in the period in which such losses are determined.

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.

F-11



---



##### 



GENE LOGIC INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)





| |             
| | ------------
| | 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
antidilutive.



| |                   
| | ------------------
| | Stock Option Plans

At December 31, 2003, the Company has two
stock-based employee compensation plans. The Company accounts
for these plans under the recognition and measurement principles
of Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued to Employees (APB
25), and related interpretations. Under APB 25,
compensation expense for grants that are compensatory are
recorded over the vesting period only to the extent that the
fair value of the underlying stock on the date of grant exceeds
the exercise or acquisition price of the stock or stock-based
award. Stock options granted under the Companys 1997
Equity Incentive Plan are considered compensatory and are
granted with an exercise price equal to the fair value on the
grant date; stock issued under the Employee Stock Purchase Plan
is considered non-compensatory under APB 25 and is purchased at
85% of the lesser of either the fair value of the shares at the
time of purchase or the fair value at the employees
eligibility date.

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:

|                                                                                                              |             |      |         |       |   |      |         |       |   |   |         |       |  
|------------------------------------------------------------------------------------------------------------- | ----------- | ---- | ------- | ----- | - | ---- | ------- | ----- | - | - | ------- | ----- | -
|                                                                                                              |             | 2003 |         | 2002  |   | 2001
|                                                                                                              |             |      |         |       |   |     
|Net loss, as reported                                                                                         |             | $    | (24,771 | )     |   | $    | (24,050 | )     |   | $ | (33,170 | )    
|Add: Stock-based employee compensation expense
    included in reported net loss                              |             |      |        |       |   |      |        |       |   |   | 738     |      
|Deduct: Stock-based employee compensation expense
    determined under fair value based method for all awards |             |      | (8,290  | )     |   |      | (15,336 | )     |   |   | (25,821 | )    
|                                                                                                              |             |      |         |       |   |      |         |       |   |   |         |      
|Pro forma net loss                                                                                            |             | $    | (33,061 | )     |   | $    | (39,386 | )     |   | $ | (58,253 | )    
|                                                                                                              |             |      |         |       |   |      |         |       |   |   |         |      
|Basic and diluted net loss per share:                                                                         |             |      |         |       |   |      |         |       |   |   |         |      
|                                                                                                              | As reported |      | $       | (0.82 | ) |      | $       | (0.89 | ) |   | $       | (1.25 | )
|                                                                                                              | Pro forma   |      | $       | (1.10 | ) |      | $       | (1.47 | ) |   | $       | (2.19 | )

F-12



---



##### 



GENE LOGIC INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

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, 2003, 2002 and 2001,
with the following assumptions:

|                        |  |                |  |                |  |               
|----------------------- |  | -------------- |  | -------------- |  | --------------
|                        |  | 2003           |  | 2002           |  | 2001          
|                        |  |                |  |                |  |               
|Expected volatility     |  | 69%            |  | 71%            |  | 76%           
|Risk-free interest rate |  | 1.61% to 2.58% |  | 2.04% to 4.42% |  | 2.99% to 4.69%
|Expected lives          |  | 3 years        |  | 3 years        |  | 3 years       
|Dividend rate           |  | 0%             |  | 0%             |  | 0%            

Reclassifications

Certain reclassifications have been made to the
prior years financial statements to conform to the current
year presentation.

New Accounting
Pronouncements

In December 2003, the Securities and
Exchange Commission (SEC) issued Staff Accounting
Bulletin (SAB) No. 104, Revenue
Recognition (SAB 104), which supercedes SAB
No. 101, Revenue Recognition in Financial
Statements (SAB 101). The primary purpose of
SAB 104 is to rescind accounting guidance contained in SAB 101
related to multiple element revenue arrangements, superceded as
a result of the issuance of Emerging Issues Task Force
(EITF) Issue No. 00-21. Additionally, SAB 104
rescinds the SECs Revenue Recognition in Financial
Statements Frequently Asked Questions and Answers
(the FAQ) issued with SAB 101 that had been codified
in SEC Topic 13, Revenue Recognition. Selected
portions of the FAQ have been incorporated into SAB 104. The
adoption of SAB 104 did not have an impact on the Companys
consolidated financial position or results of operations.

The EITF Issue No. 00-21, Accounting
for Revenue Arrangement with Multiple Deliverables
(Issue No. 00-21), addresses circumstances
involving the delivery or performance of multiple products,
services, and/or rights to use assets, and for which performance
may occur at different points in time or over different periods
of time. The issue also addresses whether the different
revenue-generating activities, or deliverables, are sufficiently
separable, and there exists sufficient evidence of their fair
values to separately account for some or all of the
deliverables. The issue applies to all contractual arrangements
under which a vendor will perform multiple revenue-generating
activities. Issue No. 00-21 is effective for all revenue
arrangements entered into in fiscal periods beginning after
June 15, 2003, with early adoption permitted. The Company
adopted this guidance prospectively for all revenue arrangements
entered into after January 1, 2003, and the impact of
adoption was not material to the Companys results of
operations.

In January 2003, the Financial Accounting
Standards Board issued Interpretation No. 46,
Consolidation of Variable Interest Entities
(Interpretation No. 46). The objective of
Interpretation No. 46 is to improve financial reporting by
companies involved with variable interest entities. The
Interpretation requires variable interest entities to be
consolidated by a company if that company is subject to a
majority of the risk of loss from the variable interest
entitys activities or is entitled to receive a majority of
the entitys residual returns or both. Interpretation
No. 46 is effective immediately for arrangements entered
into or modified after January 31, 2003 and will be applied
to all arrangements entered into or modified before
February 1, 2003 during the quarter ending March 31,
2004. The initial adoption of Interpretation No. 46 for
arrangements entered into or modified after January 31,
2003 did not have any impact on the Companys financial
position or results of operations. The Company is still
evaluating the impact of Interpretation No. 46 for all
arrangements entered into prior to February 1, 2003;
however, the Company does not anticipate that the impact of
these arrangements will have a material effect on the
Companys financial position or results of operations.

F-13



---



##### 



GENE LOGIC INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

In May 2003, the Financial Accounting
Standards Board issued Statement No. 150, Accounting for
Certain Financial Instruments with Characteristics of Both
Liabilities and Equity (Statement
No. 150). Statement No. 150 established
standards for how an issuer classifies and measures certain
financial instruments with characteristics of both liabilities
and equity. Statement No. 150 is effective for financial
instruments entered into or modified after May 31, 2003, and
otherwise is effective at the beginning of the first interim
period beginning after June 15, 2003. The Company adopted
Statement No. 150 on July 1, 2003, with no effect on
the Companys financial position or results of operations.

Note 2  Acquisition of
TherImmune

On February 25, 2003, the Company announced
an agreement to acquire TherImmune, a privately held contract
study services company, in order for the Company to: 1) expand
its drug discovery and development services capabilities; and 2)
enhance its revenue growth and accelerate the time to
profitability.

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. Approximately 5% of the total consideration is being held
in escrow at least through October 1, 2004 to satisfy
potential indemnification obligations of the TherImmune
securityholders.

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                                              |  | $ | 8,103   |  
|Property and equipment                                      |  |   | 11,130  |  
|Customer relationships (estimated useful life,
    2 years) |  |   | 2,500   |  
|Liabilities assumed                                         |  |   | (13,682 | )
|Goodwill (allocated to contract study
    services segment) |  |   | 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 and is based on the historical statements of Gene
Logic and TherImmune during the years ended December 31:

|                                     |  |      |         |      |  |   |         |  
|------------------------------------ |  | ---- | ------- | ---- |  | - | ------- | -
|                                     |  | 2003 |         | 2002
|                                     |  |      |         |     
|Total revenue                        |  | $    | 75,218  |      |  | $ | 79,381  |  
|Net loss                             |  |      | (26,080 | )    |  |   | (25,269 | )
|                                    
|Basic and diluted net loss per share |  | $    | (0.84   | )    |  | $ | (0.82   | )
|Weighted average shares outstanding  |  |      | 31,081  |      |  |   | 30,875  |  

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 each period presented.

F-14



---



##### 



GENE LOGIC INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



Note 3  Property and
equipment


Property and equipment includes the following as
of December 31:

|                                                     |  |      |         |      |  |   |         |  
|---------------------------------------------------- |  | ---- | ------- | ---- |  | - | ------- | -
|                                                     |  | 2003 |         | 2002
|                                                     |  |      |         |     
|Furniture                                            |  | $    | 2,062   |      |  | $ | 1,495   |  
|Computer and office equipment                        |  |      | 13,094  |      |  |   | 13,142  |  
|Laboratory equipment                                 |  |      | 15,400  |      |  |   | 9,550   |  
|Leasehold improvements                               |  |      | 15,945  |      |  |   | 8,269   |  
|                                                     |  |      |         |      |  |   |         |  
|                                                     |  |      | 46,501  |      |  |   | 32,456  |  
|Less  accumulated depreciation
    and amortization |  |      | (22,590 | )    |  |   | (17,686 | )
|                                                     |  |      |         |      |  |   |         |  
|Property and equipment, net                          |  | $    | 23,911  |      |  | $ | 14,770  |  
|                                                     |  |      |         |      |  |   |         |  

Depreciation expense was $6,094, $5,451 and
$5,405 for the years ended December 31, 2003, 2002 and
2001, respectively.

Note 4  Long-term
investments

During 2000, the Company purchased a 26.7% voting
stock interest in Neuralstem, a privately held unconsolidated
investee. The investment was accounted for under the equity
method of accounting. Through April 30, 2001, the Company
recorded its equity share of losses of Neuralstem and
intercompany transactions were eliminated in the accompanying
financial statements. Effective April 30, 2001, the
Companys voting stock interest was reduced to 14.8% and
the Company began accounting for its investment in Neuralstem
under the cost method of accounting. The financial statements do
not reflect any additional share of Neuralstems losses or
elimination of intercompany sales and expenses after such date.
The Companys equity share of losses of Neuralstem was
$1,492 through April 30, 2001. During 2003 and 2001, the
Company recorded a $4,268 and $2,495 write-down of its
investment in Neuralstem, respectively, due to a decline in
Neuralstems estimated market value that was deemed to be
other than temporary. The 2003 write-down represented the
remaining book value of this investment.

In November 2003, MetriGenix, Inc.
(MetriGenix) sold substantially all of its assets
for cash to a privately held company (the Buyer).
The proceeds of sale were used to satisfy MetriGenixs then
known liabilities. In connection with the sale, the Company
consented to the assignment to Buyer of a fully paid BioExpress
subscription with a term through December 31, 2006, which
thereafter renews automatically on an annual basis unless either
party elects not to renew, under which 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 Buyer, valued at $2,911, representing 15.3% of the
equity of the Buyer, 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 Buyer. If the
Companys equity interest is diluted below 15%, the Buyer
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 Buyer. 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 the Buyer using the cost method
of accounting and is recording the investment value, $3,186, as
revenue over the estimated term of the subscription agreement of
approximately three years. During 2003, the Company recorded $96
in revenue relating to the subscription agreement.

During 2001, the Company recorded 100% of
MetriGenixs losses up to the value of the Companys
contribution, $871, using the equity method of accounting. As
the Companys investment in MetriGenix has been reduced to
zero at December 31, 2001 and there is no guarantee or
commitment to provide future

F-15



---



##### 



GENE LOGIC INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

funding, the Company does not expect to record
additional losses related to this investment in the future. The
Company also entered into certain agreements with MetriGenix
including a subscription to GeneExpress and to provide certain
administrative services and subleased space. No revenue was
recorded related to the subscription in 2002 and 2001. In 2003,
2002 and 2001, the Company received fees of $678, $793 and $256,
respectively, for the reimbursement of costs associated with
providing administrative services and subleased space.

Under an agreement with Avalon Pharmaceuticals,
Inc. (Avalon), the Company received convertible
preferred stock in 1999 and 2002 as partial payment for a
subscription to the GeneExpress System. The Company accounts for
this investment under the cost method of accounting, as the
Company holds less than 10% of Avalons voting stock
outstanding and does not exert significant influence over
Avalon. During 2002, the Company sold 50% of its Avalon holdings
for a gain of $250. At December 31, 2003 and 2002, the
value of the Companys investment in Avalon was $1,000.

During 2002, the Company recorded a $753
write-down of its investment in Metabometrix, Ltd.
(Metabometrix) due to a decline in
Metabometrix estimated market value that was deemed to be
other than temporary. The Company accounts for this investment
under the cost method of accounting, as the Company holds less
than 10% of Metabometrixs voting stock outstanding and
does not exert significant influence over Metabometrix. The 2002
write-down represented the remaining book value of this
investment.

Note 5  Intangible assets

As of January 1, 2002, the Company adopted
SFAS 142, which addresses the financial accounting and reporting
standards for goodwill and other intangible assets. This
Standard requires that goodwill be separately disclosed from
other intangible assets in the balance sheet, and no longer be
amortized, but tested for impairment on a periodic basis.

In accordance with SFAS 142, the Company
discontinued the amortization of goodwill effective
January 1, 2002. A reconciliation of previously reported
net loss and net loss per share to the pro forma amounts
adjusted for the exclusion of goodwill amortization for the
years ended December 31 is as follows:

|                                      |  |      |         |      |  |      |         |   |  |   |         |  
|------------------------------------- |  | ---- | ------- | ---- |  | ---- | ------- | - |  | - | ------- | -
|                                      |  | 2003 |         | 2002 |  | 2001
|                                      |  |      |         |      |  |     
|Reported net loss                     |  | $    | (24,771 | )    |  | $    | (24,050 | ) |  | $ | (33,170 | )
|Add: Goodwill amortization            |  |      |        |      |  |      |        |   |  |   | 1,524   |  
|                                      |  |      |         |      |  |      |         |   |  |   |         |  
|Pro forma adjusted net loss           |  | $    | (24,771 | )    |  | $    | (24,050 | ) |  | $ | (31,646 | )
|                                      |  |      |         |      |  |      |         |   |  |   |         |  
|Basic and diluted net loss per share: |  |      |         |      |  |      |         |   |  |   |         |  
|Reported net loss                     |  | $    | (0.82   | )    |  | $    | (0.89   | ) |  | $ | (1.25   | )
|Add: Goodwill amortization            |  |      |        |      |  |      |        |   |  |   | 0.06    |  
|                                      |  |      |         |      |  |      |         |   |  |   |         |  
|Pro forma adjusted net loss           |  | $    | (0.82   | )    |  | $    | (0.89   | ) |  | $ | (1.19   | )
|                                      |  |      |         |      |  |      |         |   |  |   |         |  

F-16



---



##### 



GENE LOGIC INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Information regarding the Companys other
intangible assets at December 31 is as follows:

|                               |                            |      |        |        |  |   |        |        | 
|------------------------------ | -------------------------- | ---- | ------ | ------ |  | - | ------ | ------ | 
|                               |                            | 2003 |        | 2002  
|                               |                            |      |        |       
|Carrying amount:               |                            |      |        |        |  |   |        |       
|                               | Licenses                   |      | $      | 9,190  |  |   | $      | 8,966  | 
|                               | Patent costs               |      |        | 2,448  |  |   |        | 2,228  | 
|                               | Software development costs |      |        | 19,937 |  |   |        | 17,998 | 
|                               | Customer relationships     |      |        | 2,500  |  |   |        |       | 
|                               | Database upgrade costs     |      |        | 4,053  |  |   |        | 5,738  | 
|                               |                            |      |        |        |  |   |        |       
|Total carrying amount          |                            | $    | 38,128 |        |  | $ | 34,930 |       
|                               |                            |      |        |        |  |   |        |       
|Accumulated amortization:      |                            |      |        |        |  |   |        |       
|                               | Licenses                   |      | $      | 6,064  |  |   | $      | 4,491  | 
|                               | Patent costs               |      |        | 174    |  |   |        | 129    | 
|                               | Software development costs |      |        | 7,796  |  |   |        | 6,773  | 
|                               | Customer relationships     |      |        | 937    |  |   |        |       | 
|                               | Database upgrade costs     |      |        | 3,207  |  |   |        | 2,443  | 
|                               |                            |      |        |        |  |   |        |       
|Total accumulated amortization |                            | $    | 18,178 |        |  | $ | 13,836 |       
|                               |                            |      |        |        |  |   |        |       
|Net carrying value:            |                            |      |        |        |  |   |        |       
|                               | Licenses                   |      | $      | 3,126  |  |   | $      | 4,475  | 
|                               | Patent costs               |      |        | 2,274  |  |   |        | 2,099  | 
|                               | Software development costs |      |        | 12,141 |  |   |        | 11,225 | 
|                               | Customer relationships     |      |        | 1,563  |  |   |        |       | 
|                               | Database upgrade costs     |      |        | 846    |  |   |        | 3,295  | 
|                               |                            |      |        |        |  |   |        |       
|Total net carrying value       |                            | $    | 19,950 |        |  | $ | 21,094 |       
|                               |                            |      |        |        |  |   |        |       

Amortization expense for the years ended
December 31, 2003, 2002 and 2001 was $10,684, $8,084 and
$5,629, respectively, including amortization of software
development costs of $5,680, $4,349 and $2,282, respectively.
Estimated amortization expense for existing intangible assets
for each of the five succeeding years ending December 31
will be as follows:

|     |  |   |       | 
|---- |  | - | ----- | 
|2004 |  | $ | 9,852 | 
|2005 |  |   | 5,577 | 
|2006 |  |   | 2,180 | 
|2007 |  |   | 58    | 
|2008 |  |   | 22    | 

F-17



---



##### 



GENE LOGIC INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Note 6  Accrued expenses

Accrued expenses consist of the following as of
December 31:

|                                  |  |      |       |      |  |   |       | 
|--------------------------------- |  | ---- | ----- | ---- |  | - | ----- | 
|                                  |  | 2003 |       | 2002
|                                  |  |      |       |     
|Property additions                |  | $    | 1,998 |      |  | $ | 89    | 
|Professional fees                 |  |      | 511   |      |  |   | 804   | 
|Accrued vacation                  |  |      | 1,715 |      |  |   | 1,433 | 
|Payroll, taxes and other benefits |  |      | 2,167 |      |  |   | 2,713 | 
|Consulting fees                   |  |      | 150   |      |  |   | 148   | 
|                                  |  |      |       |      |  |   |       | 
|Accrued expenses                  |  | $    | 6,541 |      |  | $ | 5,187 | 
|                                  |  |      |       |      |  |   |       | 

Note 7  Long-term
debt

Long-term debt as of December 31 consists of
the following:

|                                                                                                                    |  |      |      |      |  |   |     |  
|------------------------------------------------------------------------------------------------------------------- |  | ---- | ---- | ---- |  | - | --- | -
|                                                                                                                    |  | 2003 |      | 2002
|                                                                                                                    |  |      |      |     
|Facility loan  bearing interest
    at 5.0% per annum and due in quarterly installments through
    September 2009 |  | $    | 260  |      |  | $ | 300 |  
|Facility loan  bearing interest
    at 4.5% and is due upon demand                                                 |  |      | 450  |      |  |   | 450 |  
|                                                                                                                    |  |      |      |      |  |   |     |  
|                                                                                                                    |  |      | 710  |      |  |   | 750 |  
|Less  current portion                                                                                              |  |      | (492 | )    |  |   | (40 | )
|                                                                                                                    |  |      |      |      |  |   |     |  
|Long-term debt                                                                                                      |  | $    | 218  |      |  | $ | 710 |  
|                                                                                                                    |  |      |      |      |  |   |     |  

As of December 31, 2003, principal payments
on long-term debt for the years ending December 31 are as
follows:

| |      |  |  |   |     | 
| | ---- |  |  | - | --- | 
| | 2004 |  |  | $ | 492 | 
| | 2005 |  |  |   | 44  | 
| | 2006 |  |  |   | 47  | 
| | 2007 |  |  |   | 49  | 
| | 2008 |  |  |   | 51  | 
| | 2009 |  |  |   | 27  | 
| |      |  |  |   |     | 
| |      |  |  | $ | 710 | 
| |      |  |  |   |     | 

Interest expense was $48, $16 and $153 for the
years ended December 31, 2003, 2002 and 2001, respectively.

Note 8  Income taxes

Income tax expense reflected in the consolidated
statements of operations represents withholding taxes on certain
payments by foreign customers. The actual income tax expense for
the years ended December 31, 2003, 2002 and 2001 is
different from the amount computed by applying the statutory
federal income tax rates

F-18



---



##### 



GENE LOGIC INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

to losses before income tax expense. The
reconciliation of these differences for the years ended
December 31 is as follows:

|                                                         |  |      |        |      |  |      |        |   |  |   |         |  
|-------------------------------------------------------- |  | ---- | ------ | ---- |  | ---- | ------ | - |  | - | ------- | -
|                                                         |  | 2003 |        | 2002 |  | 2001
|                                                         |  |      |        |      |  |     
|Tax benefit at federal statutory rate                    |  | $    | (7,658 | )    |  | $    | (8,177 | ) |  | $ | (11,279 | )
|State income taxes, net of federal income
    tax effect |  |      | (1,041 | )    |  |      | (1,111 | ) |  |   | (1,527  | )
|Benefit from stock option compensation                   |  |      |       |      |  |      | (488   | ) |  |   | (1,723  | )
|Other                                                    |  |      | (400   | )    |  |      | 1,368  |   |  |   | 1,554   |  
|Increase in valuation allowance                          |  |      | 11,345 |      |  |      | 9,900  |   |  |   | 13,508  |  
|                                                         |  |      |        |      |  |      |        |   |  |   |         |  
|Income tax expense                                       |  | $    | 2,246  |      |  | $    | 1,492  |   |  | $ | 533     |  
|                                                         |  |      |        |      |  |      |        |   |  |   |         |  

The tax effect of cumulative temporary
differences at December 31 is as follows:

|                          |                                     |      |        |         |   |  |        |         |  
|------------------------- | ----------------------------------- | ---- | ------ | ------- | - |  | ------ | ------- | -
|                          |                                     | 2003 |        | 2002   
|                          |                                     |      |        |        
|Deferred Tax Assets:      |                                     |      |        |         |   |  |        |        
|                          | NOL and tax credit carryforwards    |      | $      | 85,055  |   |  | $      | 73,463  |  
|                          | Contract revenue                    |      |        | 1,777   |   |  |        | 1,494   |  
|                          | Net loss in unconsolidated investee |      |        | 3,799   |   |  |        | 2,150   |  
|                          | Depreciation                        |      |        | 523     |   |  |        | 917     |  
|                          | Accrued vacation                    |      |        | 726     |   |  |        | 507     |  
|                          | Other                               |      |        | 3,164   |   |  |        | 1,056   |  
|                          |                                     |      |        |         |   |  |        |        
|                          |                                     |      | 95,044 |         |   |  | 79,587 |        
|                          | Less  valuation allowance          |      |        | (86,578 | ) |  |        | (75,028 | )
|                          |                                     |      |        |         |   |  |        |        
|                          | Net deferred tax assets             |      | $      | 8,466   |   |  | $      | 4,559   |  
|                          |                                     |      |        |         |   |  |        |        
|Deferred Tax Liabilities: |                                     |      |        |         |   |  |        |        
|                          | Capitalized software costs          |      | $      | 6,883   |   |  | $      | 4,335   |  
|                          | Unrealized gains                    |      |        | 96      |   |  |        | 96      |  
|                          | Other                               |      |        | 1,487   |   |  |        | 128     |  
|                          |                                     |      |        |         |   |  |        |        
|                          | Net deferred tax liabilities        |      | $      | 8,466   |   |  | $      | 4,559   |  
|                          |                                     |      |        |         |   |  |        |        

At December 31, 2003, Net Operating Loss
carryforwards (NOLs) for income tax purposes were
$203,688, 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 $6,390 as of December 31, 2003. The
carryforwards, if not utilized, will expire in increments from
2008 through 2023. 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.

Note 9  Commitments and
contingencies

Operating
Leases

The Company conducts all of its operations from
leased facilities in Gaithersburg, Maryland 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.

F-19



---



##### 



GENE LOGIC INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Future minimum lease payments under all operating
lease agreements for the years ending December 31 are as
follows:

|                    |  |   |        | 
|------------------- |  | - | ------ | 
|2004                |  | $ | 4,690  | 
|2005                |  |   | 4,790  | 
|2006                |  |   | 4,921  | 
|2007                |  |   | 4,818  | 
|2008                |  |   | 3,224  | 
|2009 and thereafter |  |   | 9,136  | 
|                    |  |   |        | 
|                    |  | $ | 31,579 | 
|                    |  |   |        | 

Rent expense for the years ended
December 31, 2003, 2002 and 2001, was $4,476, $2,939 and
$2,759, respectively.

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:

|                                                                                   |  |   |      |  
|---------------------------------------------------------------------------------- |  | - | ---- | -
|2004                                                                               |  | $ | 160  |  
|2005                                                                               |  |   | 160  |  
|2006                                                                               |  |   | 156  |  
|2007                                                                               |  |   | 61   |  
|                                                                                   |  |   |      |  
|                                                                                   |  |   | 537  |  
|Less  amounts representing
    interest (weighted average effective rate of 8.9%) |  |   | (73  | )
|                                                                                   |  |   |      |  
|Present value of net minimum lease payments                                        |  |   | 464  |  
|Less  current portion of
    lease obligations                                    |  |   | (124 | )
|                                                                                   |  |   |      |  
|Long term portion of capital lease obligation                                      |  | $ | 340  |  
|                                                                                   |  |   |      |  

Contingencies

Clinical trials or the manufacturing, marketing
and sale of any of the Companys customers potential
therapeutic or diagnostic products may expose the Company to
liability claims from the use of such products. The Company
currently maintains professional liability insurance and
believes that its insurance coverage is adequate to cover any
potential liabilities.

Commitments

The Company incurs payment obligations under its
supply and license agreement with Affymetrix, Inc. In 2004 and
2005, the Companys annual payment obligation will be
$4,000, plus any applicable royalties and purchases of
microarrays and associated instrumentation and software in
accordance with the terms of the agreement.

F-20



---



##### 



GENE LOGIC INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Litigation

The Company is not subject to any pending
material litigation.

Note 10  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 and with at least one day of service with the Company
are eligible, starting on the calendar quarter, to contribute up
to 15% of their combined salary and bonus. 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. Beginning in 2004, the Company will make a matching
contribution.

Note 11  Segment
information

On April 1, 2003, the Company began managing
its business as two business segments: information services and
contract study services. Prior to this date, the Company
operated as one business segment, information services.
Information services is based on the Companys gene
expression reference database, the GeneExpress System, for
research related to drug discovery and optimization. Contract
study services consists of services related to drug development
including, primarily preclinical toxicity and pharmacology
studies and related laboratory services and, to a lesser extent,
Phase I clinical trial services.

The following table presents the results of
operations by segment used by management to evaluate
performance. Information services segment operating loss is
determined by revenue for this segment less database production
and research and development expenses. Contract study services
segment operating income is determined by revenue for this
segment less costs related to contract studies. The Company does
not identify or allocate, nor does management evaluate, selling,
general and administrative expenses and assets by business
segment. Inter-segment transactions are eliminated in the
determination of segment operating income (loss). Amortization
and depreciation is allocated by business segment as identified
below. The following table sets forth information on reportable
segments for the years ended December 31:

|                        |                     |      |   |        |   |      |   |        |   |  |   |         |  
|----------------------- | ------------------- | ---- | - | ------ | - | ---- | - | ------ | - |  | - | ------- | -
|                        |                     | 2003 |   | 2002   |   | 2001
|                        |                     |      |   |        |   |     
|Information Services    |                     |      |   |        |   |      |   |        |   |  |   |        
|                        | Revenue             |      | $ | 51,960 |   |      | $ | 54,848 |   |  | $ | 43,328  |  
|                        | Operating loss(1)   |      |   | (198   | ) |      |   | (5,460 | ) |  |   | (15,701 | )
|Contract Study Services |                     |      |   |        |   |      |   |        |   |  |   |        
|                        | Revenue             |      | $ | 17,559 |   |      | $ |       |   |  | $ |        |  
|                        | Operating income(2) |      |   | 2,160  |   |      |   |       |   |  |   |        |  

F-21



---



##### 



GENE LOGIC INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

A reconciliation of segment operating income
(loss) to net loss before income tax expense for the years
ended December 31 is as follows:

|                                             |                         |      |         |       |   |      |         |        |   |   |         |         |  
|-------------------------------------------- | ----------------------- | ---- | ------- | ----- | - | ---- | ------- | ------ | - | - | ------- | ------- | -
|                                             |                         | 2003 |         | 2002  |   | 2001
|                                             |                         |      |         |       |   |     
|Segment Operating income (loss)              |                         |      |         |       |   |      |         |        |   |   |         |        
|                                             | Information services    |      | $       | (198  | ) |      | $       | (5,460 | ) |   | $       | (15,701 | )
|                                             | Contract study services |      |         | 2,160 |   |      |         |       |   |   |         |        |  
|                                             |                         |      |         |       |   |      |         |        |   |   |         |        
|                                             |                         |      | 1,962   |       |   |      | (5,460  | )      |   |   | (15,701 | )      
|Selling, general and administrative expenses |                         |      | 22,198  |       |   |      | 19,734  |        |   |   | 19,323  |        
|Amortization of goodwill                     |                         |      |        |       |   |      |        |        |   |   | 1,524   |        
|Interest (income), net                       |                         |      | (1,979  | )     |   |      | (3,139  | )      |   |   | (8,645  | )      
|Other (income) expense                       |                         |      |        |       |   |      | (250    | )      |   |   | (83     | )      
|Write-down of equity investments             |                         |      | 4,268   |       |   |      | 753     |        |   |   | 2,495   |        
|                                             |                         |      |         |       |   |      |         |        |   |   |         |        
|Net loss before income tax expense           |                         | $    | (22,525 | )     |   | $    | (22,558 | )      |   | $ | (30,315 | )      
|                                             |                         |      |         |       |   |      |         |        |   |   |         |        



---



|    |                                                                                                                                                                    
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Includes an allocation of amortization and
    depreciation of $13,724, $12,643 and $12,009 for the years ended
    December 31, 2003, 2002 and 2001, respectively.
|   
|(2) | Includes an allocation of amortization and
    depreciation of $1,172 for the year ended December 31, 2003.                                                        

For 2003 and 2002, no customer accounted for 10%
or more of the Companys revenue; however, during 2001, two
customers accounted for 16% and 11%, respectively, of the
Companys revenue. The following is a breakdown of the
Companys total revenue by geographic region:

|                  |  |               |    |             |  |        |    |   |  |  |    |  
|----------------- |  | ------------- | -- | ----------- |  | ------ | -- | - |  |  | -- | -
|                  |  | North America |    | Pacific Rim |  | Europe
|                  |  |               |    |             |  |       
|December 31, 2003 |  |               | 48 | %           |  |        | 34 | % |  |  | 18 | %
|December 31, 2002 |  |               | 46 | %           |  |        | 34 | % |  |  | 20 | %
|December 31, 2001 |  |               | 63 | %           |  |        | 22 | % |  |  | 15 | %

Note 12  Stock-based
compensation

During 1997, the Company instituted a stock plan
(the Stock Plan), which has been amended. The Stock
Plan replaced a similar plan adopted in 1996. Under the Stock
Plan, the Compensation Committee (the Committee) of
the Companys Board of Directors, at its discretion, can
grant options, award stock bonuses or provide opportunities to
make direct purchases of restricted stock to employees, certain
directors and consultants of the Company and related
corporations. The Stock Plan authorizes the grant of options for
up to 10,600,000 shares of Common Stock. In 2002, the Board of
Directors amended the Stock Plan to eliminate future stock
bonuses and grants of restricted stock. At December 31,
2003, there were 2,684,367 shares available for issuance under
the Stock Plan.

During 1997, the Company adopted a
Directors stock plan (the Directors
Plan) to provide for granting of options to non-employee
directors of the Company. The Directors Plan is
administered by the Committee which is authorized to grant
options of up to 575,000 shares of Common Stock. At
December 31, 2003, there were 237,500 shares available for
issuance under the Directors Plan. Options are to be
granted at the fair market value of the Common Stock at the
grant date.

The options, awards and opportunities to purchase
stock 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.

During 1997, the Company adopted an Employee
Stock Purchase Plan (the Purchase Plan) covering an
aggregate of 1,250,000 shares of Common Stock. The Purchase Plan
allows employees to purchase shares

F-22



---



##### 



GENE LOGIC INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

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 date an Offering began (or, if later, the date
during the Offering when the employee was first eligible to
participate). In 2002, the Board imposed a limit of 600 shares
per purchaser per purchase date. At December 31, 2003,
there were 631,007 shares available for issuance under the
Purchase Plan.

The following is a roll forward of option
activity for the years ended December 31, 2003, 2002 and
2001:

|                                 |                          |           |           |                     |   |                |           |            |   |   |       |       | 
|-------------------------------- | ------------------------ | --------- | --------- | ------------------- | - | -------------- | --------- | ---------- | - | - | ----- | ----- | 
|                                 |                          |           |           |                    
|                                 |                          |           |           | Shares Subject to  
|                                 |                          |           |           | Outstanding Options
|                                 |                          |           |           |                    
|                                 |                          | Shares    |           |                     |   | Weighted      
|                                 |                          | Available |           |                     |   | Average       
|                                 |                          | For Grant |           | Shares              |   | Exercise Price
|                                 |                          |           |           |                     |   |               
|Balance at January 1, 2001       |                          |           | 1,745,074 |                     |   |                | 4,537,766 |            |   | $ | 25.16 |      
|                                 | Options granted          |           |           | (1,657,657          | ) |                |           | 1,657,657  |   |   | $     | 16.10 | 
|                                 | Options exercised        |           |           |                    |   |                |           | (515,857   | ) |   | $     | 4.31  | 
|                                 | Options cancelled        |           |           | 681,160             |   |                |           | (681,160   | ) |   | $     | 40.46 | 
|                                 |                          |           |           |                     |   |                |           |            |   |   |       |      
|Balance at
    December 31, 2001 |                          |           | 768,577   |                     |   |                | 4,998,406 |            |   | $ | 22.23 |      
|                                 | Additional authorization |           |           | 1,250,000           |   |                |           |           |   |   | $     |      | 
|                                 | Options granted          |           |           | (496,600            | ) |                |           | 496,600    |   |   | $     | 13.95 | 
|                                 | Options exercised        |           |           |                    |   |                |           | (149,873   | ) |   | $     | 5.88  | 
|                                 | Options cancelled        |           |           | 2,705,297           |   |                |           | (2,705,297 | ) |   | $     | 31.77 | 
|                                 |                          |           |           |                     |   |                |           |            |   |   |       |      
|Balance at
    December 31, 2002 |                          |           | 4,227,274 |                     |   |                | 2,639,836 |            |   | $ | 11.83 |      
|                                 | Additional authorization |           |           | 1,000,000           |   |                |           |           |   |   | $     |      | 
|                                 | Options granted          |           |           | (2,826,864          | ) |                |           | 2,826,864  |   |   | $     | 6.62  | 
|                                 | Options exercised        |           |           |                    |   |                |           | (28,425    | ) |   | $     | 4.14  | 
|                                 | Options cancelled        |           |           | 521,457             |   |                |           | (521,457   | ) |   | $     | 15.82 | 
|                                 |                          |           |           |                     |   |                |           |            |   |   |       |      
|Balance at
    December 31, 2003 |                          |           | 2,921,867 |                     |   |                | 4,916,818 |            |   | $ | 8.46  |      
|                                 |                          |           |           |                     |   |                |           |            |   |   |       |      

Options to purchase a total of 3,988,802,
2,092,207 and 2,961,240 at December 31, 2003, 2002 and
2001, respectively, were exercisable. The weighted-average
grant-date fair value of options granted during the years ended
December 31, 2003, 2002 and 2001 was $3.14, $6.85 and
$8.43, 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-23



---



##### 



GENE LOGIC INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

The following table summarizes information about
stock options outstanding at December 31, 2003:

|               |  |                     |           |                     |  |          |           |                |  |          |       |  |  |  |           |  |  |   |       | 
|-------------- |  | ------------------- | --------- | ------------------- |  | -------- | --------- | -------------- |  | -------- | ----- |  |  |  | --------- |  |  | - | ----- | 
|               |  |                     |           |                    
|               |  | 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 |  | 2003                |           | Life                |  | Price    |           | 2003           |  | Price   
|               |  |                     |           |                     |  |          |           |                |  |         
|$0.15$4.50    |  |                     | 800,592   |                     |  |          | 4.5 Years |                |  | $        | 3.14  |  |  |  | 800,592   |  |  | $ | 3.14  | 
|$4.51$6.00    |  |                     | 1,191,509 |                     |  |          | 7.7 Years |                |  | $        | 5.14  |  |  |  | 669,395   |  |  | $ | 5.06  | 
|$6.01$7.21    |  |                     | 1,983,093 |                     |  |          | 7.0 Years |                |  | $        | 7.16  |  |  |  | 1,784,388 |  |  | $ | 7.18  | 
|$7.21$62.88   |  |                     | 941,624   |                     |  |          | 7.4 Years |                |  | $        | 19.89 |  |  |  | 734,427   |  |  | $ | 22.27 | 
|               |  |                     |           |                     |  |          |           |                |  |          |       |  |  |  |           |  |  |   |       | 
|$0.15$62.88   |  |                     | 4,916,818 |                     |  |          | 6.8 Years |                |  | $        | 8.46  |  |  |  | 3,988,802 |  |  | $ | 8.79  | 
|               |  |                     |           |                     |  |          |           |                |  |          |       |  |  |  |           |  |  |   |       | 

Note 13  Related party
transactions

In connection with the formation of MetriGenix,
affiliates of two members of the Companys Board of
Directors purchased an aggregate of 73.3% of MetriGenixs
preferred stock and the Company entered into certain agreements
with MetriGenix, including a subscription to the GeneExpress
System from which the Company derived no revenue in 2002 and
2001 and to provide certain administrative services and
subleased space (see Note 4). Fees charged to MetriGenix for
administrative services and subleased space totaled $678, $793
and $256 for the years ended December 31, 2003, 2002 and
2001, respectively. In addition, certain executive officers and
a director of the Company purchased restricted shares of common
stock of MetriGenix and the Company issued promissory notes to
four of these executive officers representing loans issued to
them to fund payment for the shares. As of December 31,
2003, all loans had been satisfied in accordance with their
terms.

Note 14  Quarterly results of
operations (unaudited)

The following is a summary of the quarterly
results of operations for the years ended December 31, 2003
and 2002.

|                                     |  |          |        |         |  |              |        |             |  |   |         |   |  |   |        |  
|------------------------------------ |  | -------- | ------ | ------- |  | ------------ | ------ | ----------- |  | - | ------- | - |  | - | ------ | -
|                                     |  | March 31 |        | June 30 |  | September 30 |        | December 31
|                                     |  |          |        |         |  |              |        |            
|2003                                 |  |          |        |         |  |              |        |             |  |   |         |   |  |   |        |  
|Revenue                              |  | $        | 12,724 |         |  | $            | 19,432 |             |  | $ | 17,710  |   |  | $ | 19,653 |  
|Net loss                             |  | $        | (5,801 | )       |  | $            | (3,970 | )           |  | $ | (10,111 | ) |  | $ | (4,889 | )
|                                     |  |          |        |         |  |              |        |             |  |   |         |   |  |   |        |  
|Basic and diluted net loss per share |  | $        | (0.21  | )       |  | $            | (0.13  | )           |  | $ | (0.33   | ) |  | $ | (0.16  | )
|                                     |  |          |        |         |  |              |        |             |  |   |         |   |  |   |        |  
|2002                                 |  |          |        |         |  |              |        |             |  |   |         |   |  |   |        |  
|Revenue                              |  | $        | 11,842 |         |  | $            | 14,066 |             |  | $ | 14,185  |   |  | $ | 14,755 |  
|Net loss                             |  | $        | (7,533 | )       |  | $            | (4,380 | )           |  | $ | (6,957  | ) |  | $ | (5,180 | )
|                                     |  |          |        |         |  |              |        |             |  |   |         |   |  |   |        |  
|Basic and diluted net loss per share |  | $        | (0.28  | )       |  | $            | (0.16  | )           |  | $ | (0.26   | ) |  | $ | (0.19  | )
|                                     |  |          |        |         |  |              |        |             |  |   |         |   |  |   |        |  

F-24



---



##### 



GENE LOGIC INC.


SCHEDULE II  VALUATION
AND QUALIFYING ACCOUNTS

December 31, 2003, 2002 and
2001

(in thousands)


Reserve for tissue samples:

|                  |  |            |     |          |  |             |     |  |  |   |     | 
|----------------- |  | ---------- | --- | -------- |  | ----------- | --- |  |  | - | --- | 
|                  |  | Balance at |     |          |  |            
|                  |  | Beginning  |     | New      |  | Balance at 
|                  |  | of Year    |     | Reserves |  | End of Year
|                  |  |            |     |          |  |            
|December 31, 2003 |  | $          | 580 |          |  | $           | 414 |  |  | $ | 994 | 
|December 31, 2002 |  |            | 234 |          |  |             | 346 |  |  |   | 580 | 
|December 31, 2001 |  |            |    |          |  |             | 234 |  |  |   | 234 | 

Allowance for doubtful accounts:

|                  |  |            |   |          |  |                |    |             |  |             |     |             |  |   |      |   |  |   |     |   |  |   |    | 
|----------------- |  | ---------- | - | -------- |  | -------------- | -- | ----------- |  | ----------- | --- | ----------- |  | - | ---- | - |  | - | --- | - |  | - | -- | 
|                  |  | Balance at |   |          |  | Reserves       |    |             |  |             |     |            
|                  |  | Beginning  |   | New      |  | Due to         |    | Accounts    |  | Adjustment  |     | Balance at 
|                  |  | of Year    |   | Reserves |  | Acquisition(1) |    | Written-Off |  | to Reserves |     | End of Year
|                  |  |            |   |          |  |                |    |             |  |             |     |            
|December 31, 2003 |  | $          |  |          |  | $              | 28 |             |  | $           | 449 |             |  | $ | (334 | ) |  | $ | (86 | ) |  | $ | 57 | 
|December 31, 2002 |  |            |  |          |  |                |   |             |  |             |    |             |  |   |     |   |  |   |    |   |  |   |   | 
|December 31, 2001 |  |            |  |          |  |                |   |             |  |             |    |             |  |   |     |   |  |   |    |   |  |   |   | 



---

Notes:



|    |                                                                                            
|--- | -------------------------------------------------------------------------------------------
|(1) | Reserve recorded in connection with the
    acquisition of TherImmune Research Corporation.