**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


**Washington,
      D.C. 20549**





**FORM
      10-K**




**(Mark
              One)**x
            **Annual
              Report Pursuant To Section 13 Or 15(D) Of The Securities Exchange Act
              Of
              1934****For
              the fiscal year ended December 31, 2006****OR****o**
            **Transition
              Report Pursuant To Section 13 Or 15(D) Of The Securities Exchange Act
              Of
              1934****For
              the transition period from _______________ to
              _______________**




**Commission
      File Number: 0-23317**





**GENE
      LOGIC INC.**


*(Exact
      name of registrant as specified in its charter)*





**Delaware**
            **06-1411336***(State
                of Other Jurisdiction of Incorporation or
                Organization)*
            *(I.R.S.
                Employer Identification No.)*





**50
      West Watkins Mill Road**


**Gaithersburg,
      Maryland 20878**


*(Address
      of Principal Executive Offices)*





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


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


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


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


*(Title
      of Class)*





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





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





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





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





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





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


Large
      accelerated filer  ̈ Accelerated
      filer x Non-accelerated
      filer  ̈





The
      aggregate market value of the voting stock (which consists solely of shares
      of
      Common Stock) held by non-affiliates of the Registrant as of June 30, 2006
      was
      approximately $41,881,719.60, based on the closing price on that date of Common
      Stock on The NASDAQ Stock Market.*





The
      number
      of shares outstanding of the Registrant’s Common Stock, $.01 par value, was
      31,820,273 as of March 1, 2007.





**     
       Excludes 786,135 shares of Common Stock held by directors and executive
      officers and stockholders whose beneficial ownership exceeds 10% of the shares
      outstanding on June 30, 2006. Exclusion of shares held by any person should
      not
      be construed to indicate that such person possesses the power, direct or
      indirect, to direct or cause the direction of the management or policies of
      the
      Registrant, or that such person is controlled by or under common control with
      the Registrant.*










1








**TABLE
      OF CONTENTS**








**PART
                  I**ITEM
                  1.
              BusinessITEM
                  1A.
              Risk
                  FactorsITEM
                  1B.
              Unresolved
                  Staff CommentsITEM
                  2.
              PropertiesITEM
                  3.
              Legal
                  ProceedingsITEM
                  4.
              Submission
                  of Matters to a Vote of Security
                  Holders**PART
                  II**ITEM
                  5.
              Market
                  for the Registrant’s Common Equity, Related
                  Stockholder Matters and Issuer Purchases of Equity
                  SecuritiesITEM
                  6.
              Selected
                  Consolidated Financial DataITEM
                  7.
              Management’s
                  Discussion and Analysis of Results of
                  Operations and Financial ConditionITEM
                  7A.
              Quantitative
                  and Qualitative Disclosure About Market
                  RiskITEM
                  8.
              Financial
                  Statements and Supplementary
                  DataITEM
                  9.
              Changes
                  in and Disagreements with Accountants on Accounting
                  and Financial DisclosureITEM
                  9A.
              Controls
                  and ProceduresITEM
                  9B.
              Other
                  Information**PART
                  III**ITEM
                  10.
              Directors
                  and Executive Officers of the
                  RegistrantITEM
                  11.
              Executive
                  CompensationITEM
                  12.
              Security
                  Ownership of Certain Beneficial Owners and
                  Management and Related MattersITEM
                  13.
              Certain
                  Relationships and Related
                  TransactionsITEM
                  14.
              Principal
                  Accountant Fees and
                  Services**PART
                  IV**ITEM
                  15.
              Exhibits,
                  Financial Statements and Schedules and Reports on
                  Form 8-KSIGNATURESReport
                  of Independent Registered Public Accounting
                  Firm—Internal Control Over Financial ReportingReport
                  of Independent Registered Accounting
                  Firm—Consolidated Financial StatementsConsolidated
                  Balance Sheets as of December 31, 2006
                  and 2005Consolidated
                  Statements of Operations for the
                  three years ended December 31, 2006Consolidated
                  Statements of Stockholders’ Equity
                  for the three years ended December 31, 2006Consolidated
                  Statements of Cash Flows for the three
                  years ended December 31, 2006Notes
                  to Consolidated Financial
                  Statements





2





**PART
      I**








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





Unless
      the
      context otherwise requires, references in this Form 10-K to “Gene Logic,” “Gene
      Logic Laboratories Inc.,” “Gene Logic Ltd.,” “Gene Logic K.K.,” the “Company,”
“we,” “us,” and “our” refer to Gene Logic Inc. and its wholly owned
      subsidiaries. Gene Logic ® ,
      BioExpress ® ,
      ToxExpress ® ,
      ASCENTA ® and
      Genesis Enterprise System ® are
      registered trademarks of Gene Logic. ToxShieldTM is a trademark of Gene Logic.
      GeneChip ® is a
      registered trademark of Affymetrix, Inc. Viagra ® is a
      registered trademark of Pfizer, Inc. Evista ® is a
      registered trademark of Eli Lilly & Co. Hytrin ® is a
      registered trademark of Abbott Laboratories.







**ITEM
      1.**      
**BUSINESS**




**CORPORATE
      HISTORY**





Gene
      Logic
      Inc. was incorporated in September 1994 as a Delaware corporation and commenced
      operations in 1996. In 1997, we completed our initial public offering. Our
      stock
      is traded on The NASDAQ Stock Market under the symbol “GLGC”. In 1998, we
      purchased Oncormed, Inc., which brought us new expertise in tissue sample
      management and use of microarray technologies. In 2003, we purchased TherImmune
      Research Corporation, renamed it Gene Logic Laboratories Inc. and subsequently
      referred to it in our SEC filings as our Preclinical Division. We sold Gene
      Logic Laboratories on December 15, 2006, to a privately held company. In 2004,
      we acquired certain technologies from Millennium Pharmaceuticals, Inc., which,
      in combination with our genomics databases and proprietary software, are the
      basis for our current pharmaceutical development business.





We
      are
      headquartered in Gaithersburg, Maryland. Our principal executive offices are
      located at 50 West Watkins Mill Road, Gaithersburg, Maryland 20878, and our
      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**





In
      2004,
      Gene Logic created a pharmaceutical development division (known as our Drug
      Repositioning division) within the Company to identify and develop new or
      expanded uses for small molecule therapeutics. Based on advances in our
      pharmaceutical development division and changes in our Genomics business, and
      after recently concluding a comprehensive review of our strategy, we have
      decided to focus our resources on becoming a pharmaceutical development company.
      We are now building a therapeutic pipeline by applying our proprietary drug
      indication discovery platform to find new and expanded uses for drug candidates
      supplied by major pharmaceutical companies with whom we have drug development
      partnerships. We believe this strategy is the best way to create value for
      shareholders.





In
      2005
      and 2006, we entered into drug repositioning and development (“drug
      development”) partnerships with Pfizer, F. Hoffmann-La Roche Ltd, Eli Lilly and
      Co., and NV Organon. Our partners provide us with drug candidates that have
      already been assessed as safe in human clinical trials, and whose development
      for their original indications has been discontinued. Our drug development
      partnerships are generally structured to provide us with milestone payments
      for
      repositioned drug candidates that our partners return to clinical development
      for indications that we have identified, and long-term value in the form of
      royalties or other co-ownership positions.






3


We
      apply,
      at our own expense, our drug indication discovery platform to identify new
      uses
      for these clinical-stage drug candidates. This platform consists of genomics
      databases and bioinformatics software developed by Gene Logic over the past
      10
      years, and biological screening technologies acquired from Millennium
      Pharmaceuticals and which subsequently have undergone further development.
      In
      2006, we began evaluating more than 40 drug candidates for our drug development
      partners. Based on our experience to date, we have been able to develop
      alternative indication hypotheses for 25%-33% of the candidates for which
      evaluation is complete. Some of the candidates for which we have found new
      indications have or will progress to *in
      vivo* efficacy
      models to evaluate and support their suitability for re-entering clinical trials
      for the proposed new indications. For the candidates that will shortly begin *in
      vivo* efficacy
      studies, our partners have agreed to fund a portion of the costs associated
      with
      these studies. We expect that some portion of the drug candidates will have
      successful outcomes in the *in
      vivo* tests and
      will be selected by our partners to re-enter clinical trials, but we do not
      yet
      have sufficient data to estimate the rate of clinical trial re-entry. We do
      not
      expect any of these drug candidates to re-enter clinical trials, if at all,
      until after 2007.





In
      the
      event that a partner chooses not to pursue development of a candidate for which
      we find a new indication, we may seek to acquire the repositioned candidate
      and
      may choose to further develop it ourselves or outlicense it to third parties.
      For example, in 2006, we acquired certain rights from Millennium Pharmaceuticals
      to a drug candidate for which we have identified potential new indications.





From
      1996
      through 2006, our business was primarily devoted to developing and
      commercializing proprietary genomic and toxicogenomic databases, toxicogenomic
      services, software tools and other services. The Genomics services we provide
      enable customers worldwide to discover and prioritize drug targets, identify
      biomarkers, predict toxicity and understand mechanisms of toxicity, and
      understand mechanisms of action of specific compounds.





In
      2006,
      we began to redirect our Genomics Division in response to our customers’
shifting their research activities from early-stage drug discovery into
      later-stage development and validation efforts and a resulting decline in sales
      of our Genomics licenses. In August, we took steps to reduce the staffing and
      expense levels in this business. We examined the business for new avenues to
      create value and concluded that our commercially demonstrated expertise in
      biomarker discovery and validation could be used as a potential new platform
      for
      molecular diagnostics development. As
      a
      result, we have engaged outside financial advisors to identify strategic
      alternatives for our Genomics business. We continue to serve new and existing
      Genomics customers.





In
      December 2006, we sold our Preclinical Division. The Preclinical Division
      provided contract research services to assess the safety and pharmacologic
      effects of compounds to support regulatory submissions for human clinical
      trials. We decided to sell the Preclinical Division because the business
      provided insufficient strategic or synergistic advantage to our pharmaceutical
      development, genomics or molecular diagnostic efforts. The sale included four
      of
      our leased facilities and the transfer of approximately 200 employees.





**SCIENTIFIC
      AND INDUSTRY BACKGROUND**




**The
      Drug Discovery and Development Process**


The
      process of drug development is expensive, time consuming and risky. On average
      it takes 13 years from the beginning of the discovery effort to get a drug
      to
      market and, while research and development costs have been doubling every five
      years, success rates for getting drugs to market have been flat or declining.





Today,
      drug discovery and development in the United States generally consists of the
      following steps:


·
            ***Discovery.***Discovery is the process of identifying new biological targets and
                the
                compounds that can affect them. Targets must be identified, prioritized
                and validated. Gene expression data has been very useful in target
                identification and prioritization, but the process of target validation
                remains tedious, expensive and time-consuming. Through lead discovery
                and
                lead optimization, compounds that can affect identified targets are
                identified, tested, analyzed, modified and optimized, using information
                about potential toxicity, absorption, distribution, metabolism and
                excretion.


·
            ***Preclinical
                Testing.***Compounds that are being considered as drugs must be studied to determine
                if the compound will have unacceptable toxic effects and if it will
                be
                effective in treating the targeted disease or condition. Traditionally,
                prior to initiating studies in humans, a pharmaceutical company conducts
                laboratory and animal studies to show evidence of effectiveness and
                levels
                of toxicity. More recently, compounds can also be evaluated for potential
                toxicity using toxicogenomics and effectiveness using pharmacogenomics.
                The
                Food and Drug Administration (“FDA”) has published a guidance document on
                the use of pharmacogenomics (the document uses the term pharmacogenomics
                to encompass pharmacogenomics, pharmacogenetics, and toxicogenomics).Although
                the FDA accepts pharmacogenomics data as part of an Investigational
                New
                Drug Application (“IND”) submission, it does not accept pharmacogenomics
                data as a substitution for the animal studies required as part of
                the IND
                submission process.


·
            ***Investigational
                New Drug Application.***After completing preclinical testing, the company files an IND application
                with the FDA for permission to test the compound in humans. The IND
                application shows results of previous experiments; how, where and
                by whom
                the new studies will be conducted; the chemical structure of the
                compound;
                how it is thought to work in the body; any toxic effects found in
                the
                animal studies; and, how the compound is manufactured. In addition,
                the
                IND application must be reviewed and approved for ethical issues
                and
                protection of patient rights by the organization’s Institutional Review
                Board. Once the trials commence, progress reports on clinical trials
                must
                be submitted at least annually to the FDA.




4




·
            ***Clinical
                Trials.***These tests involve a series of studies (Phase I, II and III) involving
                up
                to several thousand patients over a multi-year period. These tests
                assess
                safety, appropriate dosage, and effectiveness in humans.


o
            ***Phase
                I Trials.***The
                initial introduction of an investigational new drug into humans.
                These
                studies are primarily small studies designed to determine the safety
                of
                compounds, and, if possible, to gain early evidence of effectiveness.


o
            ***Phase
                II Trials.***Includes the early, controlled, smaller-scale, clinical studies conducted
                to obtain preliminary data on the effectiveness of the drug for a
                particular indication or indications in patients with the disease
                or
                condition.


o
            ***Phase
                III Trials.***Larger scale trials after preliminary evidence of effectiveness of
                the
                drug has been obtained in Phase 2, to gather additional information
                about
                effectiveness and safety needed to evaluate the overall benefit-risk
                relationship of the drug. Phase 3 studies usually include several
                hundred
                to several thousand people.


·
            ***New
                Drug Application (“NDA”).***Following successful completion of clinical trials, the company files
                an
                NDA application with the FDA. FDA approval of an NDA is required
                before
                any new drug can be commercialized.


·
            ***Approval.***Once the FDA approves the NDA, the new medicine becomes available
                for
                physicians to prescribe. The company must continue to periodically
                report
                about the medicine to the FDA, including instances of adverse reactions
                and appropriate quality-control records. For some medicines, the
                FDA
                requires additional studies (Phase IV) to evaluate long-term effects.





**Drug
      Repositioning**


A
      significant number of drug candidates are halted at some point in the discovery
      and development process. Candidates may have toxicity issues, lack efficacy
      in
      the targeted therapeutic application, be difficult to manufacture, have a narrow
      market, or be inferior to competitive products, among other issues. Drug
      repositioning is generally defined by the industry as either (i) finding new
      uses for drug candidates discontinued during the clinical phases or (ii) finding
      uses for marketed drugs in additional therapeutic applications.





**Biological
      Function and Genomics**


The
      cells
      of all living organisms contain a blueprint or set of instructions for how
      each
      cell-type should work. This blueprint is passed from one generation to the
      next
      and is encoded in a set of molecules called deoxyribonucleic acid (“DNA”). These
      DNA molecules are organized into long strands that bind to each other in a
      twisted double helix structure. DNA molecules can be organized in a vast number
      of different ways, leading to the production of millions of different protein
      molecules. These protein
      molecules are the
      basic building blocks of all living organisms.





Protein
      molecules are produced from DNA utilizing an intermediate molecule called
      messenger ribonucleic acid (“ mRNA”) ,
      which
      translates DNA into protein form. The specific sequence of DNA that produces
      a
      particular protein is called a gene .
      In
      humans, every cell contains three billion base pairs of DNA molecules, referred
      to collectively as the human
      genome .
      Only a
      small percentage of the genome actively produces proteins.





Cells
      are
      very different from each other in structure and function despite the fact that
      they share the same genetic blueprint. For example, a brain cell and a muscle
      cell, although very different, contain exactly the same DNA code. The reason
      for
      the difference in structure and function is that not all genes are active in
      any
      cell. The type of cell and its function are determined by which genes are
      actively producing protein and the amount of protein they are producing. In
      fact, almost any change in the activity of a cell, whether normal or diseased,
      is reflected in a change in the genes that are producing protein. This pattern
      of gene activity is called gene
      expression .
      The
      determination of patterns of gene expression is a broad measure of the function
      of a cell.





Microarray
      technology has
      accelerated the process of measuring gene expression. Microarray technology
      uses
      millions of DNA sequences attached to a solid surface in a dense matrix. Samples
      of cells and tissues from humans or animals are prepared, and the resulting
      mRNA
      is then labeled and exposed to the surface of the microarray. The labeled mRNA
      adheres to its counterpart DNA on the microarray, resulting in information
      which
      can then be analyzed to determine the level and pattern of gene expression
      within that tissue or cell.





While
      the
      biology of different normal and diseased cells can be evaluated by analyzing
      gene expressions patterns, there are also variations of the gene sequence for
      similar genes from individual to individual. These individual variations in
      gene
      sequence, known as SNPs, account for similar proteins working more or less
      effectively. These differences in protein function lead to individual variations
      in the effectiveness of drugs, susceptibility to disease, and toxicity of
      compounds. There may be hundreds or thousands of variations within any gene
      from
      one individual to another. There are thought to be about three million
      significant SNPs in the human genome, although not all of them have yet been
      discovered and the function for most is not known. These variations are
      determined by various methods and machines that allow a DNA sequence to be
      analyzed.





5




Different
      patterns of gene expression are associated with normal and diseased cells,
      as
      well as either the toxic or therapeutic effect that drugs can have on cells.





For
      example, a cancerous tissue can be compared to normal tissue to find aberrant
      gene activity that is associated with the cancer, and that information can
      be
      used to identify biomarkers (a molecular marker associated with a biological
      function) and targets and to develop drugs to treat the disease. Using
      information about the human genome to develop drugs is called pharmacogenomics .





Normal
      cells can also be compared to cells that have been treated with a specific
      compound, to determine if that compound has a toxic effect on cells. Using
      information about how gene expression patterns vary when chemicals are toxic
      to
      tissues is called toxicogenomics .





The
      amount
      of information that is generated from sequencing three billion base pairs of
      DNA
      and using microarrays to look at gene expression patterns in tens of thousands
      of biological tissues and processes could not be stored and analyzed if it
      were
      not for advances in information technology that occurred with the development
      of
      computers and the internet. The science of using computers to capture and
      understand biology is known as bioinformatics .





Besides
      gene expression data, there are other methods to look at biological function.
      In
      addition to the traditional methods, new methods are being developed. Some
      of
      these include:


·
            *In
                vivo*(“in
                life”)imaging,
                which is the use of imaging technologies to visually see where potential
                drugs are attaching to biological targets in animals. This can be
                done by
                putting either a label or tag on the compound of interest, injecting
                the
                labeled compound into a test animal, and using a machine to see where
                the
                labeled compound actually goes. Alternatively, the animal itself
                can be
                genetically modified so that a particular biological pathway or target
                is
                labeled in the animal. When that biological pathway or target is
                activated
                by a test compound, a signal from the tag can be seen using special
                imaging machines.


·
            *In
                vitro* (“in dish”)screening,
                which is the use of cells grown in culture to evaluate how compounds
                cause
                the cells to change or react. There are many different measurements
                that
                can be made on the cells. The cells used in these assays can also
                be
                genetically modified so they indicate a particular process or pathway
                in
                the cell that is being activated.


·
            Metabolomics,
                which is the measurement of proteins that have been used or changed
                in
                performing their function. This information can be used to determine
                what
                pathways and biological functions have been active.


·
            Proteomics,
                which is the measurement of many proteins at once to analyze patterns
                of
                protein production and use. Proteomics measures proteins while gene
                expression measures mRNA. However, proteomics is much more difficult
                to do
                because there are millions of rapidly changing types of proteins
                as
                compared to tens of thousands of types of mRNA molecules.





Gene
      expression and other methods of looking at biological functions are critical
      to
      pharmaceutical companies’ drug development processes. The current model for drug
      development is based on developing a systematic understanding of biology.
      Pharmaceutical companies develop drugs by seeking specific proteins that could
      be therapeutic targets. These companies then seek chemical compounds that could
      modulate or manipulate the targets in a way that would have a therapeutic
      effect. Scientists have the ability to screen large libraries of compounds
      using
      high-throughput automated systems against biological targets to identify
      potential therapeutic compounds that will modulate these targets. But, first,
      scientists must identify the targets, from among the 3,000 to 5,000 human genes
      that might produce proteins. One efficient way to identify these targets is
      using gene expression data produced from normal and diseased human tissues
      as
      well as from animal models and cell lines.





**Molecular
      Diagnostics** encompass
      a variety of technologies and methods for utilizing profiles of DNA and RNA
      changes in individual patients to facilitate determining what condition a
      patient has (diagnosis), the likely outcome (prognosis), response to therapy
      (monitoring), and the best responders to various treatments (personalized
      medicine). Traditional clinical diagnostic processes involve physicians
      analyzing patient body fluids or tissues to assess biological functions, usually
      by analysis of proteins and tissues. Over the past few years, the growth of
      molecular diagnostics has increased the use of RNA and DNA analysis to assess
      biological function.





Development
      of new types of molecular markers requires a process of discovery followed
      by
      validation in carefully selected patient populations in carefully controlled
      clinical trials. Such clinical trials may take weeks or years to conduct and
      results are generally published in peer-reviewed medical journals. Once enough
      studies are conducted to demonstrate the validity of a new diagnostic, the
      tests
      can be offered through laboratories licensed through a state and federal process
      certified by the Clinical Laboratory Improvement Advisory Committee (“CLIA”).
      Alternatively, manufacturers of the reagents and systems that are required
      to
      perform the diagnostic assay can submit an application to the FDA (510K or
      PMA)
      which, if approved, allows them to market products to laboratories and doctors
      who are licensed to conduct clinical analysis on tests ordered by doctors.
      In
      2007, the FDA published draft recommendations suggesting new regulations on
      any
      genetic test that utilizes multiple markers and requires an algorithm to produce
      a result. While these draft recommendations have not been finalized, if they
      are, then the FDA would require approval for all tests in this
      category.








6


**OUR
      BUSINESS**




We
      currently conduct our operations through two business segments: the Drug
      Repositioning Division and the Genomics Division. We are focusing primarily
      on
      our Drug Repositioning business and continue to serve new and existing Genomics
      customers while seeking strategic alternatives for that business.





**Drug
      Repositioning Division**





Gene
      Logic’s drug repositioning platform provides an efficient and cost-effective
      approach for systematically uncovering a drug candidate’s biological activity
      and identifying possible new indications for drug candidates for which
      development has otherwise been discontinued.





The
      pharmaceutical development process is expensive, time-consuming and risky,
      with
      a high failure rate. See “Scientific and Industry Background” above. Billions of
      dollars are spent annually to identify and develop biologically active compounds
      that do not ultimately succeed for various reasons, including (i) insufficient
      effectiveness in treating the disease or condition for which they were designed;
      (ii) safety and toxicity issues; (iii) patient variability in responding to
      a
      drug candidate; and (iv) insufficient potential economic return for the company
      developing the drug candidate.





Pharmaceutical
      companies have traditionally relied on two mainstream approaches to establish
      a
      product pipeline - internal development and product in-licensing. The first
      approach continues to be time-consuming and expensive while the latter is
      limited by increased competition between pharmaceutical companies to in-license
      a finite number of quality drug candidates. Furthermore, in traditional drug
      development, development of a drug candidate that is determined to have limited
      effectiveness in human clinical trials for a selected indication will be
      stopped, even though the compound could be effective in treating *other* medical
      conditions. Until now, any alternative uses were most often discovered by
      serendipity, such as in the cases of Pfizer’s Viagra ® ,
      Eli
      Lilly & Co.’s Evista ® ,
      and
      Abbott’s Hytrin ® .





Drug
      repositioning offers pharmaceutical companies a third approach to expanding
      their drug development pipelines. Gene Logic has the ability to evaluate a
      drug
      candidate in less than one year using our drug indication discovery platform,
      allowing us to quickly and efficiently discover possible new indications for
      a
      drug candidate. Following confirmation of the potential new use via *in
      vivo* efficacy
      tests, we believe that some of these candidates will be found suitable for
      re-entry into clinical development for a new indication. Our Drug Repositioning
      Division uses a technology platform that integrates technologies acquired from
      Millennium Pharmaceuticals in 2004 (which we continue to improve) with our
      core
      genomic and toxicogenomic capabilities (see below).





We
      have
      developed partnerships with four pharmaceutical partners in 2005 and 2006,
      Pfizer, Inc., F. Hoffmann-La Roche Ltd, Eli Lilly and Co., and NV
      Organon. Our
      agreement with Organon involves co-ownership and co-development of repositioned
      drug candidates, and it therefore differs substantially from our other
      agreements. Our other drug repositioning and development agreements vary
      somewhat as to specific terms (see “Contractual Arrangements” earlier), but
      generally conform to the following:





·
            We
                agree with a partner on a group of drug candidates to be evaluated.
                Our
                partner provides samples of the candidate and, at our expense, we
                analyze
                each candidate using our drug indication discovery
                platform;


·
            As
                to drug candidates for which we have identified new uses and that
                our
                partners take back into development, we are entitled to receive
                success-based payments when certain milestones are achieved. The
                totals
                range from $60-100+ million per compound and in most cases include
                the
                following individual milestones:


o
            Notice
                of re-initiation of development,


o
            Filing
                of an Investigational New Drug (“IND”) with the
                FDA,


o
            Establishment
                of proof of concept in a Phase II clinical
                trial,


o
            Commencement
                of a Phase III clinical trial, and


o
            Receipt
                of market approval in the U.S., in Europe, or in Japan; and






7


·
            As
                to drug candidates returned by our partners to commercial development,
                we
                are entitled to receive royalty payments, as a percentage of sales,
                that
                range from single- to low double-digits and are generally tiered
                according
                to sales volume.





In
      most
      cases, if our partner decides not to take the drug candidate back into
      development, we have development rights that would entitle our partner to
      receive milestone payments and royalties on sales. We may
      choose to license such candidates to a third party for development, or we may
      invest in further development to increase a particular candidate’s value prior
      to outlicensing. We have acquired certain rights from Millennium Pharmaceuticals
      to a drug candidate for which we have identified potential new
      indications.





We
      believe
      that no single technology is adequate to assess the effect of a drug candidate
      across complex biological processes. Our multi-platform solution allows us
      to
      systematically and efficiently evaluate a range of biological activity that
      potentially may be affected by a drug candidate, including its potential effect
      on a wide variety of diseases, without requiring a prior disease-specific
      hypothesis. The technologies we use to develop hypotheses about which diseases
      a
      drug candidate may be used to treat include *in
      vivo* (in
      life), *in
      vitro* (in
      dish), *in
      silico* (in
      computer data), and *ex
      vivo* (outside
      organism) assessments of a drug candidate at the DNA, RNA, protein, pathway,
      and
      cellular levels.





The
      technologies include:


*Real-Time* In Vivo *Imaging* - We are
      using in-licensed technology in conjunction with proprietary protocols and
      procedures to create an optimal imaging program that allows the pharmacological
      action of a compound in organs and tissues to be visualized non-invasively
      using
      genetically engineered mice. This technology allows us to determine which organs
      are affected by the compound, timing of the response, and biological pathway
      information.





Ex
      Vivo *Multiplex
      Bioanalytics* -
      Using
      sophisticated laboratory automation and proprietary targeted separation and
      analysis techniques, we can simultaneously measure levels of biomolecules in
      certain biological fluids collected from a compound-treated animal. By comparing
      the levels of biomolecules in treated animals to those in normal animals, we
      can
      identify activity caused by the compound which may signal potential alternative
      disease indications.





In
      Vitro *Molecular
      Pharmacology* - Powered
      by sophisticated robotics and software, part of our technology platform allows
      us to apply a compound to a large number of cell types to identify pathways
      that
      may be activated or repressed by the compound. Another technology enables us
      to
      apply a compound to cells in a broad panel of cellular assays, each of which
      represents one or more relevant diseases, to measure the effect of the compound
      on the diseases.





In
      Silico *Biology* - Our
      existing genomics capabilities enable us to find close relatives of the target
      protein in the genome, major and minor sites of expression of the target in
      the
      body, disease conditions that alter the expression of the target, and a host
      of
      additional drug target parameters. We use the BioExpress ® System
      and our proprietary algorithms and biostatistical expertise to identify pathways
      and cell regulatory patterns to understand a compound’s mechanism of activity in
      any organ of interest.





Potential
      alternative therapeutic uses can then be validated through a study, using an
      animal model related to the new disease indication, performed either in our
      laboratories or those of a third-party service provider or by our pharmaceutical
      partners.





In
      2006,
      we began evaluating more than 40 drug candidates for our drug development
      partners. Based on our experience to date, we have a success rate of 25%-33%
      in
      developing new hypotheses. Some of these candidates for which we have found
      new
      indications have or will progress to *in
      vivo* efficacy
      models to evaluate and support their suitability for re-entering clinical trials
      for the proposed new indications. For the candidates that will shortly begin *in
      vivo* efficacy
      studies, our partners have agreed to fund a portion of the costs associated
      with
      these studies. We expect that some portion of the drug candidates will have
      successful outcomes in the *in
      vivo* tests and
      re-enter clinical trials, but we do not yet have sufficient data to estimate
      the
      rate of clinical trial re-entry. We do not expect any of these drug candidates
      to re-enter clinical trials, and we do not expect to derive significant revenue
      from milestones or royalties from our drug development partnerships, until
      after
      2007.





**Genomics
      Division**


Our
      Genomics Division includes proprietary gene expression and toxicogenomics
      databases, toxicogenomics services, software tools, microarray data generation
      and analysis services (for gene expression and SNP genotyping), and other
      professional services. These services assist researchers in identifying and
      characterizing drug targets and biomarkers and can help predict potential human
      toxicity of drug candidates. Gene expression patterns and biological pathways
      in
      disease, genetic abnormalities, and mechanisms involved in drug efficacy and
      toxicity all help researchers make better informed decisions.





8




Our
      genomics data are based on gene expression results and clinical data from a
      collection of over 35,000 diseased and normal human and animal model tissues,
      as
      well as primary cells and cell cultures. These samples, together with relevant
      pathology and clinical data are collected from clinical centers, teaching
      hospitals, academic medical centers, standard toxicology animal lab studies
      and,
      in some instances, commercial providers. The samples in our BioExpress System
      represent more than 400 separate clinical disease indications with focused
      collection programs in critical therapeutic areas of greatest market interest,
      including oncology, cardiovascular, central nervous system, inflammatory and
      metabolic diseases. The samples in our ToxExpress ® System
      are primarily derived from animal liver, the primary toxicity response site,
      as
      well as animal heart and kidney.





We
      isolate
      and prepare the genetic material from these tissue samples and then analyze
      the
      genetic material through a high throughput, automated process using microarrays
      to determine gene expression. The results of this analysis and the corresponding
      pathology and clinical or experimental information for each sample are compiled
      using our software and bioinformatics capabilities, resulting in reference
      databases and software tools that are the foundation of our Genomics
      Division.





Our
      Genomics Division currently offers the following services:





**BioExpress
      System and Related Products and Services**  **-** The
      BioExpress System is a database that enables drug development researchers to
      use
      our data to: (i) investigate human disease and disease progression by
      identifying and prioritizing disease-associated gene targets through an
      understanding of gene expression patterns, genetic abnormalities, disease
      pathways and disease mechanisms of action, (ii) examine the interrelationship
      between the human genome, disease mechanisms and related individual clinical
      parameters, and (iii) identify potential disease biomarkers. The database
      comprises gene expression data derived from normal and diseased human and animal
      tissues and related pathology and clinical or experimental information about
      those samples. BioExpress Suites and Custom Suites consist of subsets of
      BioExpress System data. The ASCENTA ® System is
      a Web-based analysis system that contains selected, curated gene expression
      data
      sets from the BioExpress System.





**Microarray
      Data Generation and Analysis Services -** We offer
      a growing portfolio of services that enable customers to outsource to us the
      generation and analysis of gene expression and SNP genotyping information,
      primarily from customer-supplied biological samples. Our services are designed
      to deliver high quality, reproducible data in the customer’s preferred format.
      To provide these services, we use automation, state-of-the-art facilities and
      our expertise in sample handling, preparation and processing and data analysis.
      Customers use this information to help make better decisions throughout their
      drug discovery and development process.





**ToxExpress
      System and Related Services -** The
      ToxExpress System is a database consisting of gene expression profiles and
      associated experimental data from rat and canine tissues as well as rat and
      human primary hepatocytes. These samples include both normal samples and treated
      samples (i.e., samples that have been exposed to specific compounds with known
      toxicity). The information for each treated sample includes a “toxicity
      profile”, containing time-course, dose and other classical toxicology study
      information, supplemented with data from studies on primary human liver tissues
      and cells and other animal model tissues. The ToxExpress System data can be
      used
      to develop predictive models and to undertake mechanistic studies on acute
      and
      chronic human toxicity. Customers compare our data to theirs to develop risk
      assessment/management strategies, and to prioritize leads in development.
      ToxExpress also includes the following related offerings: ToxSuite Datasets,
      Molecular Mechanism of Toxicity Services, ToxShield TM Suites,
      and Custom ToxExpress Services.





**Genesis
      Enterprise System** ® **Software -** The
      Genesis Enterprise System Software is our enterprise-wide bioinformatics
      solution. It is a sophisticated and comprehensive software platform for
      warehousing, comparing, mining, analyzing and visualizing gene expression and
      clinical information. This software enables drug development researchers to
      compile and rapidly assess large data sets (including our proprietary data,
      customer-derived data and publicly available research data), and contains
      various tools for conducting sophisticated analyses of gene expression
      data.





In
      2006,
      in response to our customers’ shifting their research activities from
      early-stage drug discovery into later-stage development and validation efforts,
      we examined our Genomics Division for new avenues to create value. We concluded
      that our commercially demonstrated expertise in biomarker discovery and
      validation could be used as a potential new platform for molecular diagnostics
      development. We believe that the following capabilities could serve as the
      basis
      for more rapid development of biomarker diagnostic products: (i) our substantial
      clinical network of hospitals and other research institutions with which we
      have
      agreements for human sample accrual; (ii) our Biorepository containing more
      than
      17,000 human clinical samples from more than 400 different diseases; (iii)
      our
      BioExpress database and related software enabling biomarker prototyping, proof
      of concept, and specificity testing; and (iv) our GLP data generation capacity
      to undertake clinical validation studies.As
      a
      result, we have engaged outside financial advisors to identify strategic
      alternatives for our Genomics business. We continue to serve new and existing
      Genomics customers while we explore this opportunity.





9




**CUSTOMERS,
      SALES, MARKETING AND CUSTOMER SUPPORT**





During
      2006, three Genomics Division customers each accounted for 10% or more of our
      total revenue.





The
      following table sets forth information on the composition of our total revenue
      by geographic region for each of the last three fiscal years:


**Geographic
                  Region****For
                  the year ended:**
              
              **North**
                **America**
              
              **Pacific**
                **Rim**
              
              **Europe**December
                  31, 2006
              
              40%
              
              39%
              
              21%December
                  31, 2005
              
              34%
              
              40%
              
              26%December
                  31, 2004
              
              35%
              
              46%
              
              19%


We
      market
      and sell the services of our Genomics Division primarily to pharmaceutical
      and
      biotechnology companies based in North America, Japan and Europe. A
      company
      in Japan assists us, for a fee, in making sales in Japan and provides marketing
      advice and support in connection with our Genomics Division. W e
      also
      maintain customer service support representation in Japan and the United
      Kingdom. We provide pre- and post-sales support activities to our Genomics
      customers through our genomics services and software support group, including
      technical demonstrations, planning and implementation of initial deployment
      and
      new and ongoing training, content updates, software upgrades, on-going support
      and follow-on training.





We
      market
      and sell the capabilities of our Drug Repositioning Division to pharmaceutical
      companies based in North America, Japan and Europe. We have a team of business
      development professionals with diverse pharmaceutical and consulting experience
      who lead contract negotiations with potential pharmaceutical partners. Once
      a
      contract is signed, members of both the technology and business development
      groups interact with each pharmaceutical partner as required.





**RESEARCH
      & DEVELOPMENT**





Research
      and development expenses for the years ended 2006, 2005 and 2004 were $9.9
      million, $6.8 million and $2.4 million, respectively. Most of our research
      and
      development expenses consist of costs associated with our Drug Repositioning
      Division and are for the evaluation of customer-supplied drug candidates and
      ongoing development of our drug indication discovery platform.





A
      smaller
      portion of our research and development expense consists of general technology
      and process improvements related to our Genomics Division. This portion of
      our
      research and development is focused on developing new applications and licensing
      or acquiring technologies to serve as platforms for molecular diagnostics,
      and
      for the development of new gene expression, SNP genotyping, and other
      molecular-based solutions. We continue to research methods to improve the
      production of our gene expression data and decrease the size requirements for
      tissue samples.





10




**CONTRACTUAL
      ARRANGEMENTS**





**Drug
      Repositioning Division**





We
      have
      drug development partnerships to identify new indications for discontinued
      clinical-stage drug candidates from our pharmaceutical partners. Under these
      agreements, we do not receive up-front revenue. We are entitled to receive
      milestone payments in the event that a drug candidate for which we have found
      a
      new indication is returned to a partners’ development pipeline at its election.
      If our partner begins commercial sales of the repositioned drug, we would be
      entitled to a percentage of royalties based on actual sales or other
      compensation. Each partner has agreed to provide a specific number of drug
      candidates during the term of the applicable agreement, from which we can select
      those to be introduced into our drug repositioning pipeline. We will evaluate
      those drug candidates at our expense and will inform our partners of any new
      possible indications we identify for these drug candidates. In some instances,
      our partners have the right to elect to have us conduct mutually agreed upon *in
      vivo* model
      validation studies based on our hypotheses, which may be partially or entirely
      at our or our partners’ expense. Drug candidates with new indications would then
      be returned to a partner’s pipeline at its sole election. If a partner elects
      not to pursue a new use we identify, we may, in some instances, have the option
      to develop, license and commercialize such use, subject to payments of
      success-based milestones and royalties to our partner. Unlike our other
      agreements, under the agreement with Organon, both companies are equal owners
      of
      drug candidates for which we find new uses and may decide to jointly develop
      and
      commercialize the drug candidate. If we acquire development rights as to a
      given
      drug candidate, we could elect to either (i) out-license the development rights
      to such drug candidate without further development on our part, or (ii) continue
      to develop the drug candidate, either through our own resources or with a
      development partner, to a point where we can more effectively out-license the
      drug candidate to a third-party for final development and commercialization.





We
      do not
      expect to derive any significant revenue from milestones or royalties under
      these agreements until after 2007.





**Genomics
      Division**





We
      expect
      that approximately half of our Genomics Division revenue in 2007 will continue
      to be derived from subscription agreements. Our customers enter into multi-year
      or perpetual license agreements for our larger databases (and annual,
      multi-year, or perpetual license agreements for certain of our smaller
      databases) to obtain non-exclusive access to all or parts of our gene expression
      and toxicogenomics databases. These agreements may be for a full database or
      a
      portion of a database tailored to a customer’s needs and most relevant to their
      drug development strategy. One of our subscription agreements contains
      requirements for the addition of certain data that, if not met, could result
      in
      a reduction in license fees. Pricing for these subscriptions is generally
      dependent upon such factors as the database solution being offered, the term
      of
      the license, the extent and type of use by the customer, the number of users
      at
      the customer site, the scope of installation at the customer’s site,
      requirements for customization, any content requirements and whether we provide
      any custom analysis or data management services. Contracts under these
      subscription agreements may be terminated by either party if the other party
      breaches the agreement and fails to cure such breach within any applicable
      cure
      period or in the event of a bankruptcy of either party.





In
      certain
      circumstances, customers may acquire a perpetual license to use certain
      information from our databases. Pricing for perpetual licenses to data is
      generally dependent upon such factors as the data solution being offered, the
      extent and type of use by the customer and the number of users at the customer
      site. Some of our customers purchasing perpetual licenses continue as customers
      purchasing additional services, including licenses to other databases and
      microarray data generation and analysis services.





We
      expect
      that approximately half of our revenue will be derived from a combination of
      microarray data generation and analysis and other professional services and
      solutions. The particular type and scope of the services we provide are based
      on
      the customer’s needs. Pricing for these services is generally dependent upon
      such factors as the number of samples or compounds analyzed, the type of
      analysis performed, the starting material provided by the customer, the type
      and
      source of GeneChip ® microarray used for the services and requirements for customization. Generally,
      contracts for services may be terminated by either party if the other party
      breaches the agreement and fails to cure such breach within any applicable
      cure
      period or in the event of a bankruptcy of either party.




COMPETITION





**Drug
      Repositioning Division**





Currently,
      an increasing number of pharmaceutical and biotechnology companies are
      evaluating whether to implement internal repositioning programs for their own
      drug candidates. In addition, there are companies attempting to reposition
      drug
      candidates on behalf of drug development partners, including Melior, KineMed,
      Perlegen Sciences, Inc., Vanda Pharmaceuticals Inc. and CombinatoRX Inc. We
      are
      not aware of any existing competitor that has developed, or is in the process
      of
      developing, a comparable suite of technologies to that employed by us. Other
      companies, some of whom are not doing repositioning work, have individual
      technologies that could directly compete with components of our drug
      repositioning technology platform.




11




**Genomics
      Division**





Our
      Genomics Division competes with internal capabilities of pharmaceutical and
      biotechnology companies and universities worldwide which may choose to use
      genomics technologies to generate for their own use similar sets of gene
      expression or SNP data. To a lesser extent, we also compete with commercial
      providers who offer less extensive and, in at least one instance,
      population-specific data (deCODE genetics, Inc.). In addition, at least one
      privately held company that we know of (Iconix Pharmaceuticals, Inc.) licenses
      an alternative toxicogenomics database and provides predictive toxicogenomics
      services that compete with our toxicogenomics services. In addition, we face
      increasing competition from a variety of public and private companies in the
      area of microarray data generation and analysis services, including Expression
      Analysis, Inc. and Clinical Data, Inc. However, we currently believe there
      are
      no commercially available gene expression databases of comparable size and
      scale
      to that of our BioExpress and ToxExpress System databases. Our services compete
      on the basis of: scope and quality of services offered; price; speed of delivery
      of specific services; strength of reputation; size of our databases; alternative
      technologies; expertise and experience in specific technological and scientific
      areas; subject focus of genomics and toxicogenomics data sets and technologies;
      our ability to acquire, handle, process, store, analyze and present complex
      gene
      expression data and clinical annotation information in a timely, quality
      controlled and accurate manner; and, our ability to integrate proprietary gene
      expression data with publicly available and other third-party generated data
      sets.





**SUPPLIERS**




**Drug
      Repositioning Division**





In
      our
      Drug Repositioning Division, we have a non-exclusive license and sublicense
      from
      Promega Corporation (the “Promega License”) to use the luminescence technology
      we use in our real-time *in
      vivo* imaging.
      The term of the agreement is for the life of the relevant patents, unless
      earlier terminated upon breach by either party, bankruptcy or termination of
      Promega’s rights by an academic institution that holds certain rights to a
      portion of the technology (in which case we would seek separate licenses from
      Promega for its technology and directly from the institution). Under the terms
      of the agreement, we paid Promega an initial fee and we pay Promega an annual
      license maintenance fee and royalties on luminescent assay reagents we use
      that
      are not purchased from Promega. We also have a non-exclusive license with
      Xenogen Corporation (the “Xenogen License”), for which we pay an annual license
      fee to use the Xenogen Imaging Technology and certain related software in
      connection with our use of certain imaging equipment we purchased from Xenogen
      for use in performing real-time *in
      vivo* imaging.
      The term of the Xenogen license ends in 2008, with a three year renewal option,
      subject to earlier termination if we fail to make timely payment or otherwise
      breach the terms of the agreement, and we have agreed to indemnify Xenogen
      and
      certain other persons and entities for liability resulting from our use of
      the
      technology.





**Genomics
      Division******





To
      build
      our genomics and toxicogenomics databases that are the basis of our Genomics
      Division, we enter into collaboration agreements from time to time with
      institutions or individuals (including a few commercial providers), to obtain
      specific tissues, blood samples and cell lines and associated experimental
      or
      clinical data. We pay fees under these agreements and, in the case of
      non-commercial providers, we may provide access to software and to certain
      gene
      expression data and financial support for the collaborator’s research.
      Non-commercial collaboration agreements typically have a term of two to three
      years, subject to automatic renewal unless earlier terminated by either party.
      Since we’ve already compiled a broad base of general data, our efforts are
      currently focused on the procurement of special, high-value, difficult-to-obtain
      and rare samples. We continue to believe that none of these collaboration
      agreements are individually material to our operations because any one can
      be
      replaced on comparable terms with another provider.





To
      generate the gene expression data in our genomics and toxicogenomics databases
      and to provide microarray data generation and analysis and other services and
      solutions as part of our Genomics Division, we use Affymetrix, Inc.
      (“Affymetrix”) microarrays, reagents, instrumentation and software. Our 2006
      supply and license agreement with Affymetrix expired on December 31, 2006.
      On
      January 9, 2007, but effective January 1, 2007, we entered into (a) a new
      three-year Biotech Access Agreement governing our purchase and use of Affymetrix
      microarrays and related products for internal research and to generate data
      for
      databases and (b) a new two-year Service Provider Agreement governing the
      purchase and use by us of microarrays to provide data generation and analysis
      and other services and solutions to individual customers. Under terms of the
      new
      agreements, we are obligated to grant to Affymetrix a non-exclusive,
      royalty-free license to certain inventions we make related to their microarray
      technology and, under certain circumstances, to offer to negotiate with them
      a
      non-exclusive, royalty-bearing license for certain inventions we make related
      to
      sample processing. The Biotech Access Agreement requires payment of an annual
      access fee of $50,000, subject to waiver for any year in which we are an
      Affymetrix Service Provider, and sets prices for the products, reagents and
      instrumentation we purchase from Affymetrix. The Service Provider Agreement
      (but
      not the BioTech Access Agreement) is terminable by either party if the other
      party defaults under the agreement and, after written notice from the
      non-defaulting party, fails to cure the default during the applicable cure
      period. **





12




In
      the
      past, we also purchased from Affymetrix a reagent made by Enzo BioChem,
      Inc. (“Enzo”). As first reported in 2004, in late 2003 Enzo terminated its
      distribution agreement with Affymetrix and filed suit against Affymetrix
      alleging in part that Affymetrix had agreements with us and other named
      customers to supply the reagent for use in potential violation of their rights.
      Subsequently, Affymetrix denied Enzo’s claims, filed counterclaims and also
      introduced a new alternative reagent, which we are using. The lawsuit is
      currently in the discovery and pretrial hearing stage. **





**INTELLECTUAL
      PROPERTY RIGHTS**





As
      of
      December 31, 2006, in our Genomics Division, we have exclusive ownership or
      license rights to 58 issued patents, 26 of which are United States patents,
      and
      98 patent applications, 47 of which are United States utility (non-provisional)
      or provisional patent applications. As of December 31, 2006, in our Drug
      Repositioning Division, we have exclusive ownership or license rights to 8
      issued patents, all of which are United States patents, and 25 patent
      applications, 11 of which are United States utility (non-provisional) or
      provisional patent applications; except for one application, all of these
      patents and applications relate to either of two compounds or their potential
      uses. We do not at this time believe that any single patent or application
      is
      individually material to our business.





With
      respect to proprietary know-how and products and processes for which patents
      are
      of questionable value or are difficult or impossible to obtain or enforce,
      we
      rely on confidentiality agreements and other trade secret protection measures
      to
      protect our interests. We take security measures to protect our proprietary
      know-how and technologies and confidential data, including requiring all
      employees, consultants and customers to enter into confidentiality agreements.
      In arrangements with our customers or suppliers that require the sharing of
      processes and data, our policy is to make available only such data as is
      relevant to our agreements with such customers and suppliers, subject to
      appropriate contractual restrictions, including requirements for them to
      maintain confidentiality and use such processes and data solely for our benefit.
      However, such measures may not adequately protect our data.





In
      the
      areas of genomics, toxicogenomics and bioinformatics technologies related to
      these capabilities, we seek patent rights primarily to protect our freedom
      to
      operate, and to obtain whatever exclusivity may be available under a given
      patent that relates to our main service offerings. We apply for patent
      protection on methods of obtaining and using genomic information and on
      databases, software, and user interface tools relating to the management and
      use
      of such information. Our applications may also contain claims to methods of
      identifying and using gene expression profiles and genetic markers, claims
      to
      novel genes and gene fragments, and claims to novel uses for known genes or
      gene
      fragments. We also actively file patent applications on technologies and
      methodologies we have developed in the field of toxicogenomics. Our
      toxicogenomics patent applications contain claims that cover methods of
      predicting toxicity, toxicity markers, statistical models, and other inventions
      related to our toxicogenomics program.





We
      have a
      worldwide, nonexclusive, fully paid, non-transferable license for the life
      of
      certain patents from Incyte Corporation (“Incyte”) (formerly Incyte Genomics,
      Inc.), obtained in connection with the settlement of certain litigation in
      2001,
      to use i) a process that Affymetrix recommends we use in the preparation of
      samples for use with the Affymetrix GeneChip platform; and ii) certain patent
      rights related to the development and use of certain types of databases. The
      samples and process may only be used to generate gene expression data for use
      in
      research and development. The license may be terminated by Incyte under certain
      limited circumstances if we: i) use certain patents outside of the permitted
      field of use, or induce another party to do so; ii) violate certain agreements
      regarding any future disputes between the parties involving these patents;
      or
      iii) violate the confidentiality provisions of the agreement. If Incyte were
      to
      terminate the license agreement on the grounds that we materially breached
      such
      agreement and if we dispute such claim, the party in whose favor the court
      finds
      would be entitled to an agreed-upon payment from the losing party. Likewise,
      if
      we claim Incyte has materially breached the License Agreement and if Incyte
      disputes such claim, the party in whose favor the court finds would be entitled
      to an agreed-upon payment from the losing party.





Under
      the
      terms of our supply agreement with Affymetrix described above under “Suppliers,”
we have the right to use Affymetrix products, software, systems and database
      patent rights to generate and use databases, license the data in such databases
      to third parties and provide sample processing services to generate and analyze
      data for a customer’s internal use for research and development. In addition, we
      are obligated to grant to Affymetrix a non-exclusive, royalty-free license
      to
      certain inventions we make related to their microarray technology and, under
      certain circumstances, to offer to negotiate with them a non-exclusive,
      royalty-bearing license for certain inventions we make related to sample
      processing.





13


For
      our
      Drug Repositioning Division, we have acquired or obtained licenses to use
      certain intellectual property rights and technologies from Millennium, Xenogen,
      Promega and others, and we will, from time to time, continue to acquire and
      obtain licenses to use intellectual property rights and technologies as needed
      for our Drug Repositioning Division. We will also pursue patents, where
      appropriate, on new enabling technology used in our Drug Repositioning Division.
      Certain agreements with partners having rights to known drugs, under which
      our
      Drug Repositioning Division seeks new therapeutic uses for such compounds,
      provide us with certain intellectual property rights to those new uses. Where
      such agreements permit, we will pursue broad patent protection for selected
      new
      uses that we have found for known drugs.





**GOVERNMENT
      REGULATION**





**Drug
      Repositioning Division**





Our
      Drug
      Repositioning Division operations in our Cambridge, Massachusetts facilities
      are
      subject to a
      variety
      of national, state and local laws and regulations, including the Animal Welfare
      Act and the rules and regulations promulgated thereunder by the United States
      Department of Agriculture (“USDA”). These regulations establish the standards
      for the humane treatment, care, use and handling of animals by research
      facilities. In addition, our Cambridge facilities are registered with the United
      States National Institutes of Health Office of Protection for Research Risks
      (“OPRR”) and comply with The Office of Laboratory Animal Welfare (“OLAW”)
      regulations. Our Cambridge, Mass. facilities maintain standard operating
      procedures and the documentation necessary to comply with such
      regulations. Our
      Cambridge, facility is subject to regulation under the Ordinance for the use
      of
      Laboratory Animals for the City of Cambridge which is enforced by the
      Commissioner of Laboratory Animals. Under this ordinance we maintain standard
      operating procedures and the documentation necessary to comply with such
      regulations.





**Genomics
      Division** ****





Our
      Genomics Division depends upon our continued access to and use of tissue samples
      and related clinical data, which are affected by regulations governing
      disclosure of confidential personal data, such as regulations governing the
      disclosure of medical information, issued by the Department of Health and Human
      Services under the Health Insurance Portability and Accountability Act of 1996
      (“HIPAA”), and applicable regulations of Canada and the European Union. We
      monitor our procedures to ensure that such procedures comply with applicable
      privacy regulations. We also perform certain experiments in our Genomics
      Division which comply with applicable laboratory standards as prescribed by
      the
      Good Laboratory Practice (“GLP”) regulations promulgated by the FDA. The
      acquisition and use of human tissue by us is generally subject to regulations
      imposed by the Internal Review Boards of the organizations providing such
      materials and to the requirements for patient informed consent.





**General** ****





All
      of our
      laboratories are subject to licensing and regulation under federal, state and
      local laws relating to hazard communication and employee right-to-know
      regulations, the handling, storage and disposal of medical specimens, laboratory
      materials and hazardous waste and radioactive materials and the safety and
      health of laboratory employees.





The
      Occupational Safety and Health Administration (“OSHA”) has established extensive
      requirements relating to workplace safety, which require us follow certain
      procedures including providing ongoing training and proper equipment for
      employees working in our facilities. Our employees receive initial and periodic
      training focusing on compliance with applicable hazardous materials regulations
      and health and safety guidelines.





The
      use of
      controlled substances in our laboratory testing facilities is regulated in
      the
      United States by the United States Drug Enforcement Administration (“DEA”) and
      relevant state and local agencies. All of our laboratories using controlled
      substances for testing purposes are subject to licensure by the DEA and
      applicable state agencies.





The
      regulations of the United States Department of Transportation and the United
      States Postal Service apply to the transportation of laboratory specimens via
      surface and air.







14




**SEASONALITY**





Customer
      purchasing patterns do not show significant predictable seasonal
      variation.





**HUMAN
      RESOURCES**





As
      of
      December 31, 2006, we had 151 employees, consisting of 150 within the United
      States, and 1 who resides in Japan. Most of our employees are engaged directly
      in research, development, production and marketing and sales activities. None
      of
      our employees are covered by collective bargaining agreements, and management
      considers relations with our employees to be good.





**AVAILABLE
      INFORMATION**





We
      maintain a Web site at www.genelogic.com . However,
      material contained on our Internet site is not incorporated by reference into
      this Form 10-K. We make available free of charge on or through our Web site
      our
      SEC filings, including our Annual Report on Form 10-K, Quarterly Reports on
      Form
      10-Q, Current Reports on Form 8-K and amendments to those reports we file or
      furnish pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of
      1934 as soon as reasonably practicable after such reports are electronically
      filed with, or furnished to, the Securities and Exchange Commission
      (SEC).






15






**ITEM
      1A.****RISK FACTORS**





We
      operate
      in a rapidly changing environment that involves a number of risks, some of
      which
      are beyond our control. Set forth below are risks and uncertainties we have
      identified as material that could cause actual results to differ materially
      from
      the results contemplated by the forward-looking statements contained in this
      Form 10-K and that could have material adverse effects on our business, results
      of operations, financial condition and cash flows.





**Risks
      Related to Our Drug Repositioning Division**





**Our
      platform**  **may
      not yield sufficient new indications and thus measurable successes to
      gain market acceptance.**





We
      may not
      succeed in achieving significant market acceptance of any of our technologies
      used in drug repositioning activities because the technologies we use and our
      approach to drug repositioning may fail to generate sufficient new indications
      that are accepted for clinical trial re-entry or that are of sufficient
      commercial value to interest our partners. This outcome would have a material
      adverse effect on our business, financial condition, results of operations
      and
      market valuation. ****





**Others
      are developing and could provide drug repositioning research and services that
      could compete with us and jeopardize our business and financial
      objectives.**





Pharmaceutical
      companies and other companies and research organizations are developing
      technologies for better understanding the complex biological processes affected
      by compounds and selecting, purposing and repurposing compounds. These parties
      may elect to use such technologies internally, in lieu of using our services,
      or
      may successfully offer such services based on their technologies in competition
      against us. While we have license rights related to certain of the technologies
      that comprise the technology platform for our Drug Repositioning Division,
      we do
      not currently have issued patents to any of the technologies we use other than
      our genomics databases and software and our license rights to the other
      technologies are generally non-exclusive. We will seek patents or other
      protection on other elements of the technologies we use to find new indications
      for drug candidates. We may not be able to obtain adequate protection for these
      technologies or the technologies may become obsolete. Competition for our
      services could cause us to be unable to get sufficient compounds to achieve
      our
      business objectives, and could otherwise jeopardize our ability to achieve
      our
      financial objectives, in drug development.





**The
      time required to present and negotiate our drug repositioning agreements is
      lengthy; we may spend considerable resources on unsuccessful sales efforts
      or
      may not be able to negotiate and enter into drug development partnership
      agreements on the schedule we anticipate.**





Our
      drug
      development business strategy depends upon our ability to establish
      collaborative arrangements with pharmaceutical partners to reposition candidates
      that have been assessed as safe in human clinical trials but for which
      development for the original indication has been discontinued. If we are unable
      to establish partnerships with a sufficient number of pharmaceutical companies,
      we may not be able to obtain enough drug candidates to meet our business
      objectives.





Our
      ability to obtain new drug development partnerships depends upon our ability
      to
      convince them that our drug indication discovery platform can increase
      productivity for their drug development efforts. Intentional repurposing of
      candidates is a relatively new activity. Pharmaceutical companies need to be
      persuaded of the potential of this approach. In addition, pharmaceutical
      companies do not generally have specific individuals responsible for managing
      discontinued candidates. The time required to present our proposals for drug
      repositioning and negotiate agreements is substantial (often 12 months or more)
      and we may expend substantial effort with no assurance that a new agreement
      will
      result on terms acceptable to us or that provide sufficient opportunities for
      us. Consolidations of pharmaceutical and biotechnology companies could also
      affect the timing and progress of our Drug Repositioning Division sales efforts.





**We
      may be unable to obtain access to sufficient numbers of acceptable candidates
      for evaluation by our platform to meet our business
      objectives**





Our
      business plan is dependent on having sufficient acceptable compounds available
      to evaluate, to provide us with sufficient opportunities to find compounds
      with
      alternative indications that are appealing to our partners or to us for further
      development. At present, we can only obtain access to these compounds through
      our partners. There are challenges to obtaining new drug development partnership
      agreements, as described above. Further, even after we enter into an agreement
      with a partner, it may take time for that partner to identify acceptable
      candidates it is willing to make available to us which may further limit the
      numbers, or timely availability, of compounds we can use to meet our business
      and financial objectives. At present, while we have the capacity to evaluate
      greater numbers of compounds, such compounds are not available under existing
      agreements. Our achievement of our business objectives will continue to be
      limited by the numbers of acceptable candidate compounds available for
      evaluation for alternative indications.






16




**We
      may be required to invest significant resources in identifying alternative
      uses
      for our partners’ candidates. We will not receive any revenue from our partners
      unless they decide to return candidates to their pipeline and our ability to
      earn revenue under our drug development agreements is based in part on factors
      over which we may have little or no control.**





Under
      our
      drug development partnership agreements we typically have agreed to perform
      evaluations of candidates at our expense. Accordingly, we may need to invest
      significant resources in seeking alternative uses for one or more partners’ drug
      candidates using our drug indication discovery platform, and we may find no
      new
      or alternative uses for these candidates. If we identify new or alternative
      uses
      for a given candidate, we may not be able to realize any value from the
      identification of such alternative use until our partner determines, if ever,
      that the use makes the candidate sufficiently desirable to warrant further
      development and commercialization. We do not control when, on what schedule,
      or
      whether, a partner will accept a drug candidate for redevelopment or at what
      pace, if at all, the partner will conduct further development efforts of such
      repositioned drug candidate. Such decisions may be affected by factors of which
      we may not be aware and over which we will have no influence.





In
      the
      event that a partner declined to develop a candidate for an indication we had
      found, we could, in some instances and with the agreement of our partner,
      acquire rights to develop that candidate for particular indications and, if
      we
      were to elect to pursue development of any such candidate, any such development
      would require that we promptly find a partner and/or that we invest substantial
      financial and other resources to develop the product to a stage where we could
      license it out to a third-party for final development and commercialization.
      We
      have not engaged in drug development to date and there can be no assurance
      that
      we would be successful in conducting such development or in identifying a
      licensing partner to continue such development on terms that would be profitable
      to us.





If
      we find
      new uses for candidates, we may not realize sufficient return from such
      discoveries. The indications we find may not be sufficiently attractive for
      development by our partners or us due to factors such as: difficulties in
      obtaining adequate patent protection for the new indication, the existence
      or
      discovery of alternate drug candidates that may equally or more effectively
      address the therapeutic need or the internal requirements of our pharmaceutical
      partners. Even if a candidate reenters a partner's pipeline, our milestone
      revenue depends on whether further development of the candidate is successful
      and our royalty revenue will depend on whether the candidate is commercially
      successful, all of which is outside of our control.




These
      factors may limit our ability to earn significant revenue under any of our
      agreements.





**The
      drug indication discovery platform for our Drug Repositioning Division currently
      relies in part on inventions of third parties that may not always be available
      to us.**





Our
      drug
      indication discovery platform currently relies in part on inventions to which
      third parties have obtained or are obtaining patent or other rights and, in
      the
      process of further developing the platform we may need to license rights to
      use
      other such inventions. We may not be able to retain or to obtain license rights
      needed for one or more of these technologies on terms acceptable to us. We
      currently license certain technology in connection with certain products
      purchased from Xenogen Corporation and we also purchase and license the right
      to
      use Luciferase from Promega Corporation. The Xenogen license is for a term
      ending in 2008 with an option to renew for an additional three years. The
      Promega license is for a period ending on the expiration or abandonment of
      the
      last of the valid claims of the licensed patent rights. Each of these licenses
      is terminable if we breach the agreement and fail to cure such breach within
      the
      applicable cure period. In addition, the Promega license includes a sublicense
      to rights owned by an academic institution and the license from Promega would
      terminate if the license to Promega from the academic institution terminated.
      If
      either of these agreements were to terminate while the relevant patent claims
      were enforceable and if we were not able to obtain new licenses, we would have
      to abandon or substantially revise one of the key technologies used in our
      drug
      repositioning process.





**Risks
      Related to Our Genomics Division**





**The
      Genomics Division is currently our sole source of revenue and, to continue
      to
      derive revenue from this division in the short term and to achieve our strategic
      objectives, we need to maintain the existing business.**





17




While
      we
      seek new uses for our Genomics assets, our strategy depends, in part, on
      maintaining revenue from and controlling costs in our Genomics Division. To
      maintain revenue, we must extend existing subscriptions, find new subscribers
      and obtain new orders from existing customers and find new customers for our
      data generation and other services. All of our remaining long-term subscriptions
      are due to expire by their terms in 2008 and there is no assurance that any
      of
      them will be renewed or extended. While we currently expect to continue to
      reduce our dependence on large, multi-year subscription agreements, and increase
      revenue from data generation services, if we fail to achieve our revenue
      objectives, our Genomics Division segment could experience further losses,
      which
      also could have an adverse effect on our ability to develop an alternative
      strategy for the Genomics assets and our entire business could materially
      suffer. It is also possible that we could eventually be forced to further reduce
      the size of our business or to further dispose of some or all of the Genomics
      assets.





**We
      may not be able to identify or implement a business strategy that will achieve
      our objectives.**





While
      we
      believe that our expertise in biomarker discovery and validation could be used
      as a potential new platform for molecular diagnostics development and we have
      engaged outside financial advisors who are actively assisting us in determining
      the value of our competencies and assets in this area, it is possible that
      we
      will be unable to identify a strategic alternative that would provide
      significant value from the further development of these assets. Further, in
      the
      process of determining the long-term prospects and value of the business, we
      may
      conclude that the fair value of the Genomics business is less than its carrying
      value, which may require us to take one or more impairment charges.





**As
      a result of uncertainty about our long-term Genomics business strategy and
      as a
      result of restructuring our operations, we may have difficulty attracting and
      retaining customers and employees.**





We
      have
      significantly restructured our Genomics Division to reduce future operating
      expenses and have changed the strategic focus of the Company. We are also
      contemplating strategic alternatives that could have a material impact on our
      business as it is presently conducted, none of which may be successful. These
      factors create uncertainty, which could cause customers and employees to have
      concerns about our future or, in the case of employees, their future, and they
      may be hesitant to commit to a long-term relationship with us and existing
      employees may be distracted from their job responsibilities and seek other
      employment. We may also find it difficult to recruit new employees due to
      uncertainty over our future. If customers do not believe that we will continue
      to support, enhance or update our services, they could be less willing to
      purchase those services. While we believe our personnel reductions have targeted
      areas not necessary to our ability to serve customers, there can be no assurance
      that these changes will not have a negative impact on our ability to keep
      retained staff or provide adequate services to our customers, which, in turn,
      may have an adverse impact on our ability to retain and hire employees and
      to
      retain existing customers and obtain new customers.





**Our
      genomics and toxicogenomics databases may require upgrading and expansion to
      keep existing and find new customers, but such upgrading and expansion may
      be
      difficult or expensive.**





In
      the
      past, we have invested in new database content, upgraded our databases and
      developed new versions of our software tools due to customer demand and changes
      in the microarray platforms. In recent years we have reduced the amount of
      content added each year to our database and focused on data from samples of
      particular interest to our customers. Specific tissue and blood samples that
      we
      believe will enhance the content of our databases may be difficult to obtain
      or
      may not be available on terms acceptable to us. Future investments will be
      limited as we continue the transformation of Gene Logic into a biopharmaceutical
      company. However, if we choose not to make such changes, it could affect our
      ability to keep existing or find new customers.





**The
      sales cycle for our Genomics Division is lengthy; we may spend considerable
      resources on unsuccessful sales efforts or may not be able to complete deals
      on
      the schedule we anticipate.**





The
      sales
      cycle for multi-year subscriptions to our BioExpress and ToxExpress System
      databases is estimated at nine to 15 months; the sales cycle for our other
      services, including toxicogenomics reports, microarray data generation and
      analysis and other professional services and solutions requires at least several
      months. The lengthy sales cycle is caused by a number of factors, including
      our
      need to educate our existing and potential customers and sell the benefits
      of
      the services of our Genomics Division to a variety of groups within such
      companies and the possible negotiation of unique terms. We may expend
      substantial effort with no assurance that a new or extended subscription or
      other agreement will result or that it can be completed in a timely manner.
      Actual and proposed consolidations of pharmaceutical and biotechnology companies
      have affected, and may in the future affect, our Genomics Division sales
      efforts.





**We
      rely on microarrays and other products supplied by Affymetrix to maintain and
      add to the underlying genomics and toxicogenomics data of our databases and
      to
      provide our microarray data generation and analysis and other
      services.**






18




Our
      continuing ability to maintain and add to the gene expression data that is
      the
      foundation of our databases depends in part on the ability of Affymetrix to
      supply us with adequate quantities of high quality microarrays and other
      products and to make available licenses of technologies to use such products.
      We
      also rely on Affymetrix microarrays to provide our microarray data generation
      and analysis services and on a new line of SNP-based microarrays to provide
      our
      SNP genotyping services. Affymetrix provides us with microarrays, reagents,
      instrumentation and software under two agreements that expire on December 31,
      2008 and 2009 respectively. There is no assurance that we can renew such
      agreements on terms comparable to, or as favorable to us as, the current
      agreements. One of the agreements is also specifically terminable if we breach
      the agreement and fail to cure any breach within the applicable cure period.
      If
      Affymetrix is unable or unwilling to supply us with the products and licenses
      we
      require on acceptable terms or if the microarrays are unavailable or defective
      or otherwise unreliable, we may incur additional database production costs
      and
      we may need to obtain alternative technologies. Alternative technologies may
      not
      be available to us, or may only be available to us on unfavorable terms.
      Restricted or curtailed access to such products could cause our Genomics
      Division to suffer by preventing or delaying our ability to provide our
      databases and services or increasing the cost to generate additional or
      replacement content for our databases.




**Other
      Risks**





**We
      have a history of operating losses that are likely to continue for some time.**





We
      have
      incurred operating losses in each year since our inception, including losses
      of
      $54.7 million in 2006, $48.3 million in 2005, and $28.5 million in 2004. At
      December 31, 2006, we had an accumulated deficit of $315.7 million. Our losses
      have resulted principally from costs incurred in the development, marketing
      and
      sale of services from our Genomics and former Preclinical Divisions, development
      of the Drug Repositioning Division, the impairment of goodwill of our former
      Preclinical Division, and acquisitions of research and development. These costs
      have exceeded our revenue and we expect to incur additional losses in the
      future, including losses relating to the ongoing development of our Drug
      Repositioning Division.





**Our
      ability to use our Federal Net Operating Loss carryforwards may be
      limited.**





We
      intend
      to utilize our Federal Net Operating Loss carryforwards (“NOLs”) to reduce any
      potential future United States income tax liability. These NOLs begin to expire
      in 2008. Based on a Section 382 analysis performed in the fourth quarter of
      2006
      (that excluded NOLs obtained through acquisitions), we do not believe we are
      currently subject to any current material limitations on the use of our NOLs
      to
      offset our potential future income tax liability, although such limitations
      could occur in the future. However, we may not generate sufficient taxable
      income to utilize our NOLs prior to their expiration.





**Our
      ability to retain and recruit and retain qualified personnel may be adversely
      affected by the substantial changes we are undergoing.**





In
      2006,
      we sold our Preclinical Division and restructured our Genomics workforce and
      supporting staff. We are now in the process of trying to develop new uses and
      find strategic alternatives for our Genomics assets and capabilities and
      continuing to develop our Drug Repositioning Business. These changes and the
      uncertainty of our future may make it difficult to retain and to recruit
      qualified personnel.





**We
      may not be able to obtain necessary funding as required to develop and operate
      our Drug Repositioning Business and our Genomics Business.**





We
      do not
      expect to begin to generate any significant revenue in our Drug Repositioning
      business until at least after 2007 and our Genomics business is currently
      operating at a loss. We are seeking strategic alternatives for our Genomics
      business to provide funding to develop the potential of this business for human
      molecular diagnostics. We may also need additional financing for our Drug
      Repositioning business. If we are unable to find an acceptable strategic
      alternative for our Genomics Division or to obtain necessary financing, or
      financing on favorable terms, when needed for our Drug Repositioning Division,
      our business would materially suffer. If additional financing is obtained
      through the issuance of equity securities or debt convertible to equity, our
      existing stockholders could experience significant dilution.





**Our
      revenue is derived primarily from, and is subject to risks faced by, the
      pharmaceutical and biotechnology industries in the United States, Japan and
      Europe; our revenue is also subject to foreign currency risk.**





We
      expect
      that our revenue will continue to be derived primarily from agreements with
      pharmaceutical and biotechnology companies. As a consequence, our results of
      operations may fluctuate substantially due to fluctuations or delays in our
      customers’ research and development expenditures and other factors affecting
      their purchasing decisions. These factors include:





·
            fluctuations
                in current or potential customers’ research and development budgets;


·
            changes
                in national or international economic
                conditions;


·
            access
                to capital markets by current or potential biotechnology
                customers;






19


·
            market-driven
                pressures on current or potential customers to improve productivity
                efficiencies through consolidation, cost reduction and overall research
                and development effectiveness;


·
            decisions
                by current or potential customers to purchase new, improved and/or
                alternative technologies;


·
            pressure
                to limit government spending in sectors relevant to our business
                or
                changes in government procurement practices, including the process
                for
                determining reimbursement rates related to United States Government
                contracts;


·
            mergers
                and acquisitions within the pharmaceutical and biotechnology industry
                resulting in fewer potential customers for our services and solutions;


·
            new
                or more stringent application of FDA and other laws and regulations
                in the
                drug approval process; and


·
            regulatory
                reviews by the FDA or other regulatory bodies that could delay or
                increase
                costs associated with drug
                development.





In
      addition, beginning in 2005, contracts with our Japanese customers began to
      be
      payable in Japanese Yen and are subject to fluctuations due to changes in
      currency exchange rates.





None
      of
      these factors is within our control.





**We
      sold our Preclinical Division in December 2006, but are still subject to certain
      risks from that sale.**





In
      December 2006, we sold our Preclinical Division. Under the terms of that sale,
      there was to be a post-closing reconciliation of working capital that could
      result in a purchase price adjustment. In accordance with the terms of the
      agreement, the buyer has raised the possibility that an adjustment is required,
      requiring us to make an additional payment to the buyer. We are in the process
      of resolving the matter as provided in the agreement. In addition, $1.5 million
      of the purchase price was placed in escrow until December 15, 2007 to cover
      our
      potential liability for any breaches of our representations, warranties and
      agreements in the stock purchase agreement, including as to certain retained
      liabilities. Claims for breaches of warranty relating to payment of taxes and
      environmental and certain other matters can exceed the escrow amount. If we
      concluded that the buyer is entitled to a purchase price adjustment under the
      terms of the agreement or the buyer makes valid claims against the escrow fund
      or under other indemnification provisions in the purchase agreement that are
      not
      subject to the escrow fund limitations, we could experience further costs
      associated with the sale of the business and may be required to further adjust
      the impairment charge associated with the sale of the Preclinical
      Division.




We
      also
      guarantee two leases of facilities to our former Preclinical Division. Buyer
      is
      required to either substitute itself as guarantor or indemnify us for any claims
      made against our guarantees. If the former Preclinical Division defaults under
      such leases and claims are made against our guarantees and buyer fails to
      substitute itself as guarantor or adequately indemnify us, we could suffer
      additional losses.




**Certain
      investments made by the Company may fluctuate in value and may create an adverse
      impact on our financial performance; the value of certain of our intangibles
      and
      long-term investments creates risk to our financial
      performance.**





We’ve
      previously recorded value for goodwill and other intangible assets, including
      licenses to technologies or data, patent costs and software development and
      database upgrade costs which, at December 31, 2006, had an aggregate value
      of
      $12.7 million. Whether or not these intangible assets are impaired involves
      significant judgment, including the following: (i) whether our licenses and
      internally developed intellectual property may not provide valid and economical
      competitive advantage; and (ii) whether our services we provide may become
      obsolete before we recover the costs incurred in connection with their
      development. Under Statement of Financial Accounting Standards No. 142,
“Goodwill and Other Intangible Assets”, we are required to perform periodic
      reviews of our intangible assets and we may be required to reduce the value
      of
      these assets if circumstances change.





In
      addition, we have an investment in Xceed Molecular (formerly named MetriGenix,
      Inc.) with a book value as of December 31, 2006 of $3.0 million. This investment
      is subject to periodic evaluation for impairment. Since Xceed is an independent
      company in which we are a minority stockholder, the factors affecting an
      impairment analysis, which include potential revenue, cost of capital and fair
      market value of the entity, are not within our control. There is no guarantee
      that, in the future, this investment might not be subject to an impairment
      charge.





**We
      may not be able to obtain adequate patent protection for new technologies and
      methods required for achieving our business objectives.**





Our
      success will depend in part on our ability to protect confidential information
      and to obtain intellectual property rights and licenses sufficient to provide
      adequate exclusivity and to preserve our freedom to operate.





We
      rely on
      confidentiality agreements and other trade secret protective measures to protect
      our interests in proprietary know-how and technology that are not patentable
      or
      for which patents are difficult to enforce. We have taken security measures
      to
      protect our proprietary know-how and confidential data and continue to explore
      further methods of protection. While we require all employees, consultants
      and
      customers with access to our trade secrets to enter into confidentiality
      agreements, we cannot be certain that we will be able to protect our trade
      secrets. We also rely on confidentiality procedures to prevent public disclosure
      of patentable proprietary technology prior to filing patents. Any material
      leak
      of confidential information into the public domain, or to third parties, could
      cause our business, financial condition and results of operations to suffer
      adverse consequences, including possible loss of patent rights.





20




Our
      patent
      position involves complex legal and factual questions. Legal standards relating
      to the validity and scope of claims in the genomics technology field are still
      evolving. Therefore, the degree of exclusivity that future patent protection
      may
      provide for our proprietary technologies in this field is uncertain. Likewise,
      legal standards relating to validity of claims to new methods of using known
      drugs are still evolving. Hence, the likelihood of patenting potential new
      therapeutic uses of drug repositioning candidates also is
      uncertain.





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


·
            the
                pending patent applications we have filed, or to which we have licensed
                rights, may not result in issued patents or may take longer than
                we expect
                to result in issued patents;  the
                claims of any patents which are issued on our pending applications
                may not
                provide commercially meaningful protection or value; the
                patents licensed or issued to us may not provide adequate exclusivity
                for
                all aspects of our proprietary genomics
                technology;


·
            other
                  companies may challenge patents issued or licensed to us;
                  and


·
            we
                  may not be able to obtain adequate patent protection for commercialization
                  of a potential new use of a successfully repositioned drug
                  candidate.




**We
      may need to initiate patent enforcement litigation or be subject to future
      infringement claims.**





In
      addition, other organizations, including companies, academic and non-profit
      institutions and governmental organizations are developing technologies in
      the
      genomics and drug repositioning fields. Many of these technologies are subject
      to the same evolving legal standards and related uncertainties about patent
      protection as our proprietary technologies. Therefore, it may be necessary
      for
      us to initiate litigation to protect and enforce our intellectual property
      rights.





We
      also
      face risks that patents issued to other organizations may restrict our ability
      to do business, and that we may be unable to obtain or maintain licenses
      providing freedom to operate on acceptable terms. Thus, the technologies that
      we
      use to develop our services, and those that we incorporate in our services,
      may
      be subject to claims that they infringe the patents or proprietary rights of
      others. In particular, we are aware of a number of patents and patent
      applications owned by others relating to genetic markers and to the analysis
      of
      gene expression or the manufacture and use of microarrays and related materials.
      Therefore, we could be sued by parties alleging patent
      infringement.





The
      risk
      of involvement in patent litigation may increase as the genomics, biotechnology
      and software industries and drug repositioning businesses expand, more patents
      are issued and other organizations engage in our business fields. We could
      incur
      substantial litigation costs to defend ourselves in patent infringement suits
      brought by other parties or to initiate such suits. In addition, patent
      litigation could cause disruption in our business activities and divert
      management’s time and attention from the operation of our business. In that
      regard, in the past we purchased reagents made by Enzo from Affymetrix, and
      also
      directly from Enzo. In late 2003, Enzo sued Affymetrix, alleging, among other
      things, that Affymetrix had agreements with Gene Logic and other named customers
      to supply the Enzo reagent for use by such customers in potential violation
      of
      Enzo’s rights. That suit continues, but we have not been made a party to that
      suit. It is possible that Enzo could in the future make claims or initiate
      litigation against us in connection with our prior use of their
      reagent.





**Our
      activities involve hazardous materials and may subject us to environmental
      liability.**





Certain
      activities of our businesses involve the controlled use of limited quantities
      of
      hazardous and radioactive materials and may generate biological and/or hazardous
      waste. We are subject to federal, state and local laws and regulations governing
      the use, manufacture, storage, handling and disposal of these materials and
      certain waste products. Although we believe that our safety procedures for
      handling and disposing of these materials comply with prescribed standards,
      we
      cannot completely eliminate the risk of accidental contamination or injury
      from
      these materials. In the event of an accident or if we otherwise fail to comply
      with applicable regulations, we could lose our permits and/or approvals or
      be
      held liable for damages or penalized with fines.





We
      believe
      that we comply in all material respects with currently applicable environmental
      laws and regulations and do not expect near term material additional capital
      expenditures for environmental control facilities. However, we may have to
      incur
      significant costs in the future to comply with environmental laws and
      regulations. At present, we also believe we have appropriate insurance coverage
      against hazardous materials claims.





**If 
      we are unable to maintain compliance with NASDAQ’s listing requirements, our
      stock could be delisted which would negatively impact our liquidity and our
      stockholders’ ability to sell shares.**





21




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





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








**ITEM
      1B.****UNRESOLVED STAFF COMMENTS**





None.












22




**ITEM
      2.**    
**PROPERTIES**





The
      following table sets forth information regarding the principal facilities we
      own
      or lease, the location and approximate size of each such facility or the size
      of
      the space leased at such property, and their designated use. We believe that
      these facilities are in good condition, enable us to serve our customers
      efficiently and are sufficient to meet our business needs for the foreseeable
      future.


Location
              
              Approximate
                Square
                  Footage
              
              Operation
              
              Business
                  Segment
              
              Type
                  of
                Holding
              
              ExpirationGaithersburg,
                  MD.
              
              57,410
              
              Laboratory
                  and Office
              
              Genomics
              
              Lease
              
              2011Gaithersburg,
                  MD.
              
              49,225
              
              Administrative
              
              Mixed
              
              Lease
              
              2007*Cambridge,
                  MA.
              
              19,093
              
              Administrative,
                  R&D
              
              Drug
                  Repositioning
              
              Lease
              
              2008125,728





*
      As of
      December 31, 2006, we had subleased a portion of this property to unrelated
      third parties, resulting in $0.4 million in future sublease payments to us
      during 2007.








**ITEM
      3.**      
**LEGAL PROCEEDINGS**





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








**ITEM
      4.**      
**SUBMISSION OF MATTERS TO A VOTE OF SECURITY
      HOLDERS**




None.










23




**EXECUTIVE
      OFFICERS**





The
      following table sets forth, as of March 1, 2007, information regarding the
      names
      and ages of all our executive officers and their respective positions and
      offices with us.




**Name**
              
              **Age**
              
              **Position**Mark
                  D. Gessler
              
              45
              
              Chief
                  Executive Officer and PresidentPhilip
                  L. Rohrer, Jr.
              
              50
              
              Chief
                  Financial OfficerF.
                  Dudley Staples, Jr.
              
              59
              
              Senior
                  Vice President, Secretary and General CounselLouis
                  Tartaglia
              
              43
              
              Chief
                  Scientific OfficerLarry
                  Tiffany
              
              40
              
              Senior
                  Vice President, General Manager,
                  Genomics





**Mark
      D. Gessler** has
      served as Chief Executive Officer since June 2000 and as President since prior
      to March 2000. Since March 2000, Mr. Gessler has been a member of our Board
      of
      Directors and from April 2001 to November 2004, he served as Chairman of the
      Board of Directors. Mr. Gessler holds an M.B.A. from the University of
      Tennessee.





**Philip
      L. Rohrer, Jr.** has
      served as Chief Financial Officer since prior to March 2000. Mr. Rohrer holds
      a
      B.A. in biology from Hood College and an M.S.M. from Frostburg State
      University.





**F.
      Dudley Staples, Jr.** has
      served as our Senior Vice President, Secretary and General Counsel since May
      2002. From prior to March 2000 to May 2001, Mr. Staples served as General
      Counsel of Online Office Supplies Company, an online seller of office supplies
      and subsidiary of eCommerce Industries, Inc., and then as Associate General
      Counsel of eCommerce Industries, Inc. Mr. Staples holds a J.D. degree from
      the
      University of Virginia School of Law.





**L** **ouis
      A. Tartaglia, Ph.D.** was
      appointed Chief Scientific Officer in February 2007. Prior to that appointment,
      he served as Senior Vice President and General Manager, Drug Repositioning
      and
      Selection beginning in January 2005. Dr. Tartaglia joined Gene Logic in July
      2004 following Gene Logic's acquisition of certain technologies from Millennium
      Pharmaceuticals, Inc. From 2002 to 2004, Dr. Tartaglia served as Vice President
      of New Ventures at Millennium Pharmaceuticals, Inc. From 1999 to 2002, he served
      as Vice President of Metabolic Diseases. Dr. Tartaglia holds a Ph.D. in
      Biochemistry from the University of California, Berkeley.





**Larry
      Tiffany** has
      served as Senior Vice President, General Manager, Genomics since June 2006.
      Prior to returning to Gene Logic, Mr. Tiffany was President and Chief Business
      Officer of Genetraks, an Australian-based veterinary molecular diagnostics
      firm,
      from 2004-2006. Prior to joining Genetraks, Mr. Tiffany was VP, Worldwide
      Business Development for Gene Logic. Mr. Tiffany holds a J.D. degree from
      Franklin Pierce Law Center; a M.S. in Biotechnology from The Johns Hopkins
      University; and a B.S. in Chemistry from Nazareth College.










24


**PART
      II**





**ITEM
      5.****MARKET FOR THE REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER
      MATTERS**


**AND ISSUER** **PURCHASES
      OF EQUITY SECURITIES**




**Price
      Range of Common Stock**





Our
      Common
      Stock is traded on the NASDAQ Stock Market under the symbol GLGC. The following
      table sets forth information regarding the high and low closing prices for
      our
      Common Stock, for the periods indicated.




**Year
                  Ended December 31, 2006**
              
              **High**
              
              **Low**First
                  Quarter
              
              $
              4.80
              
              $
              3.24Second
                  Quarter
              
              $
              4.65
              
              $
              1.27Third
                  Quarter
              
              $
              1.86
              
              $
              1.11Fourth
                  Quarter
              
              $
              2.08
              
              $
              1.38**Year
                  Ended December 31, 2005**First
                  Quarter
              
              $
              3.58
              
              $
              3.05Second
                  Quarter
              
              $
              3.45
              
              $
              2.77Third
                  Quarter
              
              $
              5.78
              
              $
              3.38Fourth
                  Quarter
              
              $
              4.97
              
              $
              3.28




**Holders**





On
      March
      1, 2007, the last reported sale price of our Common Stock on the NASDAQ Stock
      Market was $1.74. As of March 1, 2007, there were approximately 326 registered
      holders of record of our Common Stock, including one company, Cede & Co.,
      which is the Registered Nominee for the Depository Trust Company, acting as
      holder of record for beneficial holders whose stock is held in street
      name.





**Dividend
      Policy**





Since
      we
      became a public company, we have not paid dividends on our Common Stock.
      Currently, we intend to retain future earnings, if any, to finance the growth
      and development of our business and do not anticipate paying cash dividends
      for
      the foreseeable future.











25


**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, 2006,
      2005 and 2004 and with respect to the consolidated balance sheets as of December
      31, 2006 and 2005 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, 2003 and 2002 and the balance sheet data as
      of
      December 31, 2004, 2003 and 2002 are derived from audited financial statements
      not included in this Form 10-K. The following selected consolidated financial
      data includes, for 2006, through 2003 only, the results for our Preclinical
      Division (resulting from the April 1, 2003 acquisition of TherImmune Research
      Corporation, which was subsequently sold December 15, 2006) and for 2006, 2005
      and 2004 only, the results for our Drug Repositioning Division (resulting from
      the July 2004 acquisition of technologies from Millennium Pharmaceuticals,
      Inc.)
      and should be read in conjunction with the consolidated financial statements
      and
      notes thereto included elsewhere in this Form 10-K.


**Year
                  Ended December 31,**2006
                  (1)
              
              2005
                  (2)
              
              2004
              
              2003
              
              2002**(in
                  thousands, except per share data)**Revenue:Genomics
                  services
              
              $
              24,310
              
              $
              56,602
              
              $
              52,171
              
              $
              51,960
              
              $
              54,848Drug
                  repositioning services
              
              
              36
              
              
              588
              
              
              -
              
              
              -
              
              
              -Total
                  revenue
              
              
              24,346
              
              
              57,190
              
              
              52,171
              
              
              51,960
              
              
              54,848Expenses:Database
                  production
              
              
              27,408
              
              
              31,689
              
              
              41,870
              
              
              49,408
              
              
              57,941Research
                  and development
              
              
              9,876
              
              
              6,812
              
              
              2,449
              
              
              2,091
              
              
              2,367Selling,
                  general and administrative
              
              
              22,422
              
              
              26,788
              
              
              19,224
              
              
              16,042
              
              
              19,734Genomics
                  Division restructuring
              
              
              5,258
              
              
              -
              
              
              -
              
              
              -
              
              
              -Purchased
                  research and development
              
              
              -
              
              
              -
              
              
              8,817
              
              
              -
              
              
              -Total
                  expenses
              
              
              64,964
              
              
              65,289
              
              
              72,360
              
              
              67,541
              
              
              80,042Loss
                  from operations
              
              
              (40,618
              )
              
              (8,099
              )
              
              (20,189
              )
              
              (15,581
              )
              
              (25,194
              )Interest
                  (income), net
              
              
              (2,694
              )
              
              (2,625
              )
              
              (1,395
              )
              
              (1,652
              )
              
              (3,139
              )Other
                  (income) expense
              
              
              55
              
              
              (813
              )
              
              -
              
              
              (327
              )
              
              (250
              )Write-down
                  of other-than-temporary declinein
                  value of marketable securities available-for-sale
              
              
              -
              
              
              719
              
              
              -
              
              
              -
              
              
              -Write-down
                  of long-term equity investment
              
              
              275
              
              
              -
              
              
              -
              
              
              4,268
              
              
              753Loss
                  from continuing operationsbefore
                  income tax expense
              
              
              (38,254
              )
              
              (5,380
              )
              
              (18,794
              )
              
              (17,870
              )
              
              (22,558
              )Income
                  tax expense
              
              
              -
              
              
              -
              
              
              287
              
              
              2,246
              
              
              1,492Loss
                  from continuing operations
              
              
              (38,254
              )
              
              (5,380
              )
              
              (19,081
              )
              
              (20,116
              )
              
              (24,050
              )Loss
                  from discontinued operations
              
              
              (16,456
              )
              
              (42,924
              )
              
              (9,439
              )
              
              (4,655
              )
              
              -Net
                  loss
              
              $
              (54,710
              )
              $
              (48,304
              )
              $
              (28,520
              )
              $
              (24,771
              )
              $
              (24,050
              )Basic
                  and diluted net loss per share:Loss
                  from continuing operations
              
              $
              (1.20
              )
              $
              (0.17
              )
              $
              (0.61
              )
              $
              (0.67
              )
              $
              (0.89
              )Loss
                  from discontinued operations
              
              
              (0.52
              )
              
              (1.35
              )
              
              (0.30
              )
              
              (0.15
              )
              
              -Net
                  loss
              
              $
              (1.72
              )
              $
              (1.52
              )
              $
              (0.91
              )
              $
              (0.82
              )
              $
              (0.89
              )Shares
                  used in computing basic and dilutednet
                  loss per share
              
              
              31,807
              
              
              31,744
              
              
              31,493
              
              
              30,112
              
              
              26,948**Year
                  Ended December 31,**2006
              
              2005
              
              2004
              
              2003
              
              2002**(in
                  thousands)****Consolidated
                  Balance Sheets Data:**Cash,
                  cash equivalents and marketable securitesavailable-for-sale
              
              $
              50,110
              
              $
              82,125
              
              $
              102,915
              
              $
              111,823
              
              $
              167,102Working
                  capital
              
              
              43,214
              
              
              91,538
              
              
              96,059
              
              
              111,015
              
              
              163,681Total
                  assets
              
              
              90,273
              
              
              160,719
              
              
              207,081
              
              
              227,366
              
              
              227,460Total
                  long-term debt
              
              
              577
              
              
              624
              
              
              668
              
              
              710
              
              
              750Total
                  stockholders' equity
              
              
              71,090
              
              
              124,856
              
              
              172,828
              
              
              199,589
              
              
              204,438




For
      2006,
      2005 and 2004, respectively, $3.7 million, $4.2 million, and $2.2 million in
      costs previously allocated to the Preclinical Division have been re-allocated
      to
      the Genomics and Drug Repositioning Divisions. These amounts represent costs
      that the Company has now determined will not be eliminated as a result of the
      sale of its Preclinical Division.


(1)
      Includes $10.9 million loss on disposal for the Preclinical
      Division.


(2)
      Includes $32.8 million impairment charge associated with the impairment of
      goodwill for the Preclinical Division.






26




**ITEM
        7.****MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
        AND FINANCIAL CONDITION******
 
 We
        currently conduct our operations through two business segments:
 
 ·
            **Drug
                Repositioning Division**:
                Our partners provide us with drug candidates that have already been
                assessed as safe in human clinical trials, and whose development
                for their
                original indications has been discontinued. We apply, at our own
                expense,
                our drug indication discovery platform to identify new uses for these
                clinical-stage drug candidates. This platform consists of genomics
                databases and bioinformatics software developed by Gene Logic over
                the
                past 10 years, and biological screening technologies acquired from
                Millennium Pharmaceuticals, Inc. (“Millennium”) and which subsequently
                have undergone further development. Our drug development partnerships
                are
                generally structured to provide us with milestone payments for drug
                candidates that our partners return to clinical development for
                indications that we have identified, and long-term value in the form
                of
                royalties or other co-ownership positions. 
 ·
            **Genomics
                Division**:
                From 1996 through 2006, our business was primarily devoted to developing
                and commercializing proprietary genomic and toxicogenomic databases,
                toxicogenomic services, software tools and other services. The Genomics
                services we provide enable customers worldwide to discover and prioritize
                drug targets, identify biomarkers, predict toxicity and understand
                mechanisms of toxicity and action of specific compounds. 
 In
        2004,
        Gene Logic created a pharmaceutical development division (known as our Drug
        Repositioning Division) within the Company to identify and develop new or
        expanded uses for small molecule therapeutics. Based on advances in our
        pharmaceutical development division and changes in our Genomics business,
        and
        after concluding a comprehensive review of our strategy, we have decided
        to
        focus our resources on becoming a pharmaceutical development company. We
        are now
        building a therapeutic pipeline by applying our proprietary drug indication
        discovery platform to find new and expanded uses for drug candidates supplied
        by
        major pharmaceutical companies with whom we have drug development partnerships.
        We believe this strategy is the best way to create value for shareholders.
 
 In
        2005
        and 2006, we entered into drug development partnerships with Pfizer, Inc.,
        F.
        Hoffmann-La Roche Ltd, Eli Lilly and Company and NV Organon. In 2006, we
        began
        evaluating more than 40 drug candidates for our drug development partners.
        We
        have been able to develop alternative indication hypotheses for 25%-33% of
        these
        candidates for which evaluation is complete. Some of the candidates for which
        we
        have found new indications have or will progress to *in
        vivo* efficacy
        models to evaluate and support their suitability for re-entering clinical
        trials
        for the proposed new indications. We expect that some portion of the drug
        candidates will have successful outcomes in the *in
        vivo* tests and
        re-enter clinical trials, but we do not yet have sufficient data to estimate
        the
        rate of clinical trial re-entry. We do not expect any of these drug candidates
        to re-enter clinical trials until after 2007.
 
 Early
        in
        2006, it began to become apparent that our customers had begun to shift their
        emphasis away from research on early stage drug discovery where many of our
        Genomics services have been targeted, to later stage development and validation
        efforts. In response to the declining sales and financial performance that
        resulted from this change in emphasis, we restructured the Division and also
        began to explore new avenues of value for our Genomics Division, including
        capitalizing on our commercially demonstrated expertise in biomarker development
        as a potential platform for molecular diagnostics development. We engaged
        outside financial advisors to consider strategic alternatives for our Genomics
        business. We continue to serve new and existing Genomics customers while
        we
        explore these alternatives.
 
 Also
        in
        2006, we announced the closing of the sale of Gene Logic Laboratories, Inc.
        to
        Bridge Pharmaceuticals, Inc. (“Bridge”) for a sales price of $15.0 million,
        including $13.5 million paid at closing less transaction costs of $1.4 million
        and $1.5 million held in escrow for 12 months to guarantee certain obligations
        under the agreement. The purchase price remains subject to adjustment for
        certain changes in working capital and the assumption of certain liabilities
        associated with the business. In addition, we provide certain transition
        services under and an agreement with Bridge and our guarantees of two leases
        continue in effect pending their assignment to and assumption by Bridge.
        If the
        guarantees are not assumed by Bridge, then Bridge will indemnify us with
        respect
        to such guarantees. The Preclinical Division provided contract research services
        enabling customers to assess the safety and pharmacologic effects of compounds.
        We decided to sell the Preclinical Division because the business provided
        insufficient strategic or synergistic advantage to our pharmaceutical
        development, genomics or molecular diagnostics efforts.
 
 Currently,
        most of our revenue comes from our Genomics Division. Historically, we have
        derived a majority of our Genomics Division revenue from licenses to our
        databases in the form of multi-year subscriptions and annual subscriptions
        to
        our smaller databases or a subset of our larger databases. We have also granted
        perpetual licenses to our data and/or software tools. We also generate revenue
        from providing other services, including various toxicogenomics reports,
        microarray data generation and analysis and other professional services.
        Fees
        are payable ratably over the life of the agreement for multi-year agreements,
        ratably or up-front for shorter-term agreements and, in the case of perpetual
        licenses, upon delivery of the data or software. Generally, our Genomics
        Division contracts may be terminated in the event of breach by either party
        not
        cured within any applicable cure period. In the past, we have invested in
        new
        database content, upgraded our databases and developed new versions of our
        software tools. Future investments will be limited as we continue the
        transformation of Gene Logic into a biopharmaceutical company.
 
 27
  We
        have
        developed partnerships with four pharmaceutical partners in 2005 and 2006:
        Pfizer, Inc., F. Hoffmann-La Roche Ltd, Eli Lilly and Company, and NV
        Organon. Our
        agreement with NV Organon involves co-ownership and co-development of
        repositioned drug candidates, and it therefore differs substantially from
        our
        other agreements. Our other drug repositioning and development agreements
        vary
        somewhat as to specific terms (see “Contractual Arrangements” earlier), but
        generally conform to the following:
 
 ·
            We
                agree with a partner on a group of drug candidates to be evaluated.
                Our
                partner provides samples of the candidate and, at our expense, we
                analyze
                each candidate using our drug indication discovery
                platform; ·
            As
                to drug candidates for which we have identified new uses and that
                our
                partners take back into development, we are entitled to receive
                success-based payments when certain milestones are achieved. The
                totals
                range from $60-100+ million per compound and in most cases include
                the
                following individual milestones: o
            Notice
                of re-initiation of development, o
            Filing
                of an Investigational New Drug (“IND”) with the
                FDA, o
            Establishment
                of proof of concept in a Phase II clinical
                trial, o
            Commencement
                of a Phase III clinical trial, and o
            Receipt
                of market approval in the U.S., in Europe, or in Japan; and ·
            As
                to drug candidates returned by our partners to commercial development,
                we
                are entitled to receive royalty payments, as a percentage of sales,
                that
                range from single- to low double-digits and are generally tiered
                according
                to sales volume. 
 In
        most
        cases, if our partner decides not to take the drug candidate back into
        development, we have development rights that would entitle our partner to
        receive milestone payments and royalties on sales. We may
        choose to license such candidates to a third party for development, or we
        may
        invest in further development to increase a particular candidate’s value prior
        to outlicensing. We have acquired certain rights from Millennium Pharmaceuticals
        to a drug candidate for which we have identified potential new
        indications.
 
 We
        have
        incurred net losses in each year since our inception, including losses of
        $54.7
        million in 2006, $48.3 million in 2005 and $28.5 million in 2004. At December
        31, 2006, we had an accumulated deficit of $315.7 million. Our losses have
        resulted principally from costs incurred in the development, marketing and
        sale
        of services from our Genomics and Preclinical Divisions, development of the
        Drug
        Repositioning Division, the impairment of our Preclinical Division goodwill
        and
        acquisitions of research and development. These costs have exceeded our revenue
        and we expect to incur additional losses in the future.
 
 **RESULTS
        OF CONTINUING OPERATIONS**
  *Years
        Ended December 31, 2006 and 2005*
 
 **Revenue.** We
        primarily derive our revenue from our Genomics Division services. To date,
        we
        have recorded no meaningful revenue from our Drug Repositioning Division.
        Revenue from continuing operations decreased $32.8 million, or 57%, to $24.3
        million in 2006 from $57.2 million in 2005. During 2006, three customers
        each
        accounted for greater than 10% of our total revenue. During 2005, two customers
        accounted for greater than 10% of our total revenue. The 2006 decrease in
        revenue resulted from declining subscription revenue, the absence of anticipated
        sales of perpetual licenses to database products and slower than anticipated
        sales growth for microarray data generation and analysis services. These
        changes
        were caused primarily by our customers’ having shifted their emphasis from
        research on early stage drug development, for which many of our Genomics
        Division services are targeted, into later-stage development and validation
        efforts. The 2006 results reflect the absence of $28.6 million in subscription
        fees from expired agreements, $2.7 million less for perpetual license fees
        and
        reduced revenue of $2.4 million from certain agreements with existing customers
        renegotiated at reduced service levels, partially offset by higher revenue
        of
        $2.8 million from increased microarray data generation and analysis services
        in
        2006.
 
 In
        2006,
        long-term subscription agreements with five customers were to expire by their
        terms and two agreements allowed for early termination at the customer’s
        election. These agreements accounted for 38% of our Genomics services revenue
        in
        2006, of which 16% consisted of revenue from the sale of perpetual licenses
        to
        data and software. As to the two agreements that were subject to early
        termination at the customer’s election, one customer terminated its agreement
        early and one customer elected to continue its agreement. As to the remaining
        five agreements, four agreements have expired by their terms and one was
        terminated by mutual agreement. Three of these customers purchased perpetual
        licenses to data and software in connection with their respective terminations.
 
 28
  Our
        remaining long-term subscriptions are due to expire by their terms in 2008.
        For
        2007, we expect to continue to derive more revenue from our other services
        and
        reduce our revenue from large, multi-year subscription agreements.
 
 **Database
        Production Expense.** Database
        production expenses, which consist primarily of costs to provide microarray
        data
        generation and analysis services and costs related to the acquisition and
        processing of tissues and overhead expenses needed to generate the content
        for
        the BioExpress and ToxExpress System databases, decreased to $27.4 million
        for
        2006 from $31.7 million for 2005. The decrease consisted primarily of a
        $4.2 **** million
        reduction in database production expenses, including lower costs for agreements
        with third parties, partially offset by $1.0 million increase in inventory
        reserves in 2006. For 2007, we expect database production expenses to decrease
        due to the restructuring of the Genomics Division and increased customer
        demand
        for microarray data generation and analysis services.
 
 **Research
        and Development Expense.** Research
        and development expenses, which consist primarily of costs associated with
        the
        evaluation of customer-supplied drug candidates and ongoing development of
        our
        drug indication discovery platform, increased to $9.9 million for 2006 from
        $6.8
        million for 2005. The increase was primarily the result of large numbers
        of
        evaluations of drug candidates begun under the terms of our drug discovery
        partnerships. For 2007, we expect research and development expenses to increase
        modestly, as we continue to evaluate drug candidates supplied by our drug
        discovery partners and further develop our indication discovery platform.
        In
        addition, we may incur additional expenses if we decide to pursue further
        development of a drug candidate for which we acquired certain rights from
        Millennium in 2006.
 
 **Selling,
        General and Administrative Expense.** Selling,
        general and administrative expenses from continuing operations, which consist
        primarily of sales, marketing, accounting, legal, human resources and other
        general corporate expenses, decreased to $22.4 million for 2006 from $26.8
        million for 2005. The decrease is largely due a reduction of $2.0 million
        in
        costs under the terms of our 2006 annual employee incentive compensation
        plan
        and lower payroll expense for Genomics Division and Corporate staff. For
        2007,
        we expect selling, general and administrative expenses to decrease, primarily
        due to the restructuring of the Genomics Division.
 
 **Genomics
        Division Restructuring Expense.** During
        2006, we initiated a restructuring of our Genomics Division, which is expected
        to be substantially completed by December 31, 2007. This restructuring included
        the termination of 70 employees, which resulted in severance costs of $1.5
        million; the acceleration of future costs of $2.4 million for certain
        laboratory and office facilities that were no longer needed for continuing
        operations and were either abandoned or for which we have entered into sublease
        arrangements; and the impairment of certain intangible assets of $1.3 million,
        primarily patent and license costs, which we determined would no longer be
        utilized by our Genomics Division. Once fully implemented, we estimate that
        the
        staff reductions will reduce our annual salary and fringe benefits costs
        by
        approximately $8.0 million and we expect to realize additional savings in
        certain non-employee costs in connection with this restructuring.
 
 **Net
        Interest Income.** Net
        interest income increased to $2.7 million for 2006 from $2.6 million for
        2005,
        due to increases in our rates of return on investments, largely offset by
        a
        decline in the balance of our cash and cash equivalents and marketable
        securities available-for-sale.
 
 **Other
        (Income) Expense.** Other
        (income) expense was an expense of $0.1 million for 2006 compared to income
        of
        $0.8 million for 2005, due to foreign currency transaction losses and gains
        in
        each period, respectively, relating to our subscription agreements with our
        Japanese customers. Beginning in 2005, as a result of changing our distribution
        arrangements in Japan, our agreements with our Japanese customers are now
        denominated in Japanese Yen.
 
 **Write-down
        of Other-than-Temporary Decline in the Value of Marketable Securities
        Available-for-Sale.** In
        2005,
        we recorded a $0.7 million write-down of our investment in Avalon
        Pharmaceuticals, Inc., due to an other-than-temporary decline in its estimated
        market value.
 
 **Write-down
        of Equity Investment.** In
        connection with our investment in Xceed Molecular (“Xceed”, formerly MetriGenix
        Corporation) in 2003, we had entered into a subscription agreement granting
        Xceed a license to use our BioExpress System and had been issued a warrant
        to
        enable us to maintain our 15% equity ownership in Xceed, which would terminate
        upon termination of the subscription agreement. In 2006, we terminated the
        subscription agreement by mutual agreement and the warrant was therefore
        terminated. As a result, we recorded a $0.3 million write-down of the fair
        value
        of this warrant during 2006. At December 31, 2006, the remaining book value
        of
        our investment in Xceed was $3.0 million, which we believe approximates fair
        value.
 
 29
  *Years
        Ended December 31, 2005 and 2004*
 
 **Revenue.** Revenue
        from continuing operations increased $5.0 million, or 10%, to $57.2 million
        in
        2005 from $52.2 million in 2004. During 2005, two customers each accounted
        for
        greater than 10% of our total revenue. During 2004, one customer accounted
        for
        greater than 10% of our total revenue. The increase in 2005 reflected $11.7
        million in additional revenue from sales to several existing customers of
        perpetual licenses for certain data and software, partially offset by $4.2
        million less revenue from certain agreement extensions at reduced service
        levels
        and the absence of $3.9 million in subscription fees from agreements that
        expired.
 
 **Database
        Production Expense.** Database
        production expenses, which consisted primarily of costs related to the
        acquisition and processing of tissues and overhead expenses needed to generate
        additional content for the BioExpress and ToxExpress System databases, decreased
        to $31.7 million for 2005 from $41.9 million for 2004. The decrease consisted
        primarily of a $7.6 million reduction in database production expenses, including
        lower costs for acquiring tissues and certain agreements with third parties,
        and
        a decrease of $3.1 million in depreciation and amortization expense.
 
 **Research
        and Development Expense.** Research
        and development expenses, associated primarily with our Drug Repositioning
        Division, increased to $6.8 million for 2005 from $2.4 million for 2004.
        The
        increase was primarily a result of further development of the biological
        screening technologies acquired from Millennium in 2004.
 
 **Selling,
        General and Administrative Expense.** Selling,
        general and administrative expenses, which consist primarily of sales,
        marketing, accounting, legal, human resources and other general corporate
        expenses, increased to $26.8 million for 2005 from $19.2 million for 2004.
        The
        increase is largely due to an increase of $4.4 million in our investment
        in our
        Drug Repositioning Division and increased costs under our 2005 annual employee
        incentive compensation plan.
 
 **Purchased
        Research and Development.** During
        2004, we incurred a one-time expense of $8.8 million for the write-off of
        purchased in-process research and development associated with the acquisition
        of
        biological screening technologies acquired from Millennium.
 
 **Net
        Interest Income.** Net
        interest income increased to $2.6 million for 2005 from $1.4 million for
        2004,
        due to increases in our rates of return on investments, partially offset
        by a
        decline in the balance of our cash and cash equivalents and marketable
        securities available-for-sale.
 
 **Other
        (Income) Expense.** Other
        (income) expense increased to $0.8 million for 2005 from zero for 2004, due
        to
        foreign currency transaction gains relating to our Japanese customers. Beginning
        in 2005, as a result of changing our Japanese distribution arrangements,
        our
        agreements with our Japanese customers are denominated in Japanese
        Yen.
 
 **Write-down
        of Other-than-Temporary Decline in the Value of Marketable Securities
        Available-for-Sale.** In
        2005,
        we recorded a $0.7 million write-down of our investment in Avalon
        Pharmaceuticals, Inc., due to an other-than-temporary decline in its estimated
        market value.
 
 LIQUIDITY
          AND CAPITAL RESOURCES
 From
        inception through December 31, 2006, we have financed our operations and
        acquisitions through the issuance and sale of equity securities and payments
        from customers. As of December 31, 2006, we had approximately $50.1 million
        in
        cash, cash equivalents and marketable securities available-for-sale, compared
        to
        $82.1 million as of December 31, 2005.
 
 Net
        cash
        from operating activities from continuing operations decreased to a negative
        $34.0 million for 2006 from a positive $6.1 million for 2005,
        primarily due to our increased net loss from continuing operations for
        2006,  the timing of customer payments (including prepayments) for our
        services in 2005 and payments in 2006 to Millennium and under our compensation
        and retention plans. We presently anticipate that our use of cash for 2007
        will
        be lower due to an anticipated lower net loss from continuing operations.
 
 During
        2006 and 2005, our investing activities consisted primarily of purchases,
        sales
        and maturities of available-for-sale securities, capital expenditures and
        software development and database upgrade costs. Capital expenditures for
        2006
        and 2005 were $2.0 million and $9.9 million, respectively. The decrease in
        capital expenditures was primarily due to the completion in 2005 of a
        significant facility renovation. For 2007, we do not expect the level of
        capital
        expenditures to be significant.
 
 We
        have
        capitalized software development costs of $1.0 million and $2.1 million for
        2006
        and 2005, respectively. These costs related to efforts to enhance the software
        platform of our BioExpress and ToxExpress System databases. Also, we have
        incurred database upgrade costs of $2.6 million and $4.2 million for 2006
        and
        2005, respectively, enhancing the content of our databases using new versions
        of
        microarrays from Affymetrix. Future investments in upgrades and new versions
        of
        our software tools are being evaluated as part of our overall strategy for
        the
        Genomics Division.
  In
        2006,
        we announced the closing of the sale of our Preclinical Division to Bridge
        for a
        sales price of $15.0 million, including $13.5 million paid at closing less
        transaction costs of $1.4 million and $1.5 million held in escrow for 12
        months
        to guarantee certain obligations under the
        agreement.
 30
  Our
        financing activities, other than the repayment of an equipment loan, have
        primarily consisted of the exercise of stock options.
 
 In
        July
        2004, we purchased and licensed certain biological screening technologies
        utilized by our Drug Repositioning Division and hired a research team from
        Millennium. During 2006, we paid Millennium $3.5 million in cash representing
        the final installment of the purchase price. In connection with the purchase,
        we
        also contractually agreed to, and subsequently met, a commitment to spend
        an
        aggregate of $14.5 million to further develop and commercialize these
        technologies.
 
 To
        generate our gene expression data, we use Affymetrix microarrays,
        instrumentation and software. Under the terms of our current supply and license
        agreements with Affymetrix, we do not have a purchase commitment. In 2006,
        under
        the prior agreement, we agreed to purchase a minimum of $7.1 million in products
        and services from Affymetrix in 2006. As of December 31, 2006, we had met
        this
        commitment.
 
 Specific
        future financial commitments from continuing operations as of December 31,
        2006
        are set forth in the following table:
 **Total**
                
                **2007**
                
                **2008
                    & 2009**
                
                **2010
                    & 2011**
                
                **Beyond
                    2011**Long-term
                    debt
                
                $
                586
                
                $
                504
                
                $
                82
                
                $
                -
                
                $
                -Operating
                    leases
                
                
                6,375
                
                
                1,858
                
                
                2,804
                
                
                1,428
                
                
                285Total
                
                $
                6,961
                
                $
                2,362
                
                $
                2,886
                
                $
                1,428
                
                $
                285
 We
        believe
        that existing cash, cash equivalents and marketable securities
        available-for-sale and anticipated payments from customers will be sufficient
        to
        support our operations for the foreseeable future. These estimates are
        forward-looking statements that involve risks and uncertainties. Our actual
        future capital requirements and the adequacy of our available funds will
        depend
        on many factors, including those discussed under “Risks Related to Our Business
        and Industry” elsewhere in this Report.
 
 **CRITICAL
        ACCOUNTING POLICIES**
  
 Our
        consolidated financial statements are prepared in accordance with accounting
        principles generally accepted in the United States, which require management
        to
        make estimates and assumptions that affect the reported amounts of assets
        and
        liabilities at the date of the financial statements and the reported amounts
        of
        revenue and expenses during the reporting period. Actual results could differ
        from these estimates. The following discussion highlights what we believe
        to be
        the critical accounting policies and judgments made in the preparation of
        these
        consolidated financial statements.
 
 ***REVENUE
        RECOGNITION***
  Revenue
        is
        recognized in accordance with the SEC’s Staff Accounting Bulletin No. 104,
“Revenue Recognition” (“SAB 104”). SAB 104 requires that four basic criteria be
        met before revenue can be recognized: 1) persuasive evidence of an arrangement
        exists; 2) delivery has occurred or services rendered; 3) the fee is fixed
        and
        determinable; and 4) collectability is reasonably assured. As to 1), our
        business practices require that our services be performed pursuant to contracts
        with our customers. As to 2), we recognize revenue when services are rendered
        to
        our customers. Determination of 3) and 4) are based on management’s judgments
        regarding the fixed nature of our arrangements taking into account termination
        provisions and the collectability of fees under our arrangements. Should
        changes
        in conditions cause management to determine these criteria are not met for
        certain future arrangements, revenue recognized for any reporting period
        would
        be adjusted and could be adversely affected.
 
 In
        accordance with Emerging Issues Task Force Issue No. 00-21, “Revenue
        Arrangements with Multiple Deliverables”, revenue recognized for any
        multiple-element contract is allocated to each element of the arrangement
        based
        on the relative fair value of the element. The determination of fair value
        of
        each element is based on our analysis of objective evidence from comparable
        internal or third-parties’ sales of the individual element. If we are unable to
        determine evidence of fair value for an undelivered element of the arrangement,
        revenue for the arrangement is deferred and recognized using the revenue
        recognition method appropriate to the predominant undelivered
        element.
 
 **Genomics
        Services Revenue.** Through
        2006, the majority of Genomics services revenue consists of fees earned under
        subscription agreements for all or parts of our gene expression databases,
        the
        BioExpress System and ToxExpress System, which are typically for a specific
        multi-year term for the larger databases and annual terms for smaller parts
        of
        the databases. We have also granted to some customers perpetual licenses
        to
        certain data from our BioExpress and ToxExpress System databases and software
        tools. In addition, we have generated a smaller, but growing percentage of
        revenue from providing other services, including various toxicogenomics reports,
        microarray data generation and analysis and other professional services.
        Revenue
        from subscription agreements is recognized ratably over the period during
        which
        the customer has access to the database. Certain subscription agreements
        have
        included a right of early termination (which, in some instances, is subject
        to
        conditions) by the customer, without penalty, on a specified date prior to
        the
        normal expiration of the term. If any agreement has a right of early
        termination, revenue is recognized ratably over the subscription term up
        to the
        possible date of early termination, based on subscription fees earned under
        the
        agreement through the possible date of early termination. If such early
        termination does not occur, the balance of the subscription fees earned under
        the agreement is recognized as revenue ratably over the remaining term of
        the
        agreement. Revenue from perpetual licenses to data and software for which
        the
        Company is not obligated to provide continuing support or services is recognized
        when the data and/or software has been delivered. Revenue from perpetual
        licenses for which the Company is obligated to provide continuing support
        or
        services is recognized during the period such support or services are provided.
        Revenue from other services is recognized when the services are performed.
        Our
        agreements generally provide for termination in the event of a breach of
        the
        agreement by either party or a bankruptcy or insolvency of either
        party.
   31
  Periodically,
        we enter into contractual arrangements with multiple deliverables. If we
        are
        unable to determine objectively and reliably the fair value of individual
        undelivered elements, we recognize all revenue using the revenue recognition
        method appropriate to the predominant undelivered element. We also defer
        the
        direct and incremental expenses associated with the delivery of services
        for
        which revenue has been deferred and recognize these expenses as we recognize
        the
        related revenue. The timing of revenue recognition associated with agreements
        we
        enter into in future periods may also be dependent on our ability to objectively
        and reliably determine the fair value of deliverables included in those
        agreements.
 
 ***GOODWILL
        AND INTANGIBLE ASSETS IMPAIRMENT***
  In
        2003,
        we recorded goodwill of $43.0 million as a result of the acquisition of
        TherImmune Research Corporation (later renamed Gene Logic Laboratories Inc.,
        our
        former Preclinical Division). In addition, we’ve previously recorded value for
        goodwill and other intangible assets, including licenses to technologies
        or
        data, patent costs and software development and database upgrade costs. The
        determination of whether or not these other intangible assets are impaired
        involves significant judgment, including the following: (i) our licenses
        and
        internally developed intellectual property may not provide valid and economical
        competitive advantage; and (ii) our services may become obsolete before we
        recover the costs incurred in connection with their
        development.
 
 Under
        Statement of Financial Accounting Standards No. 142, “Goodwill and Other
        Intangible Assets”, we are required to perform an annual impairment test of our
        goodwill and periodic reviews of our other intangible assets. In addition,
        we
        are required to test for impairment at any point we have an indication that
        impairment may exist. We have elected to perform our annual impairment test
        of
        goodwill as of October 1. The goodwill impairment test that we have historically
        selected consisted of a ten-year discounted cash flow analysis, including
        the
        determination of a terminal value, and required management to make various
        judgments and assumptions, including revenue growth rates and discount rates,
        which management believed to be reasonable.
 
 In
        conjunction with our review of assets held for sale of the Preclinical Division,
        we determined that the remaining value of the goodwill that resulted from
        the
        acquisition of TherImmune (later renamed Gene Logic Laboratories Inc., our
        former Preclinical Division) was likely impaired, due to our assessment of
        the
        possible indications of fair value resulting from our decision to consider
        the
        sale of the division. As a result, we recorded a non-cash expense of $10.2
        million which was included in the $11.0 million impairment charge in the
        third quarter of 2006 representing the implied impairment of goodwill of
        our
        Preclinical Division. During the third quarter of 2005, we recorded a non-cash
        expense of $32.8 million representing the implied impairment of goodwill
        of our
        Preclinical Division. These non-cash expenses are included in the loss from
        discontinued operations of our Preclinical Division for the respective periods.
 
 As
        part of
        our annual testing of goodwill, we determined that no impairment existed
        in the
        carrying value of goodwill of our Genomics Division. However, due to the
        restructuring of our Genomics Division, we recorded impairment charges of
        $1.3
        million in the third quarter of 2006 for certain intangible assets which
        we
        determined would no longer be utilized by our Genomics Division.
 
 Our
        assessment of the fair value of our divisions is dependent on subjective
        estimates we make of inherently uncertain future net cash flows including
        estimates of terminal values. Accordingly, our estimates for future periods
        of
        net cash flows may change as market conditions and circumstances dictate.
        Future
        impairment tests of goodwill for our Genomics Division and other intangibles
        may
        result in additional impairment charges based on these changing estimates.
 
 ***ACCOUNTS
        RECEIVABLE AND UNBILLED SERVICES***
  Our
        ability to collect outstanding receivables and unbilled services from our
        customers is critical to our operating performance and cash flows. Typically,
        arrangements with our customers require that the payments for our services
        be
        made in advance, based upon the achievement of milestones or in accordance
        with
        predetermined payment schedules. We have an allowance for doubtful accounts
        based on our estimate of accounts receivable that are at risk of collection.
        If
        the financial condition of our customers were to deteriorate, resulting in
        an
        impairment of their ability to make payments, an increase in the allowance
        for
        doubtful accounts may be required.
 
 32
  ***INVENTORY***
 
 We
        maintain an inventory of tissue samples collected from various commercial
        and
        academic sites that are used to expand the content of our databases. We assess
        the quality and supply of samples in excess of our current requirements in
        determining appropriate reserves. Our methods for calculating these reserves
        are
        based both on historical performance and management estimates. Inventory
        reserves are reviewed for adjustment on an ongoing basis. Changes in tissue
        quality and/or our requirements for their use could potentially cause
        adjustments to these reserves in future periods.
 
 We
        also
        maintain an inventory of microarrays and reagents used to generate genomic
        data
        for our databases and for services in our Genomics Division. This inventory
        is
        valued at the lower of cost or market. Certain items in inventory may be
        considered impaired, obsolete, or excessive and as such, we may establish
        an
        allowance to reduce the carrying value of these items to their net realizable
        value. Based on certain estimates, assumptions and judgments made from
        information available at the time, we determine the appropriate amount of
        any
        such inventory allowance. If these estimates or assumptions or the market
        for
        the use of our microarrays and reagents change, we may be required to record
        additional reserves.
 
 ***EQUITY
        INVESTMENTS***
 
 Following
        the write-down of $0.3 million in 2006, we hold an equity investment in one
        company (Xceed Molecular, formerly MetriGenix) with a remaining book value
        of
        $3.0 million as of December 31, 2006. We record an investment impairment
        charge
        when it is believed that an investment has experienced a decline in value
        that
        is other-than-temporary. Future adverse changes in market conditions or poor
        operating results of the underlying investee could result in our inability
        to
        recover the carrying value of this investment that may not be reflected in
        such
        an investment’s current carrying value, thereby possibly requiring an impairment
        charge in the future.
 
 ***STOCK-BASED
        COMPENSATION***
 
 In
        the
        first quarter of 2006, we adopted Statement of Financial Accounting Standards
        No. 123 (revised 2004), “Share-Based Payment” (“SFAS 123R”). SFAS 123R requires
        us to expense the fair value of stock-based compensation awards of our various
        stock-based compensation programs over the requisite service period of the
        award. We estimate the fair value of our stock-based compensation using fair
        value pricing models which require the use of significant assumptions for
        expected volatility of our common stock, life of stock options and risk-free
        interest rate. Future adverse changes in such assumptions could result in
        us
        recording increased stock-based compensation expenses for stock-based
        compensation awards granted/issued in the future.
 
 RECENTLY
          ISSUED ACCOUNTING PRONOUCEMENTS
 In
        September 2006, the Financial Accounting Standards Board (“FASB”) issued
        Statement of Financial Accounting Standards No. 157, “Fair Value Measurements”
(“SFAS 157”). SFAS 157 defines fair value, establishes a framework for measuring
        fair value under generally accepted accounting principles and expands
        disclosures about fair value measurements. SFAS 157 emphasizes that fair
        value
        is a market-based measurement, not an entity-specific measurement, and states
        that a fair value measurement should be determined based on the assumptions
        that
        market participants would use in pricing the asset or liability. This Statement
        applies under other accounting pronouncements that require or permit fair
        value
        measurements, for which the FASB previously concluded in such accounting
        pronouncements that fair value is the relevant measurement attribute.
        Accordingly, this Statement does not require any new fair value measurements.
        SFAS 157 is effective for fiscal years beginning after November 15, 2007,
        which
        we intend to adopt on January 1, 2008. We are currently evaluating the impact,
        if any, that SFAS 157 will have on our financial position, results of operations
        and cash flows, but do not believe the effect will be material.
 
 In
        July
        2006, the Financial Accounting Standards Board issued Interpretation No.
        48,
        "Accounting for Uncertainty in Income Taxes" ("FIN 48") which clarifies the
        accounting for income taxes by prescribing the minimum recognition threshold
        a
        tax position is required to meet before being recognized in the financial
        statements. FIN 48 also provides guidance on derecognition, measurement,
        classification, interest and penalties, accounting in interim periods,
        disclosure and transition. FIN 48 is effective for fiscal years beginning
        after
        December 15, 2006. We do not expect the adoption of this Interpretation to
        have
        a material impact on our financial statements.
 
 33
  Effective
        January 1, 2006, we adopted the fair value recognition provisions of SFAS
        123R,
        using the modified prospective transition method, and therefore have not
        restated results for prior periods. Under this method, we recognize compensation
        expense for all share-based payments granted after January 1, 2006 and for
        those
        that were granted prior to, but have not yet vested as of, January 1, 2006,
        in
        accordance with SFAS 123R. For 2006, stock-based compensation awards consisted
        of options awarded under the 1997 Equity Incentive Plan and the 1997
        Non-Employee Directors’ Stock Option Plan. Under the fair value recognition
        provisions of SFAS 123R, we recognize stock-based compensation net of an
        estimated forfeiture rate and recognize the compensation cost for those shares
        expected to vest on a straight-line basis over the requisite service period
        of
        the award. Prior to SFAS 123R adoption, we accounted for share-based payments
        under Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued
        to Employees” and accordingly, were required to recognize compensation expense
        only to the extent that the fair value of the underlying stock on the date
        of
        grant exceeded the exercise or acquisition price of the stock or stock-based
        award. Since stock options granted by us in the last several years have been
        granted with an exercise price equal to the fair value on the grant date,
        we did
        not recognize any expense for such options prior to our adoption of SFAS
        123R.
 
 Our net
        loss from continuing operations and total net loss for 2006 were impacted
        by the recognition of $0.6 million and $0.8 million, respectively, in
        non-cash expense related to the fair value of our stock-based compensation
        awards. The impact of stock compensation expense in future periods will be
        dependent on the number and type of share-based payments issued to employees
        and
        non-employee directors.
  **ITEM
        7A.     QUANTITATIVE AND
        QUALITATIVE DISCLOSURE ABOUT MARKET RISK**
  We
        have
        exposure to financial market risks, including changes in interest rates.
        At
        December 31, 2006, we had cash and cash equivalents of approximately $25.7
        million and marketable securities available-for-sale of an additional $24.4
        million. We invest our excess cash primarily in money market funds, obligations
        of the U.S. Government and its agencies and marketable debt securities of
        companies with strong credit ratings. These instruments have maturities of
        twenty-four months or less when purchased. We do not utilize derivative
        financial instruments, derivative commodity instruments or other market risk
        sensitive instruments, positions or transactions in any material fashion.
        Accordingly, we believe that, while the instruments we hold are subject to
        changes in the financial standing of the issuer of such securities, we are
        not
        subject to any material risks arising from changes in foreign currency exchange
        rates, commodity prices, equity prices or other market changes that affect
        market risk sensitive instruments. Based on our cash and cash equivalents
        and
        marketable securities available-for-sale balances at December 31, 2006, a
        hypothetical 100 basis point adverse movement in interest rates would have
        resulted in an increase in the net loss of approximately $0.5 million for
        the
        year ended December 31, 2006. Actual changes in rates may differ from the
        hypothetical assumptions used in computing this exposure.
 
 Since
        the
        beginning of 2005 and as a result of changing our distribution arrangements
        in
        Japan, we have been subject to risk from changes in foreign exchange rates
        relating to revenue with our Japanese customers, as such agreements are now
        denominated in Japanese Yen. Such changes could result in foreign currency
        exchange gains or losses. As a policy, we convert our customer payments made
        in
        Japanese Yen to United States dollars upon receipt of such payments. Revenue
        derived from the Pacific Rim as a percentage of total revenue was 39% for
        the
        year ended December 31, 2006 and was primarily derived from our customers
        in
        Japan. Exchange rate fluctuations between the United States dollar and Japan
        could result in positive or negative fluctuations in the amounts relating
        to
        revenue reported in our consolidated financial statements. A hypothetical
        10%
        adverse change in average foreign currency movements would have resulted
        in an
        increase in the net loss of approximately $0.7 million for the year ended
        December 31, 2006. There can be no assurance that losses related to this
        currency risk will not occur.
  **ITEM
        8.      FINANCIAL STATEMENTS
        AND SUPPLEMENTARY DATA**
  
 Our
        Consolidated Financial Statements and notes thereto, together with the Reports
        of Independent Registered Public Accounting Firm, appear on pages F-1 through
        F-22 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
  Attached
        as exhibits to this Form 10-K are certifications of our Chief Executive Officer
        (CEO) and Chief Financial Officer (CFO), which are required in accordance
        with
        Rule 13a-14 of the Securities Exchange Act of 1934, as amended (the Exchange
        Act). This “Controls and Procedures” section includes information concerning the
        controls and controls evaluation referred to in the certifications. Part
        II,
        Item 8 of this Form 10-K sets forth the report of Ernst & Young LLP, our
        independent registered public accounting firm, regarding its audit of our
        internal control over financial reporting and of management’s assessment of
        internal control over financial reporting set forth below in this section.
        This
        section should be read in conjunction with the certifications and the Ernst
        & Young LLP report for a more complete understanding of the topics
        presented.
 
 34
  **EVALUATION
        OF DISCLOSURE CONTROLS AND
        PROCEDURES**
  As
        of
        December 31, 2006, under the supervision and with the participation of our
        management, including the Chief Executive Officer (“CEO”) and Chief Financial
        Officer (“CFO”), an evaluation was performed of the effectiveness of the design
        and operation of our “disclosure controls and procedures” (“Disclosure
        Controls”). These are controls and procedures designed to reasonably assure that
        information required to be disclosed in our reports filed under the Exchange
        Act, such as this Form 10-K, is recorded, processed, summarized and reported
        within the time periods specified in the rules and forms of the United States
        Securities and Exchange Commission (“SEC”). Disclosure Controls are also
        designed to reasonably assure that such information is accumulated and
        communicated to our management, including the CEO and CFO as appropriate,
        to
        allow timely decisions regarding required disclosure. Based on that evaluation,
        our CEO and CFO have concluded that, as of December 31, 2006, our disclosure
        controls and procedures were effective to provide reasonable assurance that
        information required to be disclosed in our Exchange Act reports is recorded,
        processed, summarized and reported within the time periods specified by the
        SEC,
        and that material information relating to us is made known to management,
        including the CEO and CFO, particularly during the period when our periodic
        reports are being prepared.
 
 Our
        management, including the CEO and CFO, does not expect that our Disclosure
        Controls or our internal control over financial reporting will prevent or
        detect
        all errors and all instances of fraud. A control system, no matter how well
        designed and operated, can provide only reasonable, not absolute, assurance
        that
        the control system’s objectives will be met. The design of a control system must
        reflect the fact that there are resource constraints, and the benefits of
        controls must be considered relative to their costs. Further, because of
        the
        inherent limitations in all control systems, no evaluation of controls can
        provide absolute assurance that misstatements due to error or fraud will
        not
        occur or that all control issues and instances of fraud, if any, within the
        Company have been detected. These inherent limitations include the realities
        that judgments in decision-making can be faulty and that breakdowns can occur
        because of simple error or mistake. Controls can also be circumvented by
        the
        individual acts of some persons, by collusion of two or more people, or by
        management override of the controls. The design of any system of controls
        is
        based, in part, on certain assumptions about the likelihood of future events
        and
        there can be no assurance that any design will succeed in achieving its stated
        goals under all potential future conditions. Projections of any evaluation
        of
        the effectiveness of controls to future periods are subject to risks. Over
        time,
        controls may become inadequate because of changes in conditions or deterioration
        in the degree of compliance with policies or procedures.
 
 **MANAGEMENT'S
        REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING**
  Our
        management is responsible for establishing and maintaining adequate “internal
        control over financial reporting” to provide reasonable assurance regarding the
        reliability of our financial reporting and the preparation of financial
        statements for external purposes in accordance with generally accepted
        accounting principles. Internal control over financial reporting includes
        those
        policies and procedures that (i) pertain to the maintenance of records that
        in
        reasonable detail accurately and fairly reflect the transactions and
        dispositions of the assets of the company; (ii) provide reasonable assurance
        that transactions are recorded as necessary to permit preparation of financial
        statements in accordance with generally accepted accounting principles, and
        that
        receipts and expenditures of the company are being made only in accordance
        with
        authorizations of management and directors of the company; and (iii) provide
        reasonable assurance regarding prevention or timely detection of unauthorized
        acquisition, use or disposition of the company’s assets that could have a
        material effect on the financial statements.
 
 Under
        the
        supervision and with the participation of our management, including our CEO
        and
        CFO, we conducted an evaluation of the effectiveness of our internal control
        over financial reporting as of December 31, 2006 based on the framework in *Internal
        Control--Integrated*  *Framework* issued by
        the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
        Based on that evaluation, our management concluded that our internal control
        over financial reporting was effective as of December 31, 2006 to provide
        reasonable assurance regarding the reliability of financial reporting and
        the
        preparation of financial statements for external reporting purposes in
        accordance with generally accepted accounting principles.
 
 Management’s
        assessment of the effectiveness of our internal control over financial reporting
        as of December 31, 2006 has been audited by Ernst & Young LLP, an
        independent registered public accounting firm. Ernst & Young LLP has issued
        an attestation report concurring with management’s assessment, which is included
        in Part II, Item 8 of this Form 10-K.
 
 **CHANGES
        IN INTERNAL CONTROL OVER FINANCIAL
        REPORTING**
  There
        were
        no changes in our internal controls over financial reporting during the fourth
        quarter of 2006 that materially affected or are reasonably likely to materially
        affect our internal controls over financial reporting.
 
 35
  **ITEM
        9B.****OTHER
        INFORMATION**
 
 None.
 **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 2007 Annual Meeting of
        Stockholders to be filed with the Securities and Exchange Commission within
        120
        days following the Company’s fiscal year ended December 31, 2006 (the “Proxy
        Statement”).
 
 **IDENTIFICATION
        OF EXECUTIVE OFFICERS**
  The
        information required by this item is incorporated by reference to the
        information set forth in the section entitled “Executive Officers” in Part I,
        following Item 4 of this Annual Report on Form 10-K.
 
 **COMPLIANCE
        WITH SECTION 16(A) OF THE SECURITIES EXCHANGE ACT
        OF 1934**
 
 The
        information required by this item is incorporated by reference to the
        information set forth in the section entitled “Section 16(a) Beneficial
        Ownership Reporting Compliance,” contained in the Proxy Statement.
 
 **CODE
        OF ETHICS**
  The
        information required by this item is incorporated by reference to the
        information set forth in the section entitled “Corporate Governance,” contained
        in the Proxy Statement.
 
 **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.
 
 36
  **PART
        IV**
  **ITEM
        15.****EXHIBITS, FINANCIAL STATEMENTS AND SCHEDULES**
  **(a)
        1. Financial Statements**
  **Consolidated
                    Financial Statements of Gene Logic Inc.**
                PageReport
                    of Independent Registered Public Accounting Firm−Internal Control Over Financial Reporting
                F-2Report
                    of Independent Registered Public Accounting Firm − Consolidated Financial
                    Statements
                F-3Consolidated
                    Balance Sheets as of December 31, 2006 and 2005
                F-4Consolidated
                    Statements of Operations for the three years ended December 31,
                    2006
                F-5Consolidated
                    Statements of Stockholders' Equity for the three years ended
                    December 31,
                    2006
                F-6Consolidated
                    Statements of Cash Flows for the three years ended December 31,
                    2006
                F-7Notes
                    to Consolidated Financial Statements
                F-8
 **(a)
        2. Financial Statement Schedules**
 
 Schedule
        II - Valuation and Qualifying Accounts
 
 All
        other
        schedules for which provision is made in the applicable accounting regulations
        of the SEC are not required under the related instruction or are inapplicable
        and therefore have been omitted.
 
 **(a)
        3. Index to Exhibits**
  **Exhibit**
                    **Number**
                  
                  **Description
                    of Document**2.2
                  
                  Stock
                      Purchase Agreement, dated December 15, 2006, between Registrant
                      and Bridge
                      Pharmaceuticals, Inc.(23)3.1
                  
                  Amended
                      and Restated Certificate of Incorporation.(1)3.2
                  
                  By-Laws,
                      as amended and restated.(18)4.1
                  
                  Reference
                      is made to Exhibits 3.1 and 3.2.4.2
                  
                  Specimen
                      stock certificate.(1)*10.1
                  
                  Form
                      of Indemnity Agreement entered into between Registrant and
                      its directors
                      and officers.(1)*10.2
                  
                  Registrant's
                      1997 Equity Incentive Plan, as amended (the "Stock Plan").(16)*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.(superceded)(10)10.50a
                  
                  Letter
                      Agreement, amending Agreement effective January 1, 2002, between
                      Registrant and Affymetrix,
                      Inc.(superceded)(5)(B)10.50b
                  
                  Service
                      Provider Agreement, effective January 1, 2006, between Registrant
                      and
                      Affymetrix, Inc.(21)*10.55
                  
                  Executive
                      Severance Plan, as amended February 2001.(8)*10.58
                  
                  Employment
                      Agreement, dated October 11, 1999, between Registrant and Philip
                      L.
                      Rohrer, Jr.(4)10.67
                  
                  Lease
                      Agreement, dated July 21, 2000 between Registrant and ARE-50
                      West Watkins
                      Mill, LLC.(6)*10.75
                  
                  Employment
                      Agreement, dated May 30, 2002, between Registrant and F. Dudley
                      Staples,
                      Jr.(11)10.78
                  
                  Settlement
                      and Nonexclusive License Agreement, dated January 10, 2001,
                      between
                      Registrant and Incyte Corporation.(15)(A)10.79
                  
                  Lease
                      Agreement, dated November 20, 1999, between TherImmune Research
                      Corporation and Rickman
                      Associates.(15)
  37
 
  10.80
                  
                  Lease
                      Agreement, dated October 26, 2000, between TherImmune Research
                      Corporation
                      and Oxbridge Development at Crown Pointe, L.C.(15)10.81
                  
                  Lease
                      Agreement, dated June 22, 2001, between TherImmune Research
                      Corporation
                      and Oxbridge Development at Crown Pointe, L.C., including amendments
                      dated
                      September 25, 2001 and December 20, 2002.(15)10.81a
                  
                  Third
                      Amendment to Lease dated June 22, 2001, between TherImmune
                      Research
                      Corporation and Oxbridge Development at Crown Pointe,
                      L.C.(19)*10.83
                  
                  Employment
                      Agreement, dated November 4, 2004, between Registrant and Dennis
                      A.
                      Rossi.(17)*10.84
                  
                  Employment
                      Agreement, dated November 4, 2004, between Registrant and Joanne
                      M.
                      Smith-Farrell.(17)10.85
                  
                  Asset
                      Purchase Agreement, dated July 22, 2004, between Registrant
                      and Millennium
                      Pharmaceuticals, Inc.(17)(B)10.86
                  
                  Lease
                      Agreement, dated July 31, 2004, between Registrant and Thirty-Eight
                      Sidney
                      Street Limited Partnership.(17)10.87
                  
                  Lease
                      Agreement, dated October 5, 2004, between Registrant and ARE-Maryland
                      No.
                      23, LLC.(5)10.87a
                  
                  Agreement
                    for Termination of Lease and Voluntary Surrender of Premises
                    dated
                    September 28, 2006, between Registrant and ARE-Maryland No. 23,
                    LLC.(22)*10.88
                  
                  Employment
                      Agreement, dated March 10, 2005, between Registrant and V.W.
                      Brinkerhoff,
                      III.(20)10.90
                  
                  License
                      and Sublicense Agreement, dated September 12, 2005, between
                      Registrant and
                      Promega Corporation.(14)(C)10.91
                  
                  License
                      Agreement for Real-Time*In
                      Vivo*Imaging Technology, effective November 17, 2004, between Registrant
                      and
                      Xenogen Corporation.(14)(C)10.91a
                  
                  Amendment
                    to License Agreement for Real-Time*In
                    Vivo*Imaging Technology, effective November 22, 2005, between Registrant
                    and
                    Xenogen Corporation.(14)(C)*10.92
                  
                  2006
                      Performance Year Incentive Compensation Plan.(14)*10.93
                  
                  Employment
                      Agreement, dated June 21, 2006, between Registrant and Larry
                      Tiffany.(24)*10.94
                  
                  Amendment
                      to Employment Agreement, dated August 31, 2006, between Registrant
                      and
                      Larry Tiffany.(25)*10.95
                  
                  Amendment
                      to Employment Agreement, dated October 24, 2006, between Registrant
                      and
                      each of Mark D. Gessler, Philip L. Rohrer, Jr., F. Dudley Staples,
                      Joanne
                      Smith-Farrell and Louis A. Tartaglia.(26)21.1
                  
                  List
                      of Subsidiaries.23.1
                  
                  Consent
                      of Ernst & Young LLP, Independent Registered Public Accounting Firm.31
                  
                  Certifications
                      pursuant to Rule 13a-14(a) and 15d-14(a).32
                  
                  Certification
                      pursuant to 18 U.S.C. Section 1350, as adopted, pursuant to
                      Section 906 of
                      the Sarbanes-Oxley Act of 2002.
 _____________________
 *
              Indicates
                  management compensatory plan, contract or arrangement.
 
 (1)
              Filed
                  as an exhibit to Registrant’s Registration Statement on Form S-1, filed
                  October 7, 1997, as amended, (No. 333-37317) and incorporated herein
                  by
                  reference.
 
 (2)
              Filed
                  as an exhibit to Registrant’s Current Report on Form 8-K, filed on June 6,
                  2005, and incorporated herein by reference.
 
 (3)
              Filed
                  as an exhibit to Registrant’s Quarterly Report on Form 10-Q for the
                  quarter ended June 30, 1999, filed on August 13, 1999, and incorporated
                  herein by reference.
 
 (4)
              Filed
                  as an exhibit to Registrant’s Annual Report on Form 10-K for the fiscal
                  year ended December 31, 1999, filed on March 30, 2000, and incorporated
                  herein by reference.
 
 (5)
              Filed
                  as an exhibit to Registrant’s Annual Report on From 10-K for the fiscal
                  year ended December 31, 2004, filed on March 16, 2005, and incorporated
                  herein by reference.
 
 (6)
              Filed
                  as an exhibit to Registrant’s Quarterly Report on Form 10-Q for the
                  quarter ended September 30, 2000, filed on November 14, 2000, and
                  incorporated herein by reference.
 
 (7)
              Filed
                  as an exhibit to Registrant’s Annual Report on Form 10-K for the fiscal
                  year ended December 31, 2000, filed on March 29, 2001, and incorporated
                  herein by reference.
 
 (8)
              Filed
                  as an exhibit to Registrant’s Quarterly Report on Form 10-Q for the
                  quarter ended March 31, 2001, filed on May 11, 2001, and incorporated
                  herein by reference.
   38
 (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 Annual Report on Form 10-K for the fiscal
                  year ended December 31, 2005, filed on March 16, 2006, 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 Proxy Statement with respect to the Annual
                  Meeting of Stockholders held on June 1, 2006, filed on April 24,
                  2006, and
                  incorporated herein by reference.
 
 (17)
              Filed
                  as an exhibit to Registrant’s Quarterly Report on Form 10-Q for the
                  quarter ended September 30, 2004, filed on November 9, 2004, and
                  incorporated herein by reference.
 
 (18)
              Filed
                  as an exhibit to Registrant’s Current Report on Form 8-K with respect to
                  the Company’s amended By-Laws to provide for a non-executive Chairman of
                  the Board of Directors, filed on November 12, 2004, and incorporated
                  herein by reference.
 
 (19)
              Filed
                  as an exhibit to Registrant’s Annual Report on Form 10-K for the fiscal
                  year ended December 31, 2003, filed on March 15, 2004, and incorporated
                  herein by reference.
 
 (20)
              Filed
                  as an exhibit to Registrant’s Current Report on Form 8-K with respect to
                  the Company’s hiring of V. W. Brinkerhoff, III as Senior Vice President
                  and General Manager, Gene Logic Laboratories, filed on March 10,
                  2005, and
                  incorporated herein by reference.
 
 (21)
              Filed
                  as an exhibit to Registrant’s Quarterly Report on Form 10-Q for the
                  quarter ended March 31, 2006, filed on May 10, 2006, and incorporated
                  herein by reference.
 
 (22)
              Filed
                  as an exhibit to Registrant’s Quarterly Report on Form 10-Q for the
                  quarter ended September 30, 2006, filed on November 9, 2006, and
                  incorporated herein by reference.
 
 (23)
              Filed
                  as an exhibit to Registrant’s Current Report on Form 8-K with respect to
                  the Company’s sale of its Preclinical Division, filed on December 21,
                  2006, and incorporated herein by reference.
 
 (24)
              Filed
                  as an exhibit to Registrant’s Current Report on Form 8-K with respect to
                  the Company’s employment of Larry Tiffany, filed on June 30, 2006, and
                  incorporated herein by reference.
 
 (25)
              Filed
                  as an exhibit to Registrant’s Current Report on Form 8-K with respect to
                  the Company’s employment of Larry Tiffany, filed on September 7, 2006, and
                  incorporated herein by reference.
 
 (26)
              Filed
                  as an exhibit to Registrant’s Current Report on Form 8-K with respect to
                  the Company’s employment of the named executives, filed on October 24,
                  2006, and incorporated herein by reference.
   39
 (A)
              Confidential
                  treatment has been granted with respect to certain portions of
                  this
                  exhibit pursuant to an Order Granting Application Under the Securities
                  Exchange Act of 1934 and Rule 24b-2 Thereunder Respecting Confidential
                  Treatment dated December 12, 2003.
 
 (B)
              Confidential
                  treatment has been granted with respect to certain portions of
                  this
                  exhibit pursuant to an Order Granting Application Under the Securities
                  Exchange Act of 1934 and Rule 24b-2 Thereunder Respecting Confidential
                  Treatment dated May 5, 2005.
 
 (C)
              Confidential
                  treatment has been requested with respect to certain portions of
                  this
                  exhibit. Omitted portions have been filed separately with the
                  SEC.
 
    40
  **SIGNATURE**
 
 Pursuant
        to the requirements of Section 13 or 15(d) of the Securities Exchange Act
        of
        1934, the Registrant has duly caused this report to be signed on its behalf
        by
        the undersigned, thereunto duly authorized, on the 16 th day of
        March, 2007.
 
 **GENE
                LOGIC INC.**BY:
                */s/ MARK D. GESSLER*Mark
                D. GesslerChief
                Executive Officer and President
 
 Pursuant
        to the requirements of the Securities Exchange Act of 1934, this report has
        been
        signed below by the following persons on behalf of the Registrant and in
        the
        capacities and on the dates indicated.
 
 **Name**
                
                **Position**
                
                **Date***/s/
                    MARK D. GESSLER*
                
                Chief
                    Executive Officer,
                
                March
                    16, 2007(Mark
                    D. Gessler)
                
                President
                    and Director*(Principal
                    Executive Officer)**/s/
                    PHILIP L. ROHRER, JR.*
                
                Chief
                    Financial Officer
                
                March
                    16, 2007(Philip
                    L. Rohrer, Jr.)
                
                *(Principal
                    Financial and**Accounting
                    Officer)**/s/
                    JULES BLAKE*
                
                Director
                
                March
                    16, 2007(Jules
                    Blake, Ph.D.)*/s/
                    MICHAEL J. BRENNAN*
                
                Director
                
                March
                    16, 2007(Michael
                    J. Brennan, M.D., Ph.D.)*/s/
                    CHARLES L. DIMMLER, III*
                
                Director
                
                March
                    16, 2007(Charles
                    L. Dimmler, III)*/s/
                    FRANK L. DOUGLAS*
                
                Director
                
                March
                    16, 2007(Frank
                    L. Douglas, M.D, Ph.D.)*/s/
                    G. ANTHONY GORRY*
                
                Director
                
                March
                    16, 2007(G.
                    Anthony Gorry, Ph.D.)/s*/
                    LLOYD I. MILLER,III*
                
                Director
                
                March
                    16, 2007(Lloyd
                    I. Miller, III)*/s/
                    J. STARK THOMPSON*
                
                Chairman
                    of the Board
                
                March
                    16, 2007(J.
                    Stark Thompson, Ph.D.)
   41





**Gene
      Logic Inc.**





**Index
      to Consolidated Financial Statements**





**Page**Report
                of Independent Registered Public Accounting
                Firm - Internal Control Over Financial Reporting
            F-2Report
                of Independent Registered Public
                Accounting Firm - Consolidated Financial Statements
            F-3Consolidated
                Balance Sheets as of December 31, 2006
                and 2005
            F-4Consolidated
                Statements of Operations for the
                three years ended December 31, 2006
            F-5Consolidated
                Statements of Stockholders’ Equity
                for the three years ended December 31, 2006
            F-6Consolidated
                Statements of Cash Flows for the three
                years ended December 31, 2006
            F-7Notes
                to Consolidated Financial
                Statements
            F-8









F-1


**Report
      of Independent Registered Public Accounting Firm-**





**Internal
      Control Over Financial Reporting**





The
      Board
      of Directors and Stockholders of Gene Logic Inc.





We
      have
      audited management’s assessment, included in the accompanying Management’s
      Report on Internal Controls Over Financial Reporting listed as Item 9A, that
      Gene Logic Inc. maintained effective internal control over financial reporting
      as of December 31, 2006, based on criteria established in *Internal
      Control-Integrated Framework* issued by
      the Committee of Sponsoring Organizations of the Treadway Commission (the COSO
      criteria). Gene Logic Inc.’s management is responsible for maintaining effective
      internal control over financial reporting and for its assessment of the
      effectiveness of internal control over financial reporting. Our responsibility
      is to express an opinion on management’s assessment and an opinion on the
      effectiveness of the company’s internal control over financial reporting based
      on our audit.





We
      conducted our audit in accordance with the standards of the Public Company
      Accounting Oversight Board (United States). Those standards require that we
      plan
      and perform the audit to obtain reasonable assurance about whether effective
      internal control over financial reporting was maintained in all material
      respects. Our audit included obtaining an understanding of internal control
      over
      financial reporting, evaluating management’s assessment, testing and evaluating
      the design and operating effectiveness of internal control, and performing
      such
      other procedures as we considered necessary in the circumstances. We believe
      that our audit provides a reasonable basis for our opinion.





A
      company’s internal control over financial reporting is a process designed to
      provide reasonable assurance regarding the reliability of financial reporting
      and the preparation of financial statements for external purposes in accordance
      with generally accepted accounting principles. A company’s internal control over
      financial reporting includes those policies and procedures that (1) pertain
      to
      the maintenance of records that, in reasonable detail, accurately and fairly
      reflect the transactions and dispositions of the assets of the company; (2)
      provide reasonable assurance that transactions are recorded as necessary to
      permit preparation of financial statements in accordance with generally accepted
      accounting principles, and that receipts and expenditures of the company are
      being made only in accordance with authorizations of management and directors
      of
      the company; and (3) provide reasonable assurance regarding prevention or timely
      detection of unauthorized acquisition, use, or disposition of the company’s
      assets that could have a material effect on the financial statements.





Because
      of
      its inherent limitations, internal control over financial reporting may not
      prevent or detect misstatements. Also, projections of any evaluation of
      effectiveness to future periods are subject to the risk that controls may become
      inadequate because of changes in conditions, or that the degree of compliance
      with the policies or procedures may deteriorate.





In
      our
      opinion, management’s assessment that Gene Logic Inc. maintained effective
      internal control over financial reporting as of December 31, 2006 is fairly
      stated, in all material respects, based on the COSO criteria. Also, in our
      opinion, Gene Logic Inc. maintained, in all material respects, effective
      internal control over financial reporting as of December 31, 2006, based on
      the
      COSO criteria.





We
      also
      have audited, in accordance with the standards of the Public Company Accounting
      Oversight Board (United States), the consolidated balance sheets of Gene Logic
      Inc. as of December 31, 2006 and 2005, and the related consolidated statements
      of operations, stockholders’ equity, and cash flows for each of the three years
      in the period ended December 31, 2006, and our report dated March 14, 2007
      expressed an unqualified opinion thereon.








/s/
      ERNST
& YOUNG LLP








Baltimore,
      Maryland


March
      14,
      2007






F-2


**Report
      of Independent Registered Public Accounting Firm
      -**





**Consolidated
      Financial Statements**





The
      Board
      of Directors and Stockholders Gene Logic Inc.





We
      have
      audited the accompanying consolidated balance sheets of Gene Logic Inc. as
      of
      December 31, 2006 and 2005, and the related consolidated statements of
      operations, stockholders’ equity, and cash flows for each of the three years in
      the period ended December 31, 2006. Our audits also included the financial
      statement schedule listed in the Index at Item 15(a). These financial statements
      and schedule are the responsibility of the Company’s management. Our
      responsibility is to express an opinion on these financial statements and
      schedule based on our audits.





We
      conducted our audits in accordance with the standards of the Public Company
      Accounting Oversight Board (United States). Those standards require that we
      plan
      and perform the audit to obtain reasonable assurance about whether the financial
      statements are free of material misstatement. An audit includes examining,
      on a
      test basis, evidence supporting the amounts and disclosures in the financial
      statements. An audit also includes assessing the accounting principles used
      and
      significant estimates made by management, as well as evaluating the overall
      financial statement presentation. We believe that our audits provide a
      reasonable basis for our opinion.





In
      our
      opinion, the financial statements referred to above present fairly, in all
      material respects, the consolidated financial position of Gene Logic Inc. at
      December 31, 2006 and 2005, and the consolidated results of its operations
      and
      its cash flows for each of the three years in the period ended December 31,
      2006
      in conformity with U.S. generally accepted accounting principles. Also, in
      our
      opinion, the related financial statement schedule, when considered in relation
      to the basic financial statements taken as a whole, presents fairly in all
      material respects the information set forth therein.





As
      discussed in Note 1 to the consolidated financial statements, in 2006, the
      Company changed its method of accounting for stock-based compensation upon
      the
      adoption of Statement of Financial Accounting Standard No. 123(R), “Shared-Based
      Payments”.





We
      also
      have audited, in accordance with the standards of the Public Company Accounting
      Oversight Board (United States), the effectiveness of Gene Logic Inc.’s internal
      control over financial reporting as of December 31, 2006, based on criteria
      established in *Internal
      Control-Integrated Framework* issued by
      the Committee of Sponsoring Organizations of the Treadway Commission and our
      report dated March 14, 2007 expressed an unqualified opinion thereon.








/s/
      ERNST
& YOUNG LLP








Baltimore,
      Maryland


March
      14,
      2007








F-3


**GENE
      LOGIC INC.**





**Consolidated
      Balance Sheets**


**as
      of December 31, 2006 and 2005**


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




**2006**
              
              **2005****ASSETS**Current
                  assets:Cash
                  and cash equivalents
              
              $
              25,700
              
              $
              43,946Marketable
                  securities available-for-sale
              
              
              24,410
              
              
              38,179Accounts
                  receivable, net of allowance of $45 and $255 in 2006 and 2005,
                  respectively
              
              
              3,327
              
              
              1,779Unbilled
                  services
              
              
              589
              
              
              3,001Inventory,
                  net
              
              
              2,180
              
              
              3,091Prepaid
                  expenses
              
              
              1,260
              
              
              1,548Other
                  current assets
              
              
              3,551
              
              
              839Assets
                  of discontinued operations held-for-sale
              
              
              -
              
              
              32,889Total
                  current assets
              
              
              61,017
              
              
              125,272Property
                  and equipment, net
              
              
              12,829
              
              
              15,603Long-term
                  investments
              
              
              2,964
              
              
              3,239Goodwill
              
              
              2,677
              
              
              2,677Other
                  intangibles, net
              
              
              10,060
              
              
              13,399Other
                  assets
              
              
              726
              
              
              529Total
                  assets
              
              $
              90,273
              
              $
              160,719**LIABILITIES
                  AND STOCKHOLDERS' EQUITY**Current
                  liabilities:Accounts
                  payable
              
              $
              3,703
              
              $
              4,802Payable
                  to Bridge Pharmaceuticals
              
              
              1,727
              
              
              -Accrued
                  compensation and employee benefits
              
              
              2,883
              
              
              6,277Other
                  accrued expenses
              
              
              3,751
              
              
              3,554Accrued
                  restructuring costs
              
              
              1,941
              
              
              -Current
                  portion of long-term debt
              
              
              499
              
              
              497Acquired
                  technologies payable
              
              
              -
              
              
              3,492Deferred
                  revenue
              
              
              3,299
              
              
              9,738Liabilities
                  of discontinued operations held-for-sale
              
              
              -
              
              
              5,374Total
                  current liabilities
              
              
              17,803
              
              
              33,734Deferred
                  revenue
              
              
              228
              
              
              -Long-term
                  debt, net of current portion
              
              
              78
              
              
              127Deferred
                  rent
              
              
              1,074
              
              
              2,002Total
                  liabilities
              
              
              19,183
              
              
              35,863Commitments
                  and contingencies
              
              
              -
              
              
              -Stockholders'
                  equity:Preferred
                  stock, $.01 par value; 10,000,000 shares authorized; and no shares
                  issuedand
                  outstanding as of December 31, 2006 and 2005
              
              
              -
              
              
              -Common
                  stock, $.01 par value; 60,000,000 shares authorized; 31,820,273
                  and31,771,835
                  shares issued and outstanding as of December 31, 2006 and 2005,
                  respectively
              
              
              318
              
              
              318Additional
                  paid-in-capital
              
              
              386,530
              
              
              385,586Accumulated
                  other comprehensive loss
              
              
              (78
              )
              
              (78
              )Accumulated
                  deficit
              
              
              (315,680
              )
              
              (260,970
              )Total
                  stockholders' equity
              
              
              71,090
              
              
              124,856Total
                  liabilities and stockholders' equity
              
              $
              90,273
              
              $
              160,719
  See
                  accompanying notes.




F-4




**GENE
      LOGIC INC.**





**Consolidated
      Statements of Operations**


**For
      the Years Ended December 31, 2006, 2005 and 2004**


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




**2006**
              
              **2005**
              
              **2004**Revenue:Genomics
                  services
              
              $
              24,310
              
              $
              56,602
              
              $
              52,171Drug
                  repositioning services
              
              
              36
              
              
              588
              
              
              -Total
                  revenue
              
              
              24,346
              
              
              57,190
              
              
              52,171Expenses
                  (1):Database
                  production
              
              
              27,408
              
              
              31,689
              
              
              41,870Research
                  and development
              
              
              9,876
              
              
              6,812
              
              
              2,449Selling,
                  general and administrative
              
              
              22,422
              
              
              26,788
              
              
              19,224Genomics
                  Division restructuring
              
              
              5,258
              
              
              -
              
              
              -Purchased
                  research and development
              
              
              -
              
              
              -
              
              
              8,817Total
                  expenses
              
              
              64,964
              
              
              65,289
              
              
              72,360Loss
                  from operations
              
              
              (40,618
              )
              
              (8,099
              )
              
              (20,189
              )Interest
                  (income), net
              
              
              (2,694
              )
              
              (2,625
              )
              
              (1,395
              )Other
                  (income) expense
              
              
              55
              
              
              (813
              )
              
              -Write-down
                  of other-than-temporary decline in the value ofmarketable
                  securities available-for-sale
              
              
              -
              
              
              719
              
              
              -Write-down
                  of long-term equity investment
              
              
              275
              
              
              -
              
              
              -Loss
                  from continuing operations before income tax expense
              
              
              (38,254
              )
              
              (5,380
              )
              
              (18,794
              )Income
                  tax expense
              
              
              -
              
              
              -
              
              
              287Loss
                  from continuing operations
              
              
              (38,254
              )
              
              (5,380
              )
              
              (19,081
              )Loss
                  from discontinued operations
              
              
              (16,456
              )
              
              (42,924
              )
              
              (9,439
              )Net
                  loss
              
              $
              (54,710
              )
              $
              (48,304
              )
              $
              (28,520
              )Basic
                  and diluted net loss per share:Loss
                  from continuing operations
              
              $
              (1.20
              )
              $
              (0.17
              )
              $
              (0.61
              )Loss
                  from discontinued operations
              
              
              (0.52
              )
              
              (1.35
              )
              
              (0.30
              )Net
                  loss
              
              $
              (1.72
              )
              $
              (1.52
              )
              $
              (0.91
              )Shares
                  used in computing basic and diluted net loss per share
              
              
              31,807
              
              
              31,744
              
              
              31,493(1)
                  Line items include non-cash stock compensation expense as follows
                  (see
                  Note 1):Database
                  production
              
              $
              149
              
              $
              -
              
              $
              -Research
                  and development
              
              
              92
              
              
              -
              
              
              -Selling,
                  general and administrative
              
              
              390
              
              
              -
              
              
              -Loss
                  from discontinued operations
              
              
              158
              
              
              -
              
              
              -Total
                  non-cash stock compensation expense
              
              $
              789
              
              $
              -
              
              $
              -
  See
                  accompanying notes.





F-5


**GENE
      LOGIC INC.**





**Consolidated
      Statements of Stockholders’ Equity**


**For
      the Years Ended December 31, 2004, 2005 and 2006**


**(in
      thousands, except number of shares)**


**Common
                  Stock**
              
              **Additional**
              
              **Other****Number**
              
              **Par**
              
              **Paid-In**
              
              **Comprehensive**
              
              **Accumulated**
              
              **Comprehensive****of
                  Shares**
              
              **Value**
              
              **Capital**
              
              **Income
                  (Loss)**
              
              **Defecit**
              
              **Loss**Balance
                  at January 1, 2004
              
              
              31,131,198
              
              $
              311
              
              $
              383,377
              
              $
              47
              
              $
              (184,146
              )
              $
              -Issuance
                  of common stock in connection withexercise
                  of stock options
              
              
              255,479
              
              
              3
              
              
              948
              
              
              -
              
              
              -
              
              
              -Issuance
                  of common stock in connection withEmployee
                  Stock Purchase Plan
              
              
              120,215
              
              
              1
              
              
              445
              
              
              -
              
              
              -
              
              
              -Issuance
                  of common stock in connection withdrug
                  repositioning technologies acquisition
              
              
              147,521
              
              
              2
              
              
              543
              
              
              -
              
              
              -
              
              
              -Net
                  change in unrealized gains frommarketable
                  securities
              
              
              -
              
              
              -
              
              
              -
              
              
              (183
              )
              
              -
              
              $
              (183
              )Net
                  loss
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              (28,520
              )
              
              (28,520
              )Comprehensive
                  loss
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              $
              (28,703
              )Balance
                  at December 31, 2004
              
              
              31,654,413
              
              $
              317
              
              $
              385,313
              
              $
              (136
              )
              $
              (212,666
              )
              $
              -Issuance
                  of common stock in connection withexercise
                  of stock options
              
              
              54,609
              
              
              -
              
              
              111
              
              
              -
              
              
              -
              
              
              -Issuance
                  of common stock in connection withEmployee
                  Stock Purchase Plan
              
              
              62,813
              
              
              1
              
              
              162
              
              
              -
              
              
              -
              
              
              -Net
                  change in unrealized gains frommarketable
                  securities
              
              
              -
              
              
              -
              
              
              -
              
              
              58
              
              
              -
              
              $
              58Net
                  loss
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              (48,304
              )
              
              (48,304
              )Comprehensive
                  loss
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              $
              (48,246
              )Balance
                  at December 31, 2005
              
              
              31,771,835
              
              $
              318
              
              $
              385,586
              
              $
              (78
              )
              $
              (260,970
              )
              $
              -Issuance
                  of common stock in connection withexercise
                  of stock options
              
              
              48,438
              
              
              -
              
              
              155
              
              
              -
              
              
              -
              
              
              -Non-cash
                  stock-based compensation
              
              
              -
              
              
              -
              
              
              789
              
              
              -
              
              
              -
              
              
              -Foreign
                  currency translation adjustments
              
              
              -
              
              
              -
              
              
              -
              
              
              (38
              )
              
              -
              
              $
              (38
              )Net
                  change in unrealized gains frommarketable
                  securities
              
              
              -
              
              
              -
              
              
              -
              
              
              38
              
              
              -
              
              
              38Net
                  loss
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              (54,710
              )
              
              (54,710
              )Comprehensive
                  loss
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              $
              (54,710
              )Balance
                  at December 31, 2006
              
              
              31,820,273
              
              $
              318
              
              $
              386,530
              
              $
              (78
              )
              $
              (315,680
              )


F-6


**GENE
      LOGIC INC.**





**Consolidated
      Statements of Cash Flows**


**For
      the Years Ended December 31, 2006, 2005 and 2004**


**(in
      thousands)**


**2006**
              
              **2005**
              
              **2004**Cash
                  flows from operating activities:Loss
                  from continuing operations
              
              $
              (38,254
              )
              $
              (5,380
              )
              $
              (19,081
              )Adjustments
                  to reconcile loss from continuing operations to net cash flows
                  from
                  continuing operating activities:Depreciation
                  and amortization
              
              
              10,568
              
              
              10,788
              
              
              13,281Non-cash
                  purchased research and development
              
              
              -
              
              
              -
              
              
              7,908Non-cash
                  Genomics Division restructuring
              
              
              3,329
              
              
              -
              
              
              -Write-down
                  of marketable securities available-for-sale
              
              
              -
              
              
              719
              
              
              -Write-down
                  of equity investment
              
              
              275
              
              
              -
              
              
              -Inventory
                  impairment
              
              
              1,025
              
              
              -
              
              
              -Non-cash
                  stock compensation expense
              
              
              631
              
              
              -
              
              
              -Other
                  non-cash items
              
              
              24
              
              
              350
              
              
              348Changes
                  in continuing operating assets and liabilities:Accounts
                  receivable and unbilled services
              
              
              864
              
              
              (628
              )
              
              1,280Inventory
              
              
              (114
              )
              
              (1,432
              )
              
              3,321Prepaids
                  and other assets
              
              
              (1,115
              )
              
              (442
              )
              
              (119
              )Accounts
                  payable
              
              
              (1,090
              )
              
              999
              
              
              14Accrued
                  expenses and deferred rent
              
              
              (562
              )
              
              3,695
              
              
              1,788Accrued
                  technologies payable
              
              
              (3,492
              )
              
              -
              
              
              -Deferred
                  revenue
              
              
              (6,087
              )
              
              (2,613
              )
              
              614Net
                  cash flows from continuing operating activities
              
              
              (33,998
              )
              
              6,056
              
              
              9,354Loss
                  from discontiuned operations
              
              
              (16,456
              )
              
              (42,924
              )
              
              (9,439
              )Adjustments
                  to reconcile loss from discontinued operations to net cash flows
                  from
                  discontinued operating activities:Impairment
                  charges, depreciation and amortization and other non-cash
                  items
              
              
              14,011
              
              
              36,077
              
              
              3,670Changes
                  in discontinued operating assets and liabilities
              
              
              (517
              )
              
              1,199
              
              
              (3,865
              )Net
                  cash flows from discontinued operating activities
              
              
              (2,962
              )
              
              (5,648
              )
              
              (9,634
              )Net
                  cash flows from operating activities
              
              
              (36,960
              )
              
              408
              
              
              (280
              )Cash
                  flows from investing activities:Purchases
                  of property and equipment
              
              
              (2,015
              )
              
              (9,870
              )
              
              (2,994
              )Purchases
                  of licenses and patent costs
              
              
              (1,127
              )
              
              (813
              )
              
              (569
              )Software
                  development costs
              
              
              (983
              )
              
              (2,070
              )
              
              (3,327
              )Database
                  upgrade costs
              
              
              (2,584
              )
              
              (4,168
              )
              
              (569
              )Proceeds
                  from sale and maturity of marketable securities
                  available-for-sale
              
              
              44,486
              
              
              59,414
              
              
              83,372Purchase
                  of marketable securities available-for-sale
              
              
              (30,687
              )
              
              (47,576
              )
              
              (70,128
              )Net
                  proceeds received from sale of Preclinical
                  Division
              
              
              12,117
              
              
              -
              
              
              -Net
                  investing activities of discontinued operations
              
              
              (460
              )
              
              (4,707
              )
              
              (2,217
              )Net
                  cash flows from investing activities
              
              
              18,747
              
              
              (9,790
              )
              
              3,568Cash
                  flows from financing activities:Proceeds
                  from issuance of common stock to employees
              
              
              155
              
              
              274
              
              
              1,397Repayments
                  of an equipment loans
              
              
              (47
              )
              
              (44
              )
              
              (42
              )Net
                  financing activities of discontinued operations
              
              
              (141
              )
              
              (139
              )
              
              (124
              )Net
                  cash flows from financing activities
              
              
              (33
              )
              
              91
              
              
              1,231Net
                  increase (decrease) in cash and cash equivalents
              
              
              (18,246
              )
              
              (9,291
              )
              
              4,519Cash
                  and cash equivalents, beginning of year
              
              
              43,946
              
              
              53,237
              
              
              48,718Cash
                  and cash equivalents, end of year
              
              $
              25,700
              
              $
              43,946
              
              $
              53,237Supplemental
                  disclosure:Taxes
                  paid
              
              $
              -
              
              $
              -
              
              $
              569Interest
                  paid
              
              $
              19
              
              $
              35
              
              $
              49Non-cash
                financing and investing transactions:In
                  connection with the acquisition of the Drug Repositioning
                  technologies:Purchase
                  of research and development and purchase of laboratory equipment,
                  inexchange
                  for issuance of common stock, acquired technology payable and a
                  ToxExpress
                  subscription license
              
              $
              -
              
              
              -
              
              $
              7,971





F-7


**GENE
      LOGIC INC.**


**Notes
      to Consolidated Financial Statements**


**December
      31, 2006, 2005 and 2004**


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





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





*Description
      of Business*





Gene
      Logic
      Inc., including its wholly owned subsidiaries, Gene Logic Ltd. (United Kingdom
      subsidiary) and Gene Logic K.K. (Japan subsidiary), (collectively “Gene Logic”
or the “Company”), provides pharmaceutical development services that allow the
      Company to uncover new development paths for drug candidates provided by its
      customers for which development has been discontinued for reasons other than
      safety. In addition, the Company has developed and commercialized proprietary
      genomic and toxicogenomic databases, toxicogenomic services, software tools
      and
      other services that enable customers worldwide to discover and prioritize drug
      targets, identify biomarkers, predict toxicity and understand mechanisms of
      toxicity, and understand mechanisms of action of specific compounds.





From
      January until July 2004, the Company’s services were organized into two business
      segments: genomics and toxicogenomics services (“Genomics Division”) and
      preclinical contract research services (“Preclinical Division”). In July, 2004,
      as a result of the acquisition of certain technologies and the hiring of certain
      personnel from Millennium Pharmaceuticals, Inc. (“Millennium”) (see Note 2), the
      Company added a third business segment: drug repositioning services (“Drug
      Repositioning Division”). On December 15, 2006, the Company sold its Preclinical
      Division, which has now been classified as a discontinued operation (see Note
      3).





The
      Drug
      Repositioning Division is a pharmaceutical development division that identifies
      and develops new or expanded uses for small molecule therapeutics. The Company
      is building a therapeutic pipeline by applying its proprietary drug indication
      discovery platform consisting of genomics databases and bioinformatics software,
      and the biological screening technologies acquired from Millennium and which
      subsequently have undergone further development, to find new and expanded uses
      for drug candidates supplied by major pharmaceutical companies.





In
      2006,
      the Company began to redirect its Genomics Division in response to its
      customers’ shifting their research activities from early-stage drug discovery
      into later-stage development and validation efforts. Management examined the
      business for new avenues to create value and concluded that its expertise in
      biomarker discovery and validation could be used as a potential new platform
      for
      molecular diagnostics development. As a result, the Company has engaged outside
      financial advisors to identify strategic alternatives for our Genomics business.
      The Company continues to serve new and existing Genomics customers.





*Principles
      of Consolidation*





The
      consolidated financial statements include the accounts of Gene Logic Inc. and
      its wholly owned subsidiaries. All material inter-company accounts, transactions
      and profits have been eliminated in consolidation.





U *se
      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.





*Basis
      of Presentation*





As
      a
      result of the Company’s sale of its Preclinical Division and in accordance with
      Statement of Financial Accounting Standards No. 144, “Accounting for the
      Impairment or Disposal of Long-Lived Assets” (“SFAS 144”), the Company has
      classified the net assets of the Preclinical Division as assets and liabilities
      held for sale at December 31, 2005 and the results of operations of the
      Preclinical Division as discontinued operations for all periods.




F-8


*Foreign
      Currency Translation*




The
      financial statements of subsidiaries outside the United States are measured
      using the local currency as the functional currency. Assets and liabilities
      of
      these subsidiaries are translated at the rates of exchange at the balance sheet
      date, as appropriate. The resulting translation adjustments are included in
      accumulated other comprehensive loss, a separate component of stockholders’
equity. Income and expense items are translated at average monthly rates of
      exchange.





Com *prehensive
      Loss*





The
      Company accounts for comprehensive loss as prescribed by Statement of Financial
      Accounting Standards No. 130, “Reporting Comprehensive Income”. Comprehensive
      loss is the total net loss plus all changes in equity during the applicable
      period except those changes resulting from investment by owners and distribution
      to owners. Total comprehensive loss was $54,710, $48,246 and $28,703 for the
      years ended December 31, 2006, 2005 and 2004, 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 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:


**2006**
              
              **2005**Cash
              
              $
              1,076
              
              $
              2,326Money
                  market funds
              
              
              8,415
              
              
              6,949Commercial
                  paper
              
              
              16,209
              
              
              34,671Total
              
              $
              25,700
              
              $
              43,946





*Marketable
      Securities Available-for-Sale*





All
      marketable securities are classified as available-for-sale. Available-for-sale
      securities are carried at fair value, with unrealized gains and temporary losses
      reported as accumulated other comprehensive income (loss) included in
      stockholders’ equity. Realized gains and losses and declines in value judged to
      be other-than-temporary for available-for-sale securities are included in the
      Consolidated Statements of Operations. The cost of securities sold is based
      on
      the specific identification method. In 2006, 2005 and 2004, realized gains
      and/or losses resulting from the sale of marketable securities were immaterial.





As
      of
      December 31, 2006, 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
      2007. All marketable securities with a gross unrealized loss as of December
      31,
      2006 have been in an unrealized loss position for less than 12 months. The
      Company reviews marketable securities for impairment based on criteria that
      include the extent to which the investment’s carrying value exceeds its related
      market value, the duration of the market decline, the Company’s ability to hold
      the investment to recovery and the financial strength and specific prospects
      of
      the issuer of the security. During 2005, the Company determined that one of
      its
      marketable securities had an other-than-temporary decline in its value and
      accordingly, recorded a loss of $719 (see Note 6). As of December 31, 2006,
      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.




F-9


Marketable
      securities available-for-sale as of December 31 are comprised of:


**2006**
              
              **2005**Gross
              
              
              Gross
              
              
              
              
              
              
              
              
              Gross
              
              
              GrossAmortized
              
              
              Unrealized
              
              
              Unrealized
              
              
              Fair
              
              
              Amortized
              
              
              Unrealized
              
              
              Unrealized
              
              
              FairCost
              
              
              Gains
              
              
              Losses
              
              
              Value
              
              
              Cost
              
              
              Gains
              
              
              Losses
              
              
              ValueCommercial
                  paper
              
              $
              8,929
              
              $
              -
              
              $
              -
              
              $
              8,929
              
              $
              22,455
              
              $
              -
              
              $
              (14
              )
              $
              22,441Corporate
                  bonds
              
              
              13,498
              
              
              -
              
              
              (28
              )
              
              13,470
              
              
              13,501
              
              
              -
              
              
              (53
              )
              
              13,448Equity
                  securities
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              281
              
              
              -
              
              
              -
              
              
              281U.S.
                  Governmentmortgage-backedsecurities
              
              
              2,023
              
              
              -
              
              
              (12
              )
              
              2,011
              
              
              2,020
              
              
              -
              
              
              (11
              )
              
              2,009Total
              
              $
              24,450
              
              $
              -
              
              $
              (40
              )
              $
              24,410
              
              $
              38,257
              
              $
              -
              
              $
              (78
              )
              $
              38,179




*Allowances
      for Doubtful Accounts Receivable*





The
      Company uses estimates to determine the amount of the allowance for doubtful
      accounts necessary to reduce accounts receivable and unbilled services to their
      expected net realizable value. The Company estimates the amount of the required
      allowance by reviewing the status of past-due receivables and by establishing
      general provisions for estimated losses by analyzing current customer credit
      worthiness and historical bad debt trends. Actual collection experience has
      not
      varied significantly from the Company’s estimates, due primarily to collection
      policies and the financial strength of the Company’s customers. Receivables that
      are ultimately deemed uncollectible are written-off as a reduction of accounts
      receivable and the allowance for doubtful accounts.





*Inventory*





Inventory
      is stated at the lower of cost or market. Cost for microarrays and laboratory
      reagents is determined using the first-in, first-out method and cost for tissue
      samples is determined using the average cost method. All inventory is reviewed
      for impairment and appropriate reserves are recorded. All inventory is
      classified as raw materials. Inventory as of December 31 is comprised
      of:


**2006**
              
              **2005**Microarrays
              
              $
              2,233
              
              $
              2,199Laboratory
                  reagents
              
              
              510
              
              
              298Tissue
                  samples
              
              
              1,788
              
              
              2,2484,531
              
              
              4,745Less
                  -- microarray reserves
              
              
              (647
              )
              
              -Less
                  -- tissue samples reserves
              
              
              (1,704
              )
              
              (1,654
              )Inventory,
                  net
              
              $
              2,180
              
              $
              3,091





*Property
      and Equipment*





Property
      and equipment is carried at cost, less accumulated depreciation and
      amortization. Depreciation and amortization is recorded using the straight-line
      method over the estimated useful lives of the assets as follows:


Furniture
              
              
              10
                  yearsComputer
                  and office equipment
              
              
              1-5
                  yearsLaboratory
                  equipment
              
              
              5
                  yearsLeasehold
                  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. All of the Company’s current equity
      investments are accounted for under the cost method of accounting, as the
      Company holds less than 20% of the voting stock outstanding under such
      arrangements and does not exert significant influence over these companies.
      At
      December 31, 2006, the Company’s only equity investment with a remaining book
      value was Xceed Molecular (“Xceed”) (See Note 6).


F-10




*Goodwill*





The
      goodwill on the Company’s Consolidated Balance Sheet resulted from the
      acquisition of Oncormed, Inc. in 1998 and represents the excess of the purchase
      price over the fair value of the net assets acquired. These assets are part
      of
      the Genomics Division.





The
      Company accounts for goodwill under the provisions of Statement of Financial
      Accounting Standards No. 142, “Goodwill and Other Intangible Assets” (“SFAS
      142”). Under SFAS 142, the Company is required to perform an annual impairment
      test of its goodwill. The Company’s annual impairment test is performed October
      1. In addition, the Company is required to test for impairment at any point
      at
      which it has an indication that impairment may exist.





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





Based
      on
      the results of the Company’s annual impairment test, no impairment loss was
      identified in the carrying value of the $2,677 of goodwill of the Company’s
      Genomics Division.





*Other
      Intangible Assets*





Other
      intangible assets consist primarily of licenses, patent costs, software
      development costs and database upgrade costs.





The
      Company has licensed from third parties the proprietary rights and technical
      information covered by various patents and patent applications. These licenses
      will continue for the term of the agreement or the life of the respective
      patent, whichever is shorter. License costs are being amortized over their
      expected useful lives, but not greater than the lesser of the term of the
      agreement or the life of the respective patent. Certain agreements call for
      the
      payment of royalties and maintenance fees.





Patent
      costs include issued patents and patent applications and are stated at cost.
      Amortization of issued patent costs is recorded using the straight-line method
      over the shorter of their expected useful life or the legal lives of the
      patents, generally for periods ranging up to 20 years. The Company wrote off
      certain patent costs in the amount of $1,110 ($1,086 was written-off in
      connection with the Genomics Division restructuring-see Note 4), **** $52
      and
      $275 during 2006, 2005 and 2004, 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, beginning upon the
      demonstration of technological feasibility. The Company ceases capitalizing
      such
      costs when the software is available for general release to its customers.
      Software development costs are being amortized over their expected useful life
      of up to three years, commencing upon release of the software or
      upgrades.





Database
      upgrade costs consist mainly of upgrades of existing gene expression data
      utilizing Affymetrix’s new versions of microarrays. These costs are capitalized
      and amortized over their expected useful life of two years, commencing upon
      release of the update.





*Impairment
      of Long-Lived Assets*





Long-lived
      assets, consisting principally of property and equipment, long-term investments
      and other intangible assets (including licenses, patent costs, software
      development costs and database upgrade costs), are evaluated for possible
      impairment. If an impairment loss is indicated, the Company will measure the
      amount of the impairment by comparing the carrying value of the asset to the
      present value of the expected future cash flows associated with the use of
      the
      asset.


F-11


*Research
      and Development*





Research
      and development costs, including those costs incurred in acquiring and
      developing the drug repositioning technologies, are charged to operations when
      incurred or acquired.





*Database
      Production*





Except
      for
      database upgrade costs which are capitalized and amortized over their expected
      useful life, costs related to the acquisition and processing of tissues and
      overhead expenses needed to support the Company’s databases are expensed as
      incurred. These costs include labor, microarrays, tissues, licensing agreements,
      reagents, outside consultants and overhead.





*Revenue
      Recognition*





Through
      2006, the majority of Genomics Division services revenue consists of fees earned
      under subscription agreements for all or parts of the Company’s gene expression
      reference databases, the BioExpress System and ToxExpress System, and which
      are
      typically for a specific multi-year term for subscriptions to the larger
      databases and annual terms for smaller parts of the databases. The Company
      has
      also granted to some customers perpetual licenses to all or parts of the
      Company’s BioExpress and ToxExpress System databases and software tools. In
      addition, the Company generates a smaller, but growing, percentage of revenue
      from providing other services, including various toxicogenomics reports,
      microarray data generation and analysis and other professional services. Revenue
      from subscription agreements is recognized ratably over the period during which
      the customer has access to the database. Certain subscription agreements have
      included a right of early termination (which, in some instances, is subject
      to
      conditions) by the customer, without penalty, on a specified date prior to
      the
      normal expiration of the term. If an agreement has a right of early termination,
      revenue is recognized ratably over the subscription term up to the possible
      date
      of early termination, based on subscription fees earned under the agreement
      through the possible date of early termination. If such early termination does
      not occur, the balance of the subscription fees earned under the agreement
      is
      recognized as revenue ratably over the remaining term of the agreement. Revenue
      from perpetual licenses to data and software for which the Company is not
      obligated to provide continuing support or services is recognized when the
      data
      and/or software has been delivered. Revenue for perpetual licenses for which
      the
      Company is obligated to provide continuing support or services is recognized
      during the period such support or services are provided. Revenue from other
      services is recognized when the services are performed. The Company’s agreements
      generally provide for termination in the event of a breach of the agreement
      by
      either party or a bankruptcy or insolvency of either party. Agreements with
      the
      Company’s customers, other than its Japanese customers, are dollar-denominated.
      Agreements with the Company’s Japanese customers, since 2005, have been
      denominated in Japanese Yen and may be subject to fluctuations due to changes
      in
      currency exchange rates.





Revenue
      recognized for any multiple-element contract is allocated to each element of
      the
      arrangement based on the relative fair value of the element. The determination
      of fair value of each element is based on the Company’s analysis of objective
      and reliable evidence from comparable internal or third-parties’ sales of the
      individual element. If the Company is unable to determine evidence of fair
      value
      for an undelivered element of the arrangement, revenue for the arrangement
      is
      deferred and recognized using the revenue recognition method appropriate to
      the
      predominant undelivered element.





The
      Company has entered into several contractual arrangements with multiple
      deliverables, such as licenses to access its BioExpress and ToxExpress System
      databases and microarray data generation and analysis and other professional
      services. For some of these arrangements, the Company was unable to determine
      objectively and reliably the fair value of some undelivered elements, and in
      such arrangements, the Company recognizes all revenue using the revenue
      recognition method appropriate to the predominant undelivered element. The
      Company also defers the direct and incremental expenses associated with the
      delivery of services for which revenue has been deferred and recognizes these
      expenses as the Company recognizes the related revenue. These types of
      arrangements have resulted in an increase in the Company’s deferred costs and
      deferred revenue as of December 31, 2006. The timing of revenue recognition
      associated with future agreements may also be dependent on its ability to
      objectively and reliably determine the fair value of deliverables included
      in
      those agreements.





Unbilled
      services are recorded for revenue recognized to date that has not been billed
      to
      the customer pursuant to the contractual terms. Typically, the Company’s
      arrangements require that payments be made in advance, upon the achievement
      of
      milestones or in accordance with predetermined payment schedules. Deferred
      revenue is recorded for cash received from customers for whom services have
      not
      yet been performed as of the balance sheet date.


F-12


*Foreign
      Currency Transactions*





Foreign
      currency transaction (gains) and losses are included in the Company’s
      Consolidated Statements of Operations. During 2006 and 2005, foreign currency
      losses and (gains) totaled $55 and ($813), respectively, and are included in
      Other (Income) Expense on the Company’s Consolidated Statements of Operations.
      Prior to 2005, the Company was not subject to foreign currency transactions
      as
      its agreements were dollar denominated.





*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
      are excluded from the computation, as their effect is
      anti-dilutive.





*Stock-Based
      Compensation*





Prior
      to
      January 1, 2006, the Company accounted for all of its stock-based compensation
      awards under the recognition and measurement provisions of Accounting Principles
      Board Opinion No. 25, “Accounting for Stock Issued to Employees” (“APB 25”).
      Accordingly, the Company recognized compensation expense, if any, only to the
      extent that the fair value of the underlying stock on the date of grant exceeded
      the exercise or acquisition price of the stock or stock-based award. Any
      resulting compensation expense was recognized ratably over the associated
      service period, which was generally the option vesting period.





Effective
      January 1, 2006, the Company adopted the fair value recognition provisions
      of
      Statement of Financial Accounting Standards (“SFAS”) No. 123(R) (revised 2004),
“Share-Based Payment,” (“SFAS 123R”), using the modified prospective transition
      method and therefore has not restated results for prior periods. Under this
      transition method, stock-based compensation expense for 2006 included
      compensation expense for all stock-based compensation awards granted (i) prior
      to, but not yet vested as of, January 1, 2006 based on the grant date fair
      value
      estimated in accordance with the original provisions of SFAS No. 123,
“Accounting for Stock-Based Compensation” ** (“SFAS
      123”), and (ii) after January 1, 2006 based on the grant date fair value
      determined in accordance with the provisions of SFAS 123R. For 2006, stock-based
      compensation awards consisted of options awarded under the 1997 Equity Incentive
      Plan and the 1997 Non-Employee Directors’ Stock Option Plan. The Company
      recognizes these compensation costs on a straight-line basis over the requisite
      service period of the award, which is generally the option vesting period and
      typically occurs ratably over periods ranging from one to four years. In March
      2005, the SEC issued Staff Accounting Bulletin No. 107 (“SAB 107”) regarding the
      SEC’s interpretation of SFAS 123R and the valuation of share-based payments for
      public companies. The Company has applied the provisions of SAB 107 in its
      adoption of SFAS 123R. See Note 13 for a further discussion on stock-based
      compensation.




As
      a
      result of adopting SFAS 123R, the Company’s net loss from continuing operations
      and total net loss in the Consolidated Financial Statements for 2006 was $631
      and $789, respectively, higher than if the Company had continued to account
      for stock-based compensation under APB 25. The impact on basic and diluted
      net
      loss per share for 2006 was $0.02 per share. The impact of stock compensation
      expense in future periods will be dependent on the number and type of
      share-based payments issued to employees and non-employee
      directors.





Prior
      to
      January 1, 2006, the Company provided pro forma disclosure amounts in accordance
      with SFAS No. 148 “Accounting for Stock-Based Compensation—Transition and
      Disclosure”, as if the fair value method defined by SFAS 123 had been applied to
      its stock-based compensation.


F-13




The
      following table illustrates the effect on net loss and net loss per share as
      if
      the Company had applied the fair value recognition provisions of SFAS 123 to
      stock-based compensation for the indicated period:


**2005**
              
              **2004**Net
                  loss, as reported
              
              $
              (48,304
              )
              $
              (28,520
              )Add:
                  Stock-based compensation expenseincluded
                  in reported net loss
              
              
              -
              
              
              -Deduct:
                  Stock-based compensation expensedetermined
                  under fair value based method for all awards
              
              
              (2,010
              )
              
              (2,513
              )Pro
                  forma net loss
              
              $
              (50,314
              )
              $
              (31,033
              )Basic
                  and diluted net loss per share:As
                  reported
              
              $
              (1.52
              )
              $
              (0.91
              )Pro
                  forma
              
              $
              (1.58
              )
              $
              (0.99
              )


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, 2006, 2005
      and 2004 with the following assumptions:




**2006**
              
              
              **2005**
              
              
              **2004**Expected
                  volatility
              
              
              55%
              
              
              52%
              
              
              60%Risk-free
                  interest rate
              
              
              4.49%
                  to 5.11%
              
              
              3.41%
                  to 4.42%
              
              
              2.02%
                  to 3.26%Expected
                  lives
              
              
              3
                  years
              
              
              3
                  years
              
              
              3
                  yearsDividend
                  rate
              
              
              0%
              
              
              0%
              
              
              0%


*Reclassifications*





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





For
      2006,
      2005 and 2004 respectively, $3,711, $4,208 and $2,179 in costs previously
      allocated to the Preclinical Division have been re-allocated to the Genomics
      and
      Drug Repositioning Divisions. These amounts represent costs that the Company
      has
      now determined will not be eliminated as a result of the sale of its Preclinical
      Division.





*New
      Accounting Pronouncements*





In
      September 2006, the Financial Accounting Standards Board (“FASB”) issued SFAS
      No. 157, “Fair Value Measurements” (“SFAS 157”). SFAS 157 defines fair value,
      establishes a framework for measuring fair value under generally accepted
      accounting principles and expands disclosures about fair value measurements.
      SFAS 157 emphasizes that fair value is a market-based measurement, not an
      entity-specific measurement, and states that a fair value measurement should
      be
      determined based on the assumptions that market participants would use in
      pricing the asset or liability. This Statement applies under other accounting
      pronouncements that require or permit fair value measurements, for which the
      FASB previously concluded in such accounting pronouncements that fair value
      is
      the relevant measurement attribute. Accordingly, this Statement does not require
      any new fair value measurements. SFAS 157 is effective for fiscal years
      beginning after November 15, 2007 and the Company intends to adopt it on January
      1, 2008. The Company is currently evaluating the impact, if any, that SFAS
      157
      will have on its financial position, results of operations and cash flows,
      but
      does not believe the effect will be material.





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





**Note** **2
      - Drug Repositioning technologies acquisition**





In
      July
      2004, the Company acquired certain drug repositioning technologies and related
      assets (the “Drug Repositioning technologies”) and hired a research team from
      Millennium Pharmaceuticals, Inc. (“Millennium”). The Drug Repositioning Division
      uses a drug-indication discovery platform that integrates biological screening
      technologies acquired from Millennium with the Company’s genomics and
      toxicogenomics capabilities.


F-14




Consideration
      by the Company included: (i) $3,500 paid in cash in 2006; (ii) $1,000 paid
      and
      issued in cash and stock to certain employees who left Millennium and joined
      the
      Company; (iii) limited grant-back licenses to certain technologies acquired
      from
      Millennium; and (iv) approximately $488 in transaction costs. In addition,
      Millennium received a license to use the Company’s ToxExpress System database
      for three years (subsequently amended to terminate on December 30, 2005), valued
      at $4,500, for which the Company recorded $4,048 and $452 in revenue in 2005
      and
      2004, respectively. The Company also contractually agreed to, and subsequently
      met, a commitment to spend an aggregate of $14,500 over the first two and
      one-half years following the acquisition to develop and commercialize the
      acquired technologies. After completing its evaluation of the Drug Repositioning
      technologies and purchased in-process research and development activities,
      and
      in order to reflect the cost of acquiring the Drug Repositioning technologies,
      the Company recorded an $8,817, one-time, purchased research and development
      expense in Operating Expenses in the Company’s Consolidated Statements of
      Operations for the year ended December 31, 2004.





**Note
      3 - Discontinued operations**





As
      previously discussed in Note 1, the Company changed its strategic focus and
      sold
      its Preclinical Division on December 15, 2006 for a sales price of $15,000,
      including $13,500 paid at closing less transaction costs of $1,383 and $1,500
      held in escrow for 12 months to guarantee certain obligations under the
      agreement. The sales price remains subject to final adjustment to reflect
      certain changes in working capital and the assumption of certain liabilities
      associated with the business. In addition, the Company’s guarantee of two leases
      continue in effect pending their assignment to and assumption by the buyer
      and
      the Company provides certain transition services under an agreement with the
      buyer. If either of the guarantees cannot be assumed by the buyer, then the
      buyer is obligated to indemnify the Company with respect to such
      guarantee.





As
      a
      result of the Company’s sale of its Preclinical Division, the Company recorded a
      loss on disposal of $10,900 which represented the excess carrying value of
      the
      net assets of the Preclinical Division over the sales price received less costs
      to sell which is included in the loss from discontinued operations. The Company
      may further adjust the loss on disposal, which could result in a further gain
      or
      loss, if required to reflect higher actual fees and expenses incurred, final
      adjustments to the sale price or claims made against the escrow amount that
      are
      determined to be valid.





Due
      to the
      operations and cash flows of the Preclinical Division being eliminated from
      continuing operations of the Company, and the fact that the Company does not
      have any significant continuing involvement in the business, the operations
      of
      the Preclinical Division have been classified as discontinued operations for
      all
      periods presented. Summarized operating results from the discontinued operations
      included in the Company’s Consolidated Condensed Statements of Operations are as
      follows:


**2006**
              
              **2005**
              
              **2004**Revenue
              
              $
              25,961
              
              $
              22,180
              
              $
              23,766Loss
                  from discontinued operations (1)(2)
              
              $
              (16,456
              )
              $
              (42,924
              )
              $
              (9,439
              )(1)
                  Includes $10,900 loss on disposal in 2006.(2)
                  Includes $32,794 impairment charge associated with the impairment
                  of
                  goodwill in 2005.





Assets
      and
      liabilities of the discontinued operations are as follows as of the indicated
      date:


**December
                  31,****2005**Current
                  assets
              
              $
              7,546Property
                  and equipment, net
              
              
              15,079Goodwill
              
              
              10,236Other
                  long-term assets
              
              
              28Current
                  liabilities
              
              
              (3,969
              )Noncurrent
                  liabilities
              
              
              (1,405
              )Net
                  assets of discontinued operations
              
              $
              27,515


F-15


**Note
      4 - Genomics Division restructuring expenses**





During
      2006, the Company initiated a restructuring of its Genomics Division, which
      it
      expects to substantially complete by December 31, 2007, and recorded total
      restructuring costs of $5,258. The components of the restructuring
      are:





·
            the
                termination of 70 employees, effective October 5, 2006, which resulted
                in
                severance costs of $1,521;


·
            the
                acceleration of future costs of $2,426 for certain laboratory and
                office
                facilities that were no longer needed for continuing operations and
                which
                were either abandoned or for which the Company has entered into sublease
                arrangements; and


·
            the
                impairment of certain intangible assets of $1,311, primarily patent
                and
                license costs, which the Company determined would no longer be utilized
                by
                its Genomics Division.





The
      major
      components of the Genomics Division restructuring liability as of December
      31,
      2006 are comprised of:




**2006
                  Charges**
                **to
                  Operations**
              
              **2006
                  Charges**
                **Utilized**
              
              **Accrual**
                **Balance
                  as of**
                **December
                  31,**
                **2006**Severance
                  and related beenfits
              
              $
              1,521
              
              $
              (1,399
              )
              $
              122Lease
                  obligations
              
              
              2,426
              
              
              (607
              )
              
              1,819Total
              
              $
              3,947
              
              $
              (2,006
              )
              $
              1,941


**Note
      5 - Property and equipment**





Property
      and equipment includes the following as of December 31:




**2006**
              
              **2005**Furniture
              
              $
              1,651
              
              $
              1,717Computer
                  and office equipment
              
              
              13,431
              
              
              14,674Laboratory
                  equipment
              
              
              16,362
              
              
              15,024Leasehold
                  improvements
              
              
              10,474
              
              
              12,97541,918
              
              
              44,390Less
                  -- accumulated depreciation and amortization
              
              
              (29,089
              )
              
              (28,787
              )Property
                  and equipment, net
              
              $
              12,829
              
              $
              15,603




Depreciation
      expense was $3,875, $3,806 and $4,079 for the years ended December 31, 2006,
      2005 and 2004, respectively.





**Note** **6
      - Long-term investments**





In
      November 2003, the Company’s subsidiary, then named MetriGenix, Inc. (which has
      since been dissolved), sold substantially all of its assets for cash to a
      privately held company (the “Buyer”, referred to herein as “Xceed”, formerly
      MetriGenix). The proceeds of sale were used to satisfy then known liabilities
      of
      the Company’s subsidiary. In connection with the sale, Xceed received a fully
      paid BioExpress System subscription with a term through December 31, 2006,
      which
      thereafter renewed automatically on an annual basis unless either party elected
      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 Xceed, valued at $2,911, 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 Xceed, which along with additional convertible preferred
      stock previously held by the Company of $53, represented 15.3% of the equity
      of
      Xceed. 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 Xceed using
      the cost method of accounting and has recorded the investment value, $3,186,
      as
      revenue over the term of the subscription agreement. During 2006, the
      subscription agreement was terminated by mutual agreement and the warrant was
      therefore terminated. As a result, the Company recorded a $275 write-down of
      the
      fair value of the warrant. During 2006, 2005 and 2004, the Company recorded
      $1,027, $1,027 and $1,060, respectively, in revenue relating to the subscription
      agreement. At December 31, 2006, the remaining book value of the Company’s
      investment in Xceed was $2,964, which it believes approximates fair
      value.


F-16




During
      2004, the Company accounted for its investment in Avalon Pharmaceuticals, Inc.
      (“Avalon”) under the cost method of accounting. During 2005, Avalon
      completed an initial public offering and the Company reclassified its $1,000
      investment to marketable securities available-for-sale and the Company also
      recorded a $719 write-down of its investment in Avalon due to an
      other-than-temporary decline in Avalon’s estimated market value. During 2006,
      the Company sold its remaining investment in Avalon and recorded a gain, after
      the write-down, of $31.





**Note
      7 - Other intangible assets**





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


**2006**
              
              **2005**Carrying
                  amount:Licenses
              
              $
              414
              
              $
              1,600Patent
                  costs
              
              
              2,684
              
              
              3,185Software
                  development costs
              
              
              6,289
              
              
              13,170Database
                  upgrade costs
              
              
              6,865
              
              
              4,737Total
                  carrying amount
              
              $
              16,252
              
              $
              22,692Accumulated
                  amortization:Licenses
              
              $
              179
              
              $
              993Patent
                  costs
              
              
              48
              
              
              272Software
                  development costs
              
              
              3,408
              
              
              7,432Database
                  upgrade costs
              
              
              2,557
              
              
              596Total
                  accumulated amortization
              
              $
              6,192
              
              $
              9,293Net
                  carrying value:Licenses
              
              $
              235
              
              $
              607Patent
                  costs
              
              
              2,636
              
              
              2,913Software
                  development costs
              
              
              2,881
              
              
              5,738Database
                  upgrade costs
              
              
              4,308
              
              
              4,141Total
                  net carrying value
              
              $
              10,060
              
              $
              13,399





Amortization
      expense for the years ended December 31, 2006, 2005 and 2004 was $6,693, $6,982
      and $9,202, respectively, including amortization of software development costs
      of $3,750, $5,197 and $6,600, respectively. Estimated amortization expense
      for
      existing intangible assets for each of the five succeeding years ending December
      31 will be as follows:


2007
              
              $
              5,0252008
              
              
              2,2432009
              
              
              2222010
              
              
              502011
              
              
              50




**Note
      8 - Long-term debt**





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




**2006**
              
              
              **2005**Loan
                  for facility -- bearing interest at 5.0% per annum and due
                  inquarterly
                  installments through September 2009
              
              $
              127
              
              $
              174Loan
                  for facility -- bearing interest at 4.5% and due upon
                  demand
              
              
              450
              
              
              450577
              
              
              624Less
                  -- current portion
              
              
              (499
              )
              
              (497
              )Long-term
                  debt
              
              $
              78
              
              $
              127






F-17


As
      of
      December 31, 2006, future principal payments on long-term debt for the years
      ending December 31 are as follows:




2007
              
              $
              4992008
              
              
              512009
              
              
              27$
              577





Interest
      expense was $8, $10 and $12 for the years ended December 31, 2006, 2005 and
      2004, respectively.





**Note
      9 - Income taxes**





Income
      tax
      expense reflected in the Company’s 2004 Consolidated Statements of Operations
      represents withholding taxes on certain payments by Japanese customers. During
      2004, the U.S. and Japan entered into a new tax treaty eliminating this
      withholding tax effective July 1, 2004. The actual income tax expense for the
      years ended December 31, 2006, 2005 and 2004 is different from the amount
      computed by applying the statutory federal income tax rates to loss before
      income tax expense. The reconciliation of these differences for the years ended
      December 31 is as follows:


**2006**
              
              **2005**
              
              **2004**Tax
                  benefit at federal statutory rate
              
              $
              (18,614
              )
              $
              (16,433
              )
              $
              (9,599
              )State
                  income taxes, net of federal income tax effect
              
              
              (2,526
              )
              
              (2,233
              )
              
              (1,304
              )Impairment
                  losses
              
              
              4,310
              
              
              12,665
              
              
              -Other
              
              
              (1,204
              )
              
              (2,973
              )
              
              (2,314
              )Increase
                  in valuation allowance
              
              
              18,034
              
              
              8,974
              
              
              13,504Income
                  tax expense
              
              $
              -
              
              $
              -
              
              $
              287





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




**2006**
              
              **2005**Deferred
                  tax assets:NOL
                  and tax credit carryforwards
              
              $
              113,499
              
              $
              97,147Contract
                  revenue
              
              
              -
              
              
              404Net
                  loss in unconsolidated investee
              
              
              3,483
              
              
              3,483Purchased
                  research and development
              
              
              2,838
              
              
              3,065Depreciation
              
              
              2,812
              
              
              2,649Accrued
                  vacation
              
              
              399
              
              
              587Other
              
              
              4,380
              
              
              4,035127,411
              
              
              111,370Less
                  -- valuation allowance
              
              
              (126,241
              )
              
              (109,055
              )Net
                  deferred tax assets
              
              $
              1,170
              
              $
              2,315Deferred
                  tax liabilities:Capitalized
                  software costs
              
              $
              1,113
              
              $
              2,217Other
              
              
              57
              
              
              98Net
                  deferred tax liabilities
              
              $
              1,170
              
              $
              2,315


At
      December 31, 2006, net operating loss carryforwards (“NOLs”) for income tax
      purposes were $267,587, 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 $10,156 as of December
      31,
      2006. The carryforwards, if not utilized, will expire in increments from 2008
      through 2026. 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. During the fourth quarter of 2006, the Company, with the assistance
      of
      an independent third party, performed an Internal Revenue Code Section 382
      study
      on its NOLs, excluding NOLs assumed from acquisitions. Based on the study,
      the
      Company does not believe that there are presently any material limitations
      on
      the use of its NOLs. As a result of cumulative losses, the Company has recorded
      a full valuation allowance against its net deferred tax assets as management
      believes it is more likely than not that the assets will not be
      realizable.




F-18


**Note
      10 - Commitments and contingencies**





*Operating
      Leases*





The
      Company conducts all of its operations from leased facilities, under operating
      leases with varying terms expiring through 2011, in Gaithersburg, Maryland
      and
      Cambridge, Massachusetts. These leases obligate the Company to pay building
      operating costs and also contain renewal provisions which may extend their
      term.





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




2007
              
              $
              1,8582008
              
              
              1,6332009
              
              
              1,1712010
              
              
              1,2002011
              
              
              2282012
                  and thereafter
              
              
              285$
              6,375





Rent
      expense for the years ended December 31, 2006, 2005 and 2004, was $2,532, $3,398
      and $3,089, **** respectively.





*Contingencies*





In
      connection with the sale of its Preclinical Division, the Company may recognize
      an additional gain or loss in future periods to reflect higher actual fees
      and
      expenses incurred, final adjustment to the sales price, or claims made against
      the escrow amount that are determined to be valid. In addition, under the stock
      purchase agreement, the Company agreed to indemnify the buyer in the event
      of a
      breach of its representations and warranties to, and agreements with, the buyer
      and retained certain liabilities relating to the activities of the business
      prior to the sale.





The
      Company had also guaranteed leases for two properties formerly leased to, and
      used by, the Company’s Preclinical Division. These leases were among the
      obligations transferred in connection with the sale of its Preclinical Division.
      The buyer had agreed, subject to landlord consent, to accept assignment from
      the
      Company and to assume such guarantees, terminating Company’s liability
      thereunder. If either landlord does not agree to such assignment and assumption,
      the buyer has agreed to indemnify the Company for claims against either of
      such
      guarantees that continue. At this time, the buyer has not completed its
      negotiations with either landlord.





*Litigation*





The
      Company is not currently a party to any legal proceedings that would have a
      material adverse effect on the Company’s financial condition or results of
      operations.





**Note
      11 - 401(k) retirement plan**





During
      1996, the Company established the Gene Logic Inc. 401(k) Retirement Plan (the
      “401(k) Plan”) for its employees under Section 401(k) of the Internal Revenue
      Code. Under the 401(k) Plan all employees 18 years of age or older are eligible,
      starting on the calendar quarter, to contribute up to 100% of their eligible
      compensation and in the case of employees age 50 or older make certain catch-up
      contributions, subject to maximum deferrals allowed under IRS regulations.
      Employee contributions are 100% vested. In 2004, the Company initiated a
      matching contribution in the amount of 25% of up to 3% of an employee’s eligible
      compensation. Beginning April 2006, the Company’s matching contributions
      increased to 50% of up to 6% of an employee’s eligible compensation. Employees
      hired before January 1, 2004 are fully vested in the Company matching
      contributions. Employees hired after December 31, 2003 vest ratably over three
      years. These matching contributions, which are expensed, amounted to
      $370, **** $125
      and
      $111 in 2006, 2005 and 2004, respectively.





**Note
      12 - Segment information**





For
      2004,
      the Company managed its business as two business segments: Genomics Division
      and
      Preclinical Division. Beginning in 2005, the Company added a third business
      segment: Drug Repositioning Division. On December 15, 2006, the Company sold
      its
      Preclinical Division, which has now been classified as discontinued operations
      (see Note 3). The prior period’s segment information has been restated to
      conform to the current period presentation.




F-19





The
      following table presents revenue and operating income (loss) for the Genomics
      and Drug Repositioning segments, which comprise the Company’s continuing
      operations for the indicated periods. Management uses these measures to evaluate
      segment performance. To arrive at operating income (loss) for each segment,
      management has included all direct costs for providing the segment’s services
      and an allocation for corporate overhead on a consistent and reasonable basis.
      Management has excluded purchased research and development expenses, interest
      (income) expense, other (income) expense and write-downs. Operating income
      (loss) and could also exclude certain unusual or corporate-related costs in
      the
      future.





The
      following table sets forth information on reportable segments for the years
      ended December 31:




**2006**
              
              **2005**
              
              **2004****Genomics
                  services**Revenue
              
              $
              24,310
              
              $
              56,602
              
              $
              52,171Operating
                  income (loss)
              
              
              (25,541
              )
              
              5,631
              
              
              (6,437
              )Depreciation
                  and amortization expense
              
              
              9,544
              
              
              10,073
              
              
              12,978**Drug
                  repositioning services**Revenue
              
              $
              36
              
              $
              588
              
              $
              -Operating
                  income (loss)
              
              
              (15,077
              )
              
              (13,730
              )
              
              (4,935
              )Depreciation
                  and amortization expense
              
              
              1,024
              
              
              715
              
              
              303




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


**2006**
              
              
              **2005**
              
              
              **2004****Segment
                  operating income (loss)**Genomics
                  services
              
              $
              (25,541
              )
              $
              5,631
              
              $
              (6,437
              )Drug
                  repositioning services
              
              
              (15,077
              )
              
              (13,730
              )
              
              (4,935
              )Purchased
                  research and development
              
              
              -
              
              
              -
              
              
              8,817(40,618
              )
              
              (8,099
              )
              
              (20,189
              )Interest
                  (income), net
              
              
              (2,694
              )
              
              (2,625
              )
              
              (1,395
              )Other
                  (income) expense
              
              
              55
              
              
              (813
              )
              
              -Write-down
                  of other-than-temporary decline in thevalue
                  of marketable securities available-for-sale
              
              
              -
              
              
              719
              
              
              -Write-down
                  of long-term  equity investment
              
              
              275
              
              
              -
              
              
              -Loss
                  before income tax expense
              
              $
              (38,254
              )
              $
              (5,380
              )
              $
              (18,794
              )





For
      2006,
      three customers each accounted for 10% or more of the Company’s revenue
      (Customer A-20%, Customer B-12% and Customer C-10%). For 2005, two customers
      each accounted for 10% or more of the Company’s revenue (Customer D-15% and
      Customer E-14%). During 2004, one customer accounted for 10% or more of the
      Company’s revenue (Customer A-15%). The following is a breakdown of the
      Company’s total revenue by geographic region as determined by the location of
      the customer identified in the Company’s agreement:


**North
                  America**
              
              **Pacific
                  Rim**
              
              **Europe**December
                  31, 2006
              
              
              40%
              
              
              39%
              
              
              21%December
                  31, 2005
              
              
              34%
              
              
              40%
              
              
              26%December
                  31, 2004
              
              
              35%
              
              
              46%
              
              
              19%





**Note
      13 - Stock-based compensation**





At
      December 31, 2006, the Company has the following stock-based compensation plans:
      1997 Equity Incentive Plan (the “Stock Plan”), 1997 Non-Employee Directors’
Stock Option Plan (the “Directors’ Plan”) and Employee Stock Purchase Plan (the
“ESPP”).





*Stock
      Plan*





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


F-20




No
      restricted stock awards were issued in 2006.





*Directors’
      Plan*





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





*ESPP*





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





The
      following is a summary of option activity for the year ended December 31,
      2006:


**Shares
                  Subject to****Outstanding
                  Options****Weighted****Average****Shares**
              
              
              
              **Weighted**
              
              **Remaining**
              
              **Aggregate****Available**
              
              
              
              **Average**
              
              **Contractual**
              
              **Intrinsic****For
                  Grant**
              
              **Shares**
              
              **Exercise
                  Price**
              
              **Life
                  (Years)**
              
              **Value****Balance
                  at January 1, 2006**
              
              
              2,338,093
              
              
              5,515,504
              
              $
              6.86Options
                  granted
              
              
              (117,314
              )
              
              117,314
              
              $
              2.53Options
                  exercised
              
              
              -
              
              
              (48,438
              )
              $
              3.20Options
                  cancelled
              
              
              1,055,424
              
              
              (1,055,424
              )
              $
              6.43**Balance
                  at December 31, 2006**
              
              
              3,276,203
              
              
              4,528,956
              
              $
              6.88**Vested
                  and expected to vest at December 31, 2006**
              
              
              
              
              
              4,454,818
              
              $
              6.94
              
              
              4.5
              
              $
              43





Options
      to
      purchase a total of 4,199,885, 4,287,254 and 3,829,996 shares at December 31,
      2006, 2005 and 2004, respectively, were exercisable. The weighted-average
      grant-date fair value of options granted during the years ended December 31,
      2006, 2005 and 2004 was $1.05, $1.40 and $1.67, respectively.





The
      aggregate intrinsic value in the table above represents the total intrinsic
      value (the difference between the Company’s closing stock price on the last
      trading day of 2006 and the exercise price, multiplied by the number of
      in-the-money options) that would have been received by the option holders had
      all option holders exercised their options on December 31, 2006. This amount
      is
      subject to change based on changes to the fair market value of the Company’s
      Common Stock. Total intrinsic value of options exercised for 2006 was not
      material. Total intrinsic value of options exercised for 2005 and 2004,
      respectively, was $101 and $416.




As
      of
      December 31, 2006, $286 of total unrecognized compensation cost related to
      stock
      options is expected to be recognized over a weighted-average period of 1.6
      years. This estimate does not include the impact of other possible stock-based
      awards that may be made during future periods.





Cash
      received from option exercises for 2006, 2005 and 2004 was $155, $111 and $951,
      respectively.





F-21


The
      following table summarizes information about stock options outstanding at
      December 31, 2006:


**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**
              
              **2006**
              
              **Life**
              
              **Price**
              
              **2006**
              
              **Price**$0.15--$4.50
              
              
              2,001,023
              
              
              5.5
                  Years
              
              $
              3.47
              
              
              1,701,030
              
              $
              3.53$4.51--$6.00
              
              
              917,118
              
              
              4.0
                  Years
              
              $
              5.17
              
              
              888,252
              
              $
              5.17$6.01--$7.20
              
              
              88,840
              
              
              3.6
                  Years
              
              $
              6.60
              
              
              88,840
              
              $
              6.60$7.21--$62.88
              
              
              1,521,975
              
              
              3.8
                  Years
              
              $
              12.42
              
              
              1,521,763
              
              $
              12.42$0.15--$62.88
              
              
              4,528,956
              
              
              4.6
                  Years
              
              $
              6.88
              
              
              4,199,885
              
              $
              7.16





**Note
      14 - Quarterly results of operations (unaudited)**





The
      following is a summary of the quarterly results of operations for the years
      ended December 31, 2006 and 2005.


**March
                  31**
              
              **June
                  30**
              
              **September
                  30 (1)**
              
              **December
                  31****2006**Revenue
              
              $
              8,768
              
              $
              4,692
              
              $
              3,704
              
              $
              7,181Income
                  (Loss) from continuing operations
              
              
              (7,905
              )
              
              (9,682
              )
              
              (14,844
              )
              
              (5,826
              )Income
                  (Loss) from discontinued operations
              
              
              (3,892
              )
              
              (1,604
              )
              
              (11,811
              )
              
              854Net
                  loss
              
              $
              (11,797
              )
              $
              (11,286
              )
              $
              (26,655
              )
              $
              (4,972
              )Basic
                  and diluted net loss per share:Income
                  (Loss) from continuing operations
              
              $
              (0.25
              )
              $
              (0.30
              )
              $
              (0.47
              )
              $
              (0.18
              )Income
                  (Loss) from discontinued operations
              
              
              (0.12
              )
              
              (0.05
              )
              
              (0.37
              )
              
              0.02Net
                  loss
              
              $
              (0.37
              )
              $
              (0.35
              )
              $
              (0.84
              )
              $
              (0.16
              )**2005**Revenue
              
              $
              13,306
              
              $
              14,313
              
              $
              11,821
              
              $
              17,749Income
                  (Loss) from continuing operations
              
              
              (2,197
              )
              
              (926
              )
              
              (3,269
              )
              
              1,013Income
                  (Loss) from discontinued operations
              
              
              (1,904
              )
              
              (1,684
              )
              
              (36,211
              )
              
              (3,126
              )Net
                  loss
              
              $
              (4,101
              )
              $
              (2,610
              )
              $
              (39,480
              )
              $
              (2,113
              )Basic
                  and diluted net loss per share:Income
                  (Loss) from continuing operations
              
              $
              (0.07
              )
              $
              (0.03
              )
              $
              (0.10
              )
              $
              0.03Income
                  (Loss) from discontinued operations
              
              
              (0.06
              )
              
              (0.05
              )
              
              (1.14
              )
              
              (0.10
              )Net
                  loss
              
              $
              (0.13
              )
              $
              (0.08
              )
              $
              (1.24
              )
              $
              (0.07
              )




The
      quarterly data above differs from the amounts previously reported in the
      Company’s Quarterly Report on Form 10-Q filed for the respective quarter because
      of the classification of the Preclinical Division as discontinued operations,
      which occurred in the quarter ended September 30, 2006. In addition, certain
      costs previously allocated to the Preclinical Division have been re-allocated
      to
      continuing operations based on a final determination as to what specific costs
      were in fact eliminated as a result of the sale of the Preclinical Division.
      The
      table above presents quarterly information as if the Preclinical Division had
      been classified as a discontinued operation as of January 1, 2005.





(1)
      Includes $11,000 impairment charge for the Preclinical Division and $32,794
      impairment charge associated with the impairment of goodwill for the Preclinical
      Division for the three months ended September 30, 2006 and 2005,
      respectively.


F-22


**GENE
      LOGIC INC.**





**Schedule
      II - Valuation and Qualifying Accounts**


**December
      31, 2006, 2005 and 2004**


**(in
      thousands)**











**INVENTORY
      RESERVE FOR TISSUE SAMPLES AND MICROARRAYS:**




**Balance
                  at****Beginning**
              
              **New**
              
              **Reserves**
              
              **Balance
                  at****of
                  Year**
              
              **Reserves**
              
              **Used**
              
              **End
                  of Year**December
                  31, 2006
              
              $
              1,654
              
              $
              1,377
              
              $
              (680
              )
              $
              2,351December
                  31, 2005
              
              
              1,489
              
              
              383
              
              
              (218
              )
              
              1,654December
                  31, 2004
              
              
              994
              
              
              495
              
              
              -
              
              
              1,489





**ALLOWANCE
      FOR DOUBTFUL ACCOUNTS:**




**Balance
                  at****Beginning**
              
              **New**
              
              **Accounts**
              
              **Collected**
              
              **Adjustment**
              
              **Balance
                  at****of
                  Year**
              
              **Reserves**
              
              **Written-Off**
              
              **Amounts**
              
              **to
                  Reserves**
              
              **End
                  of Year**December
                  31, 2006
              
              $
              255
              
              $
              -
              
              $
              -
              
              $
              (210
              )
              $
              -
              
              $
              45December
                  31, 2005
              
              
              34
              
              
              221
              
              
              -
              
              
              -
              
              
              -
              
              
              255December
                  31, 2004
              
              
              28
              
              
              6
              
              
              -
              
              
              -
              
              
              -
              
              
              34





**VALUATION
      ALLOWANCE FOR DEFERRED TAX ASSETS:**




**Balance
                  at****Beginning**
              
              **New**
              
              **Reserves**
              
              **Balance
                  at****of
                  Year**
              
              **Reserves**
              
              **Used**
              
              **End
                  of Year**December
                  31, 2006
              
              $
              109,055
              
              $
              17,186
              
              $
              -
              
              $
              126,241December
                  31, 2005
              
              
              100,082
              
              
              8,973
              
              
              -
              
              
              109,055December
                  31, 2004
              
              
              86,578
              
              
              13,504
              
              
              -
              
              
              100,082