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# UNITED STATESSECURITIES AND
EXCHANGE COMMISSIONWashington, 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, 2004
| | - | ----------------------------------------------------------------------------------------------------------------------------------

# 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

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GENE LOGIC INC.

(Exact name of
registrant as specified in its charter)

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

610 Professional Drive 
Gaithersburg, Maryland
20879(Address of principal executive offices) 
Registrants 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)



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Indicate
by check mark whether the Registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to file such reports), and
(2) has been subject to such filing requirements for the past 90 days:

YES x NO o

Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K
(Section 229.405 of this chapter) is not contained herein, and will not be contained, to
the best of 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  o NO x

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

YES x NO o

The
aggregate market value of the voting stock (which consists solely of shares of Common
Stock) held by non-affiliates of the Registrant as of June 30, 2004 was approximately
$95,458,000, based on the closing price on that date of Common Stock on The NASDAQ Stock
Market.*

The
number of shares outstanding of the Registrants Common Stock, $.01 par value, was
31,739,454 as of March 1, 2005.

|* | Excludes
7,878,572 shares of Common Stock held by directors and executive officers and
stockholders whose beneficial ownership exceeds 10% of the shares outstanding on June 30,
2004. 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

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# PART I

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

Unless the context otherwise
  requires, references in this Form 10-K to Gene Logic, Gene
  Logic Laboratories, Inc., Gene Logic Ltd., Gene Logic
  K.K., the Company, we, us, and our
  refer to Gene Logic Inc. and its wholly owned subsidiaries. GeneExpress®,
  BioExpress®, ToxExpress® and ASCENTA®
  are registered trademarks of Gene Logic. Genesis Enterprise SystemTM
  and ToxShieldTM are trademarks of Gene Logic. GeneChip®
  is a registered trademark of Affymetrix, Inc. Viagra® is a registered
  trademark of Pfizer Inc.

|ITEM 1. | BUSINESS
|------- | --------

# OVERVIEW

Gene Logic provides innovative drug
discovery and development solutions to the pharmaceutical industry. Our solutions help
customers develop therapeutically and commercially valuable compounds in a more timely,
efficient, and cost-effective manner. Our customers can use our solutions to understand
the effect of a compound on biological processes, and to identify, evaluate and measure
critical safety, efficacy, and other patient-related factors so that they may better
assess the likely therapeutic and commercial value of their targets and compounds.
Customers use our solutions throughout the pharmaceutical R&D process, from early
discovery through late stage clinical development.

Our solutions consist of:

| |  | Genomics
      and Toxicogenomics Services: we help customers to discover and prioritize
      drug targets, identify biomarkers, and predict toxicity and provide insights
      into efficacy of specific compounds through the use of gene expression technologies,
      proprietary reference databases and bioinformatics software and professional
      services.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Preclinical
Contract Research Services:we enable customers to assess the safety and
pharmacologic effects of candidate compounds with the intention of gaining regulatory
approval to proceed with human trials on prioritized compounds, through the use of in-vivo animal
testing research studies and related laboratory services.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Drug
Repositioning and Selection Services: we can assist in (i) identifying alternative
indications for customers failed, stalled or deprioritized compounds, (ii)
expanding indications for customers currently marketed drugs, and (iii)
prioritizing and identifying indications for customers compounds entering
preclinical development.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

We sometimes refer to the combination
of our genomics and toxicogenomics services and preclinical contract research services as
our historical business.

We remain focused on providing
  our drug development solutions to pharmaceutical and biotechnology companies
  primarily in North America, Europe, and Japan; we are not currently using our
  services to build or commercialize our own proprietary pipeline of compounds;
  Our total revenue for 2004 was $75.9 million, of which $52.2 million and $23.8
  million were derived from genomics and toxicogenomics services and preclinical
  contract research services, respectively. Total revenue for 2003 was $69.5 million,
  of which $52.0 million and $17.6 million were derived from our genomics and
  toxicogenomics services and preclinical contract research services, respectively.

2

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# STRATEGY

Our business strategy is to:

| | 1.       
Increase
revenue growth and earnings in our historical business from increased           sales of
genomicsand toxicogenomics services and preclinical contract           research
services.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | We
currently receive substantial revenue through subscription and fee-for-services
arrangements from the sale of our genomics and toxicogenomics services and preclinical
contract research services. In order to increase future revenue growth, we have refocused
our related business units, which are now headed up by new general managers. In our
genomics and toxicogenomics business, we are implementing new sales, marketing, pricing,
distribution plans and new services to develop new markets, expand the number of
customers and further penetrate existing customer accounts. In our preclinical contract
research business, we are increasing our capacity and implementing new operational and
quality assurance programs to improve margin performance and enhance customer
satisfaction.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 2.       
Build
milestone and royalty positions in compounds through the application of           our
drugrepositioning and selection services.
| | -----------------------------------------------------------------------------------------------------------------------------------------------

| | We
acquired the Horizon technologies, which are the basis for our drug repositioning and
selection business, from Millennium Pharmaceuticals, Inc. (Millennium) in
2004. By combining these technologies with our capabilities in genomics and
toxicogenomics and in preclinical contract research, we are developing services which
will be the basis for strategic alliances with drug development customers. In these
alliances, we will apply our drug repositioning and selection services to help our
partners identify alternative uses for their stalled, failed or deprioritized compounds,
find new indications for their existing drugs and prioritize and identify indications for
compounds entering preclinical development. We plan to structure these alliances to
provide for fees, milestone payments and royalties as drugs reenter a partners
development pipeline. In certain other instances, such as when a partner declines to
develop a compound for an indication we have found, we may acquire rights to such a
compound for certain indications and, if we elect to pursue development of such a
compound, we will either promptly find a partner and/or invest financial and other
resources, which could be substantial, to develop the compound to a stage where we will
be in a position to license it out to a third-party for final development and
commercialization. These services are being developed at our new research facility in
Cambridge, Massachusetts, under the direction of senior level scientists who previously
worked for Millennium and who joined us in connection with the technology acquisition in
2004.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Our strategy enables us to leverage
our historical capabilities, including the following:

| | 1. Demonstrated
revenue generating genomics and toxicogenomics capability.
| | --------------------------------------------------------------------------

| | We
combine strong biological expertise with high throughput gene expression production
capability to create genomic databases and provide professional services that our
customers use in drug development decisions. We have a strong professional staff of
physicians, scientists, and technologists who have developed programs to acquire, handle,
and process human and animal tissue samples and associated clinical information. Our
production facility to generate gene expression information from these samples utilizing
microarray technology is one of the largest commercial production facilities in the
world. To handle the massive amount of data generated by us and for our customers, we
have developed expertise in bioinformatics, database design, and software development and
testing. Our customers use our expertise in biology, genomics production and data
management to implement genomics-based solutions throughout the drug discovery process,
including target discovery and prioritization, toxicogenomics and pharmacogenomics.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 2.          Comprehensive technology platform and biological expertise.
| | -----------------------------------------------------------------------

| | We
continually seek to enhance our technology platform through building, in-licensing or
acquiring technologies and expertise that complement our fundamental capabilities and
strategy. In 2003, we acquired TherImmune Research Corporation (TherImmune),
which added the capability to conduct in-life animal studies and analytical laboratory
services, both for our internal programs and on behalf of customers.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
2004, we acquired the Horizon technologies from Millennium to provide new drug
repositioning and selection services for customers. These technologies, combined with our
genomics and toxicogenomics and preclinical research capabilities, will allow us to
provide systematic and affordable solutions to finding alternative therapeutic uses for
compounds throughout the drug development process.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

3

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| | 3.
Established customer relationships.
| | --------------------------------------

| | On
the strength of our historical business, we have established customer relationships with
many of the leading global pharmaceutical and biotechnology companies, as well as U.S.
Government life science research agencies. We continually work in partnership with our
customers to improve and expand our existing services and develop new services that help
our customers reach their drug development goals.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 4.
Experience in delivering services addressing pharmaceutical companies          drug
development R&Dissues.
| | --------------------------------------------------------------------------------------------------------------

| | In
delivering our genomics and toxicogenomics services and our preclinical contract research
services, we have demonstrated experience in devising and providing services to
sophisticated customers with an understanding of their research and development
processes. We provide solutions for some of the industrys most critical needs,
including: target discovery, compound safety assessment and, with our new drug
repositioning and selection services, alternative methods for more cost effective drug
pipeline development. We have the ability to deliver services in a systematic and
reliable way, with an understanding of regulatory and complex scientific requirements.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 5.
          Strong management in a restructured organization.
| | --------------------------------------------------------------

| | We
recently added to, and refocused, our management team to allow us to execute our
strategy. We added Dennis Rossi, an experienced life-sciences executive, as a Senior Vice
President and General Manager, Genomics. We added V.W. Brinkerhoff, III, another
experienced life sciences executive, as a Senior Vice President and General Manager, Gene
Logic Laboratories and Carlos Orantes, formerly with Covance, Inc., as Vice President of
Operations for the preclinical contract research business. Dr. Louis Tartaglia, formerly
of Millennium, is a Senior Vice President and General Manager, Drug Repositioning and
Selection. Dennis Barger is our new Vice President of Global Business Development and Dr.
Joanne M. Smith-Farrell is our new Vice President of Corporate Development and Strategy.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

# SCIENTIFIC AND INDUSTRY
BACKGROUND

Each cell of all living organisms
contains a blueprint or set of instructions for how that cell should work, which is passed
from one generation to the next and is encoded in a set of molecules called DNA. These DNA
molecules are organized into long strands that bind to each other in a twisted 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 through an intermediate molecule called mRNA, which serves to translate DNA
into protein form. The specific sequence of DNA that produces a particular protein is
called a gene. In humans, every cell contains the same three billion pairs of DNA
molecules, referred to collectively as the human genome. Only a small percentage of
the genome actively produces proteins.

Yet, cells are very different from
each other in structure and function. 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. So 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 reflected in the mRNA and is called gene
expression. The determination 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
passed over 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 (single nucleotide polymorphisms),
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 3 million significant SNPs in the human genome, although not all of them have yet
been discovered and the function for most is not known. These variations are determined by
various methods and machines that allow a DNA sequence to be analyzed.

Different patterns of gene expression
are used to study the basic biology of normal and diseased cells, as well as either the
toxic or therapeutic effect that chemicals, such as a drug compound, can have on cells.

4

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For example, a diseased tissue, such
as a cancerous tissue, can be compared to normal tissue to find gene activity that is
associated with the cancer, and that information can be used to identify targets and
develop drugs to treat the disease. Using information about the human genome to develop
drugs is called pharmacogenomics.

Normal cells can also be compared to
cells that have been treated with a specific compound, to determine if that compound has
toxic effects on cells. Using information about how gene expression patterns vary when
chemicals are damaging (i.e. 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 culminated in the 1990s with the advent of
the internet. The science of using computers to capture and understand biology is known as
bioinformatics.

Besides gene expression data, there
are many other methods to look at biological function. In addition to many traditional
methods which continue to be used today, there are also new methods which are beginning to
be developed and used. Some of these include:

| |  | Metabolomics,
which is the measurement of the changed or remaining molecules of proteins that have been
used up 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 is similar to gene expression, except proteomics measures
proteins while gene expression measures mRNA. However, proteomics is much more difficult
to do because there are millions of rapidly changing types of proteins as compared to
tens of thousands of types of mRNA molecules.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | In-vivoimaging,
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 chemical
label or tag on the compound of interest, injecting the labeled compound in 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 chemically labeled in the animal. When that biological
pathway or target is activated by a test compound, a signal from the chemical tag can be
seen using special imaging machines.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | In-vitroscreening,
which is the use of cells grown in test tubes or on plates to evaluate how compounds
cause the cells to change or react. There are many different measurements that can be
made on the cells. The cells used in these assays can also be genetically modified so
they indicate a particular process or pathway in the cell that is being activated.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Gene expression and other methods of
looking at biological functions are critical to pharmaceutical companies drug
development processes. The current model for drug development is based on developing a
systematic understanding of biology. Pharmaceutical companies develop drugs by seeking
specific protein targets that could be therapeutic targets. These companies then seek
chemical compounds that could modulate or manipulate the targets by binding, or
interacting, with these targets and have a therapeutic effect on the target. 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 that could be good therapeutic
targets. One efficient way to identify these targets is from gene expression data produced
from normal and diseased human tissues as well as from animal models and cell lines.

The process of drug development is
expensive, time consuming and risky. On average it takes 13 years from the beginning of
the discovery effort to getting a drug to market. During this time, a company will
typically have filed one or more patent applications, but since patents have a maximum
term of 20 years from the date of the initial filing, the period during which the drug is
being evaluated and ultimately approved uses up a significant part of the period of
exclusivity potentially provided under patent law. Current studies suggest the overall
success rate and cost of a compound making it to market is estimated to be 8% and between
$800 million dollars to $1.2 billion dollars. On average, the research and development
costs have been doubling every five years, yet success rates for getting drugs to market
have been flat or declining.

Today drug discovery and development
generally consists of the following steps:

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

5

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| |  | 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 and effectiveness using
toxicogenomics.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Investigational
New Drug Application (IND). After completing preclinical testing, the
company files an IND application with the FDA to begin to test the drug 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 patient protection by the Institutional Review Board at the hospital or other
institution where the studies will be conducted. Once the trials commence, progress
reports on clinical trials must be submitted at least annually to the FDA.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

| |  | New
Drug Application (NDA). Following successful completion of clinical
trials, the company files an NDA application with the FDA, which typically runs 100,000
pages or more. The FDA takes up to six months to review an NDA.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

Of the drugs that make it
  to market, nearly 90% are estimated to have un-anticipated effects and new therapeutic
  uses that are found within five years. Such additional uses for compounds (sometimes
  called drug repurposing or repositioning) have usually been discovered
  by accident. An example of this is the drug Viagra, which was initially developed
  to treat heart disease and is now much more widely used for treating sexual
  dysfunction.

We are developing a platform of
technologies that can systematically analyze the biological effects of compounds on
targets and help pharmaceutical companies deliberately repurpose/reposition drugs. Our
technologies develop data on compounds under assessment using in-vitro (in the test
tube) cell models, in-vivo (in the animal) animal models, in-silico (in the
computer) models, genomic information, and ex-vivo(outside the animal) cellular
assays.

# OUR BUSINESS

# Genomics and
Toxicogenomics Services

Our genomics and toxicogenomics
services include proprietary gene expression and toxicogenomics databases, software tools,
and data generation and professional services. We design services to assist researchers to
find drug targets and biomarkers and to predict potential toxicity of drug candidates and
other compounds through understanding gene expression patterns, genetic abnormalities,
disease pathways, disease mechanisms of action and mechanisms of toxicity.

Our genomics and toxicogenomics
  services are based on the gene expression data derived from our Biorepository,
  a collection of over 33,000 diseased and normal human tissues, as well as diseased
  and normal tissue from animal models, and primary cells and cell cultures. These
  samples, together with relevant pathology and clinical data, are collected from
  clinical centers, teaching hospitals, academic medical centers and, in some
  instances, commercial providers. The samples related to assessing human biology
  represent more than 400 separate clinical disease indications with focused collection
  programs in critical areas of greatest market interest, including oncology,
  cardiovascular, central nervous systems, inflammatory and metabolic diseases.
  The samples related to assessing human toxicology are primarily derived from
  animal liver, the site of primary toxicity, as well as animal kidney and heart.

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, as well as the corresponding pathology and medical history information
for each sample, are compiled using our software and bioinformatics capabilities,
resulting in reference databases that are the foundation of our genomics and
toxicogenomics services.

6

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Our genomics and toxicogenomics
services currently comprise the following offerings:

BioExpress
System  The BioExpress System is a database that enables drug development
researchers to use our data to investigate human disease and disease progression and to
identify and prioritize disease-associated gene targets through an understanding of gene
expression patterns, genetic abnormalities, disease pathways and disease mechanisms of
actions. The BioExpress System is a general reference source that enables detailed
examination of the interrelationship between the human genome, disease mechanisms and
related individual clinical parameters. Our reference database comprises gene expression
data derived from normal and diseased human and animal tissues and related clinical
information about those samples.

The
BioExpress System can be divided into disease-specific subsets, collectively known as
BioExpress Suites. Each Suite consists of information focused on a particular type of
disease system or condition, including oncology, cardiovascular, central nervous system,
inflammation and normal human biology.

ASCENTA
System  The ASCENTA System is a web-accessible research tool containing selected,
curated gene expression data, and associated clinical information from the BioExpress
System. Use of the BioExpress System requires researchers skilled in bioinformatics. The
ASCENTA System allows researchers, who may not have the necessary level of resources or
experience to effectively use the full BioExpress System, to use the ASCENTA Systems
more intuitive format and summary data, which are organized into sample sets related to
relevant therapeutic areas, including inflammation, oncology, central nervous system
disorders, cardiovascular disease and metabolic disease.

Data
Generation Services  We offer data generation services so that customers can
outsource to us the generation of gene expression data from customer samples. We
generate and report gene expression data from samples provided by our customers using our
infrastructure and capabilities in sample collection, handling, preparation and curation,
microarray analysis and software and database development.

ToxExpress
System  The ToxExpress System is a database consisting of gene expression profiles
and associated clinical data of rat tissues and cells treated with drugs and other
compounds known to be toxic. The information includes for each sample, a toxicity
profile, including 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 contains models we have developed to
predict acute and chronic human toxicity. Customers use our ToxExpress System as a primary
tool to assess potential single- or multi-organ toxicity of proprietary drug candidates
using gene expression information. Toxicity in liver tissue has been the primary focus to
date of the ToxExpress System. Additional toxicology studies have been performed and we
are developing additional predictive models of toxicity in other organ systems including
animal kidney and heart and, to a lesser extent, bone marrow and blood.

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

Toxicogenomics
Services  We offer toxicogenomics-related services based on the predictive models
of the ToxExpress System and our capabilities in using in-life studies, microarray
analysis and software and database development. These services include:

| | ToxScreen
Reports  predict toxicity of candidate compounds based on our proprietary
predictive toxicogenomics models;
| | ----------------------------------------------------------------------------------------------------------------------

| | Molecular
Mechanism of Toxicity (MOT) Services  provide analyses of gene expression changes
to explain toxic events in specific compounds; and
| | -----------------------------------------------------------------------------------------------------------------------------------------------

| | Custom
ToxExpress Services  apply the technologies of the ToxExpress System to
customer-specific, compound-related questions and database needs related to resolving
toxicity-based issues.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

ToxShield
Suite  The ToxShield Suite is an intuitive web-enabled software platform for use
by toxicologists and drug safety scientists to assess and rank candidate compounds based
on potential toxicity in humans. Each ToxShield Suite report characterizes candidate
compounds for potential predicted toxicity, proposes likely induced pathologies and finds
reference compound matches from those included in the ToxExpress System.

Genesis
  Enterprise System  The Genesis Enterprise System is our enterprise,
  bioinformatics solution. It is a sophisticated and highly complex software platform
  for organizing, mining, analyzing, visualizing and managing gene expression
  and clinical information. Genesis enables drug development researchers to compile
  and rapidly assess large data sets (including both our data and customer derived
  data), and includes various tools for sophisticated analysis of gene expression
  results.

7

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# Preclinical Contract
Research Services

Our preclinical contract research
business comprises in-life animal study testing services, including general and specialty
toxicology services and related services. These services help customers assess the safety
and pharmacologic effects of candidate compounds prior to initiating human clinical
trials.

Our preclinical services include the
following:

General
Toxicology Services  Our general toxicology services are the cornerstone of our
preclinical services business. We offer general toxicology studies designed to assess the
safety and risk profile of pharmaceuticals, biologics, nutraceuticals, environmental
contaminants and other chemical compounds. These studies can be conducted on multiple
animal model types and use both basic and specialized routes of administration. We conduct
studies on acute toxicity, chronic toxicity, sub-chronic toxicity and carcinogenicity. We
help our customers design the studies, we conduct and document studies, we analyze results
and we help guide our customers through the FDA regulatory process.

Specialty
Toxicology Services  Our specialty toxicology services include:

| | Developmental
and Reproductive Toxicology (DART) Services  provide a detailed evaluation of
stages of animal model reproduction and development in order to estimate at which stages
of human reproduction a candidate compound under development presents a potential risk.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Safety
PharmacologyServices  investigate the effects of target compounds on vital
functions in mammalian species, primarily on the cardiovascular, respiratory and central
nervous systems, as well as on the renal/urinary, gastrointestinal and immune functions.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Vaccine
TestingServices  general toxicology-related tests designed to evaluate the
mechanism of activity of potential vaccines across multiple disease indications of key
interest to our drug development customers.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Analytical
Laboratory Services  Our analytical laboratory services provide specialized
lab-based testing related to clinical pathology (analysis of the effects and mechanism of
action of test article in blood, serum, organs and tissues of animal models), analytical
chemistry (analysis of test article in terms of purity verification, product stability,
dose verification, concentration verification and clinical trial samples), and immunology
(combination of immunoassays for preclinical, toxicology and clinical studies, including
custom assay development, assay validation and qualification, biodistribution evaluation
and chemiluminescent detection).

# Drug Repositioning and
Selection Services

The pharmaceutical development
process is widely recognized to be expensive, time-consuming and risky, with a high
failure rate. Billions of dollars are spent to identify and develop biologically active
compounds that do not ultimately succeed for various reasons, including (i) insufficient
effectiveness in treating the disease or condition for which they were designed; (ii)
safety issues; and, (iii) patient variability in responding to a compound.

The lack of effectiveness
  is caused by the difficulty scientists have in determining and evaluating the
  full biological activity of compounds under development. As a result, development
  of compounds that have limited effectiveness in human clinical trials for the
  selected indication is often stopped, even though such compounds may be effective
  in treating other medical problems. Such alternative uses are often discovered
  by accident. A widely recognized example is Pfizers Viagra, which was
  originally intended to treat heart conditions in men, but is now used to treat
  sexual dysfunction. In fact, it is estimated that nearly 90% of drugs that successfully
  complete human clinical trials will find an alternative therapeutic indication
  within five years of initially being marketed. The market potential for these
  alternative indications may be greater than the original therapeutic use for
  which a drug was developed.

Safety issues, which also account for
a significant number of failures of candidate compounds, are often due to an identified
potential for an adverse (toxic) reaction to a compound when administered to humans, based
on responses in one or more animal models or other factors. We have technologies that will
enable us to help customers better understand the potential for adverse effects and to
seek a solution to such problems. For example, our technologies can help to determine if
adverse effects in animal models will carry though to humans.

In addition, sometimes compounds
provide inconclusive or conflicting results due to the fact that different humans may
react differently to a particular compound. For example, some humans may metabolize a drug
more slowly than others and thus get a stronger dose than is desirable. Our technologies
will help us to assess such variable responses and to assist customers to develop tests or
other criteria that can indicate appropriate dosing for individuals that will make a
compound safer or more effective.

8

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We are developing a high throughput,
cost-effective solution intended to systematically identify and provide information about
a broad range of biological activity caused by candidate compounds. Our solutions are
based on technologies we acquired from Millennium Pharmaceuticals in 2004 plus our core
capabilities in genomics, toxicogenomics and preclinical services, and are being developed
by a team of scientists who began developing these technologies while at Millennium, prior
to joining us.

We believe that no single technology
is sufficient to assess the effect of a compound across complex biological processes. Our
solutions will allow us to more systematically and efficiently evaluate a broad range of
biological activity of a compound, including its effect on a wide variety of diseases,
without requiring a prior disease hypothesis. We will assess the effects of a compound
using multiple technologies, including in-vivo, in-vitro, in-silico,
and ex-vivoassessments of a compound at the DNA, RNA, protein, pathway, and
cellular level. The resulting combined information can be used to develop one or more
hypotheses about how to use a compound to treat a disease or condition. We can then
validate proposed alternative therapeutic uses through our preclinical contract research
services.

We believe repositioning compounds is
particularly attractive to the pharmaceutical industry, because the incremental cost and
time to reposition a compound once it is in the human clinical phase of development will
be substantially less than that required to develop a compound from scratch by the
traditional drug development process. Similarly, selecting for further testing and
development those compounds most likely to be successful and understanding and resolving
safety issues for compounds so they are not eliminated from development may prevent
unproductive investments and save significant investments already made by pharmaceutical
companies in candidate compounds.

Our drug repositioning and selection
services are being developed to provide the following:

| |  | Drug
Repositioning for Failed Compounds: find new and alternative uses for failed, stalled
or deprioritized compounds and restore them into clinical development. These compounds
may have been set aside due to the identification of potential toxicity, lack of
effectiveness for treating the original indication, variable patient response or a
variety of other reasons.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Market
Expansion for Active Compounds: increase a compounds commercial potential, by
identifying additional disease indications which the compound can treat.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Compound
Selection Among New Compounds: select compounds to move forward into preclinical and
clinical development by identifying those that have the lowest potential toxicity or have
the highest potential to treat more than one indication.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Our drug repositioning and selection
services consist of proprietary and in-licensed technologies in the following areas.

Indication-seeking
technologies

| | In-Vivo,
Real-Time Animal Imaging  We have developed a proprietary imaging program
allowing the action or activity of a compound in organs and tissues to be visualized
non-invasively, using mice engineered for such purposes. We can determine which organs
are impacted by the compound, timing of the response, and biological pathway information.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Ex-Vivo
      Multi-Bioanalytics Program  Using sophisticated laboratory automation
      and proprietary targeted separation and analysis techniques, we can simultaneously
      measure levels of biomolecules (i.e. molecules created in the body of an
      animal, rather than the molecules of a compound used to treat the animal)
      in large numbers from of samples from compound-treated animals. By comparing
      levels of biomolecules in compound-treated animals to those in normal animals,
      we can identify activity caused by the compound and potential alternative
      indications for the compound under investigation.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In-Vitro
Technologies  Powered by sophisticated robotics and software, our Pathfinder
technology allows us to apply a compound to a large number of cell types to identify
which pathways are being activated or repressed by the compound. Another technology,
Phenodetect, enables us to apply a compound to cells in a broad panel of cellular assays,
each of which represents one or more relevant diseases, to measure the impact of the
compound on the diseases.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In-Silico
or Computational Biology/Informatics  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 can use the BioExpress System
database 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.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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Patient
Variable Drug Response Technologies

| | Genomic
Absorption, Distribution, Metabolism and Excretion (ADME) Technology  People have
different responses to drugs, often because of differences in the way the drug is broken
down (metabolized) in the body. Our gADME platform will allow a comprehensive assessment
of the effect of the drug metabolizing enzymes and their common genetic variants on each
compound. This information can be used to create better strategies for development of
drugs generally, or to develop drugs that have failed or been deprioritized due to
variable drug response issues.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Safety
Technologies

| | Predictive
Toxicogenomics  A compounds development is often terminated because it is
deemed potentially toxic. Our proprietary predictive toxicogenomic models, derived from
our ToxExpress System database, enables us to identify compounds that are least toxic or
to evaluate clinical-stage compounds that have been deprioritized based on marginal
toxicity.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Mechanism
of Toxicity Across Species  Safety issues can arise during testing in non-human
species while a compound is in human clinical testing. In these cases, we can use our
ToxExpress System database to determine the relevance of these findings to humans. Based
on this information, the clinical development of a compound may be continued or restarted.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

We launched preliminary sales and
marketing efforts for our drug repositioning and selection services in late 2004. We are
currently performing work on one compound for Millennium and on several compounds for
another customer we acquired as a result of the Millennium transaction.

# CUSTOMERS, SALES,
MARKETING AND CUSTOMER SUPPORT

During 2004, no single customer
  accounted for 10% or more of our total revenue. However, three customers accounted
  for approximately 21% of our total revenue in 2004, of which two are up for
  renewal in 2005.

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

|                  | Geographic Region
|----------------- | -----------------
|
|
|
|
|December 31, 2004 | 54%              
|December 31, 2003 | 48%              
|December 31, 2002 | 46%              

We sell genomics and toxicogenomics
services to pharmaceutical and biotechnology companies in North America, Japan and Western
Europe. We sell our preclinical contract research services to pharmaceutical and
biotechnology companies in North America and to U.S. Government agencies. We sell our
services primarily through our direct sales force.

We have an
agreement in Japan with CTC  Laboratory Systems Corporation (CTC) pursuant to
which CTC assists us  in making sales and provides marketing advice and support for us
and,  when requested, technical support for our customers.  Under the terms  of the
agreement, CTC is our exclusive representative in Japan for  certain named accounts with
regard to the license or sale of our  genomics and toxicogenomics services and our
non-exclusive  representative in Japan for all preclinical contract research services
and for accounts other than the named accounts with regard to our  genomics and
toxicogenomics services.  The agreement commenced in July  2004 and continues until July
2007, subject to earlier termination by  either party in July 2006, or in the event of
breach of the agreement  by or insolvency of the other party.  Upon expiration or
termination of  the agreement, we would not have any restrictions on our right to sell
our services in Japan and CTC would not retain any rights to our  intellectual property;
in addition, at our request, the parties are  obligated to negotiate terms for a
six-month transition period.  For  its services, CTC is entitled to fees, based on the
services licensed  or sold as a result of CTCs efforts that generate new revenue
for us;  such fees are payable only once we receive payment from the customer.

10

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The relationship with CTC
  replaces a prior distributor relationship with Amersham Biosciences K.K. (Amersham).
  Until July 2004, Amersham acted as our authorized distributor in Japan. Amersham
  collected payments from sales in Japan, retained a percentage for its services
  and remitted the balance to us, less the Japanese government withholding tax.
  Upon expiration of that agreement, we entered into a transitional phase ending
  in July 2005, under which Amersham provides certain limited services in exchange
  for a reduced share of the revenue earned during the transition period from
  our Japanese customers that existed prior to the transition period.

As part of our international
  expansion efforts, in 2004 we hired employees based in Japan, the United Kingdom
  and Germany to further assist in supporting our customers in Japan and Western
  Europe, respectively.

To address the

needs of our genomics and toxicogenomics customers, we provide pre-and
post-sales support activities through our technical support group, including technical
demonstrations, planning and implementation of initial deployment and new and ongoing
training, regular content updates, software upgrades, on-going support and follow-on
training.

Our preclinical research study staff,
including study directors, toxicologists, pathologists and chemists,

 provide support for
our preclinical research study customers throughout the life of each study, including
prior to study commencement (development of testing protocol and regulatory guidance),
during the study (real-time testing progress reports and monitoring) and post-study
(analysis and reporting of study results).

# RESEARCH &
DEVELOPMENT

We continually seek to enhance our
services through building, in-licensing or acquiring technologies that complement our
fundamental knowledge and capabilities. In 2004, we acquired the Horizon technologies from
Millennium. In connection with the acquisition, we agreed to spend at least $8.5 million
over the first eighteen months to develop and commercialize the Horizon technologies. In
addition, subject to achieving certain performance milestones by the end of the first
eighteen months and depending upon the level of spending in prior periods, we may be
required contractually to invest up to an additional $6.0 million over the subsequent
twelve months. We expect to invest substantially more than the committed amounts for such
development and commercialization. In future periods, we expect our overall research and
development expenditures to consist primarily of the continued development of the
technologies that comprise our drug repositioning and selection services.

In addition to investing in new
technologies, we believe that a modest but decisive investment in research and development
is essential to maintaining a long-term, sustainable competitive advantage for our
genomics and toxicogenomics services. Our research and development has focused on
developing new applications and licensing or acquiring technologies to serve as platforms
for the development of new gene expression and other molecular-based solutions. We
continue to research methods to improve the production of our gene expression data using
microarray technology and decreasing the size requirements for tissue samples. We will
continue to review other technology platforms and monitor related industry trends.

Research and development expenses for
the years ended 2004, 2003 and 2002 were $2.3 million, $2.1 million and $2.4 million,
respectively.

# CONTRACTUAL ARRANGEMENTS

# Genomics and
Toxicogenomics Services

We expect that a large percentage of
our genomics and toxicogenomics services revenue will continue to be derived from
subscription agreements. Typically, our customers enter into multi-year agreements for our
larger databases (and annual or multi-year agreements for certain of our smaller
databases) to obtain non-exclusive access to all or parts of our gene expression and
toxicogenomics databases. These agreements may be for a full database or a portion of a
database tailored to a customers needs and most relevant to their drug development
strategy. Some of our subscription agreements contain periodic update requirements that,
if not met, could result in a reduction in license fees or a possible breach
of the respective agreement. Certain customers also have an option, for additional
consideration, upon expiration of their subscription, to elect to retain and use certain
information, but without any right to further updates or services.

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

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

# Preclinical Contract
Research Services

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

# COMPETITION

Our competitors are generally
different in each of our business and geographic areas. Across our business segments,
there is competition for customers on the basis of many factors, including the following:

| |  | scope
of services offering;
| | - | ---------------------------

| |  | price;
| | - | ------

| |  | strengths
in geographic locations;
| | - | ----------------------------------

| |  | size;
| | - | -----

| |  | alternative
technologies;
| | - | -------------------------

| |  | expertise
and experience in specific technological and scientific areas;
| | - | ------------------------------------------------------------------------

| |  | subject
focus of genomics and toxicogenomics data sets and technologies;
| | - | ------------------------------------------------------------------------

| |  | 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;
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | ability
to create efficient drug development processes and gene expression data generation
processes;
| | - | -----------------------------------------------------------------------------------------------------

| |  | ability
to manage large volumes of complex, interrelated gene expression and clinical information;
| | - | --------------------------------------------------------------------------------------------------

| |  | ability
to integrate  proprietary gene expression data with publicly  available and other
 third-party              generated data sets;
| | - | ----------------------------------------------------------------------------------------------------------------------------------------

| |  | the
quality and capacity of preclinical research facilities;
| | - | ------------------------------------------------------------

| |  | reputation
for on-time, quality performance in completing preclinical research studies;
| | - | ---------------------------------------------------------------------------------------

| |  | ability
to acquire,  process,  analyze and report data from preclinical  studies in a timely,
 quality              controlled and accurate manner; and
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | availability
of animals for use in preclinical studies, including the fact that at least two major
competitors breed and raise animals and thus may have a more assured supply of animals.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

# Genomics and
Toxicogenomics Services

In our genomics and toxicogenomics
services business, we are the primary company providing drug discovery and development
solutions based on use of human gene expression databases and sophisticated bioinformatics
to analyze, visualize and manage such data. We compete with in-house departments of
pharmaceutical and biotechnology companies and universities, who may choose to use
genomics technologies to generate similar sets of gene expression data themselves. To a
lesser extent, we also compete against other commercial providers who offer less extensive
data. However, as of the date of this Form 10-K, we believe there are no commercially
available gene expression databases of comparable size and scale to that of our BioExpress
System and ToxExpress System databases. In addition, there are commercial entities
developing and offering other technologies, including alternative microarray platforms,
that could in the future cause us to reevaluate the technologies needed to generate the
data that forms the basis for our genomics and toxicogenomics services.

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# Preclinical Contract
Research Services

The preclinical services industry is
dominated by two large companies: Covance, Inc. and Charles River Laboratories
International, Inc. There are other providers, including mid to small, privately held
contract service companies, in-house departments of drug development companies and
universities. We operate and compete as a niche player in the preclinical services
business; our market share of preclinical testing services is small relative to that of
our primary competition.

# Drug Repositioning and
Selection Services

Currently, there are companies that
are attempting to do repositioning for their own drugs and companies that are attempting
to reposition drugs on behalf of clients. We believe our competitors offerings are
generally based on a single, or otherwise limited, biological approach and we are not
aware of any existing competitor that has developed, or is in the process of developing, a
comparable suite of technologies available to commercial customers. Other companies, some
of whom are not doing repositioning work, have individual technologies that could directly
compete with components of our drug repositioning and selection technology platform.
Certain pharmaceutical companies have begun to assemble efforts in repositioning using
their own existing technologies. However, we do not know whether their existing
technologies have yet been developed to enable a high throughput, cost effective solution
to systematically and efficiently evaluate a broad range of biological activity of a
compound, including its effect on a wide variety of diseases, without requiring a prior
disease hypothesis.

# BACKLOG

We record an order backlog only for
our preclinical contract research services, which include studies and projects that are
performed over periods ranging from a few weeks to several years. An order backlog is
comprised of commitments under signed task orders (or other written firm commitments)
excluding any amounts thereunder recognized as revenue to date. Cancelled or terminated
contracts are removed from backlog. As of December 31, 2004, our backlog was $18 million.

We believe our backlog as
  of any date is not necessarily a meaningful indicator of future revenue from
  our preclinical contract research services business for a variety of reasons,
  including the following. First, studies vary in duration. For instance, some
  studies that are included in the December 2004 backlog may be completed in 2005,
  while others may be completed in later years. Second, the scope of studies may
  change. For instance, studies may be terminated, reduced in scope or delayed
  at any time by the customer, which may either increase or decrease their value.
  Signed, but delayed, contracts remain in our backlog until a determination has
  been made as to whether the customer agrees to cancel the study. Third, the
  success or failure of a study may affect the future development of a product
  or may result in cancellation of subsequent studies.

# SUPPLIERS

# Genomics and
Toxicogenomics Services

To build our genomics and
  toxicogenomics databases we enter into collaboration agreements from time to
  time with institutions or individuals (including a few commercial providers),
  for specific tissues, blood samples and cell lines and associated 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, financial
  support for such collaborators research and other consideration. Non-commercial
  collaboration agreements typically have a term of two to three years, subject
  to automatic renewal unless earlier terminated by either party. We believe that
  none of these collaboration agreements is material to our operations because
  any one can be replaced on comparable terms with another provider. In 2004,
  the annual amounts payable pursuant to each non-commercial collaboration agreement
  generally ranged from less than $20,000 to $200,000. The costs associated with
  these agreements are included in our database production expenses as the tissues
  are used. In 2004, these costs in the aggregate comprised approximately 5%
  of our total expenses.

To generate the gene expression
  data that is the basis of our genomics and toxicogenomics services, we use Affymetrix,
  Inc. (Affymetrix) microarrays, instrumentation and software. Our
  current supply and license agreement with Affymetrix expires in December 2005,
  but may be terminated earlier in the event of a breach of the agreement by either
  party. After December 2005, we would continue to have the right to use up our
  supply of previously purchased microarrays, subject to the license terms. After
  expiration or termination, certain restrictions currently applicable to our
  use of data generated by these microarrays would continue to apply and we would
  continue to be obligated to grant back to Affymetrix rights related to certain
  inventions resulting from the use of the Affymetrix microarrays. Under terms
  of the agreement, in 2004 we paid Affymetrix an annual subscription fee of $4.0
  million for access to their microarrays and a license to use their technology,
  and we are obligated to pay Affymetrix royalties, anticipated to begin in early
  2005, upon meeting certain revenue thresholds from subscriptions to our BioExpress
  System and ToxExpress System databases. In December 2004, we amended our supply
  and license agreement with Affymetrix, under which, for 2005, we will pay Affymetrix
  an annual subscription fee of $0.5 million and agreed to purchase in 2005 a
  minimum of $9.5 million of probe arrays, reagents, services under maintenance
  and service agreements and/or instrumentation. The remaining terms of the agreement,
  including the royalty payment obligation to Affymetrix, were not affected by
  this amendment.

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We also have purchased reagents from
Affymetrix, including a reagent made by Enzo BioChem (Enzo). As we reported
last year, 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 and also introduced a new
alternative reagent, which we have begun using.

# Preclinical Contract
Research Services

For our preclinical contract research
services, we purchase the animals used for the studies from a number of different
suppliers. We do not have long-term contracts with any of these suppliers, except for one
vendor with whom we have an annual contract. In general, we believe that we will continue
to be able to purchase animals from our current suppliers or others to meet the needs of
our preclinical services operations. Most of the animals used for our preclinical research
services are bred and raised in the U.S. We do not generally have problems with receiving
adequate supply of these animals on a timely basis. From time to time there can be
temporary shortages for a particular species due to unanticipated demand,
vendorrelated events, health issues and other factors which could lead to delays in
commencing studies or possible cancellation of studies. Certain large animals, which are
necessary for certain studies and are only available abroad,




 may be more difficult to obtain. The supply of these animals can be affected by factors beyond our control,
including but not limited to, export and import regulations and practices, natural
disasters, disease outbreaks, competition for supply and the limited number of potential
suppliers and sources. Such shortages could be of more lengthy duration and could result
in delays or cancellations of certain studies.

We also rely on certain third-party providers for various
technical services, including certain pathology and related evaluations and interpretations.

# INTELLECTUAL PROPERTY
RIGHTS

As of December 31, 2004, we had
exclusive rights to 54 issued patents, 22 of which are United States patents, and 105
patent applications, of which 55 are United States patent applications or United States
provisional patent applications. We do not at this time believe that any single patent or
application is individually material to our business.

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

In the areas of genomics,
toxicogenomics and the bioinformatics technologies related to these capabilities, we seek
patent rights primarily to protect our freedom to operate. 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 world wide, 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 1) a process that Affymetrix
recommends we use in the preparation of samples for use with the Affymetrix GeneChip
platform; and 2) certain patent rights related to the development and use of certain types
of databases (the Layton Patents and Incyte Patents as defined in
the License Agreement). The samples and process may only be used to generate gene
expression data for use in research and development. The license may be terminated under
certain limited circumstances if we: 1) use certain patents outside of the permitted field
of use, or induce another party to do so; 2) violate certain agreements regarding any
future disputes between the parties involving these patents; or 3) 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.

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Under the terms of our agreement with
Affymetrix described above under Suppliers, we also have a non-exclusive
worldwide limited license to use Affymetrix software and systems and database patent
rights to generate and use databases, license the data in such databases to third parties
and provide sample processing services to generate and analyze data for a customers
internal use for research and development.

For our drug repositioning and
selection services, we have acquired or obtained licenses to use certain intellectual
property rights and technologies from Millennium and others, and we will, from time to
time, continue to acquire and obtain licenses to use intellectual property rights and
technologies as needed.

# GOVERNMENT REGULATION

Our genomics and toxicogenomics
services depend 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 the European
Union. We monitor our procedures to ensure that such procedures comply with applicable
privacy regulations.

Our preclinical contract research
services are subject to various regulatory requirements designed to ensure the quality and
integrity of our testing processes. Our standard operating procedures are written in
accordance with applicable regulations and guidelines for operating in the United States.
The industry standards for conducting preclinical laboratory testing are embodied in the
Good Laboratory Practice (GLP) regulations promulgated by the U.S. Food and
Drug Administration (the FDA). In the United States, for studies intended for
regulatory submission, GLP compliance is required by the FDA and the U.S. Environmental
Protection Agency (EPA); foreign governments may require our North American
customers to comply with certain regulatory requirements in other countries (in order to
gain approval within these countries), such as regulations promulgated by the Japanese
Ministry of Health, Labor and Welfare (MHLW) and Ministry of Agriculture,
Forestry and Fisheries (MAFF), and in Europe, the Organisation for Economic
Co-operation and Development (OECD). GLP regulations specify requirements for
facilities, equipment, professional staff and standardized procedures for conducting
studies, including procedures for recording and reporting data and for managing study
materials and records. In addition, we have established a required quality assurance
program that monitors ongoing compliance with GLP regulations by auditing test data and
reporting and conducting inspections of testing procedures. To further ensure the quality
of our preclinical services, we have also instituted dedicated programs for improving
processes and quality, which review study data and study reports on the basis of accuracy,
completeness and compliance with applicable regulations.

Our preclinical contract research
services business, which is a laboratory testing business, is subject to periodic
inspection by the FDA. As a result of an inspection in October 2003, we received a FDA
Warning Letter (the FDA Letter) on February 1, 2005. The FDA Letter focused on
issues related to two preclinical studies conducted in 2001 and 2002 by TherImmune
Research Corporation, prior to its acquisition by Gene Logic in 2003. The issues related
to how the studies were conducted and to certain recordkeeping procedures. We are working
cooperatively with the product sponsors for the two studies to address the issues raised
by the FDA Letter. We have submitted our response to the FDA addressing each of the
violations cited in the FDA Letter, and identifying corrective actions we have taken, for
further consideration by the FDA. There is no assurance that the FDA will not take further
action. Such further action could range from requiring further work on the two studies at
issue or



refusal to accept the results of those studies to support regulatory approval
for the products involved to more extreme actions such as follow-up confirmatory
inspections of our facilities which could potentially lead to disruptions in our ability
to conduct preclinical contract research services.

Our laboratory testing facilities are
also subject to a variety of national, regional and local laws and regulations, including
the Animal Welfare Act and the rules and regulations promulgated thereunder by the United
States Department of Agriculture (USDA). These regulations establish the
standards for the humane treatment, care, use and handling of animals by dealers and
research facilities. Our preclinical testing facilities maintain standard operating
procedures and the documentation necessary to comply with such regulations. In addition,
our preclinical testing facilities are accredited by the American Association for
Assessment and Accreditation of Laboratory Animal Care (AAALAC) and are
registered with the United States National Institutes of Health Office of Protection for
Research Risks (OPRR).

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

In addition to its comprehensive
regulation of safety in the workplace, the Occupational Safety and Health Administration
(OSHA) has established extensive requirements relating to workplace safety,
which requires us to have 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.

15

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The use of controlled substances in
preclinical testing is regulated in the United States by the U.S. 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 U.S.
Department of Transportation and the U.S. Postal Service apply to the transportation of
laboratory specimens via surface and air.

In connection with sales of our
preclinical contract research services to U.S. Government agency customers and U.S.
Government contractors, we are also subject to applicable government procurement rules and
regulations, including the Federal Acquisition Regulations (FAR) and
supplemental agency regulations.

# SEASONALITY

Customer purchasing patterns do not
show significant predictable seasonal variation.

# HUMAN RESOURCES

As of December 31, 2004, we had 446 employees,
439 within the United States, and seven who reside outside the United States, specifically
in Great Britain, Germany and Japan. None of our employees is covered by collective
bargaining agreements, and management considers relations with our employees to be good.

# EXECUTIVE OFFICERS

The following table sets forth, as of
March 7, 2005, 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               | 43  | Chief Executive Officer and President                          
|Philip L. Rohrer, Jr          | 48  | Chief Financial Officer                                        
|Y. Douglas Dolginow, M.D      | 50  | Executive Vice President, Pharmacogenomics                     
|V.W. Brinkerhoff, III         | 60  | Senior Vice President, General Manager, Gene Logic Laboratories
|Dennis A. Rossi               | 54  | Senior Vice President, General Manager, Genomics               
|F. Dudley Staples, Jr         | 57  | Senior Vice President, Secretary and General Counsel           
|Dennis L. Barger              | 42  | Vice President, Global Business Development                    
|Joanne M. Smith-Farrell, Ph.D | 35  | Vice President, Corporate Development and Strategy             

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

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

Y. Douglas Dolginow, M.D.
has served as Executive Vice President, Pharmacogenomics since August
          2003. From prior to March 2000 to August 2003, Dr. Dolginow served as Senior
          Vice President, Pharmacogenomics. Dr. Dolginow received a M.D. degree from the
          University of Kansas.

V.W.
  Brinkerhoff, III has served as Senior Vice President and General Manager,
  Gene Logic Laboratories since March 2005. From August 2001 to January 2005,
  Mr. Brinkerhoff served in various executive level positions including most recently
  as Group Vice President, Operations with Wilson Greatbatch Technologies, Inc.,
  a medical device components manufacturer. From prior to March 2000 to August
  2001, Mr. Brinkerhoff served in various executive level positions including
  most recently as Vice President, Human Resources with Life Technologies, Inc.,
  a global life science products company.

Dennis
A. Rossi has served as Senior Vice President and General Manager, Genomics since
September 2004. From February 2002 to January 2004, Mr. Rossi served as Vice President,
Marketing, Life Sciences for Accelrys, a subsidiary of Pharmacopeia, Inc., a
bioinformatics and genomics company. From April 2000 to February 2002, Mr. Rossi served as
a Partner for Harvard Strategy Group, a life sciences consulting firm. From prior to March
2000 to April 2000, Mr. Rossi held several senior level management positions at Digital
Equipment Corporation, an information technology company. Mr. Rossi holds an M.P.H. from
The University of Hawaii and an M.B.A. from Boston University.

16

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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 2002, 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.

Dennis
L. Barger has served as Vice President, Global Business Development since December
2004. From January 2004 to December 2004, he served as Vice President, North America
Business Development and from April 2003 to January 2004, he served as Vice President,
Contract Services. From June 2002 to April 2003, Mr. Barger served as Director, Business
Development for MetriGenix, Inc., a bioinformatics company. From prior to March 2000 to
June 2002, Mr. Barger served as Vice President, Sales, North America for Accelrys, Inc., a
bioinformatics and genomics company.

Joanne
M. Smith-Farrell, Ph.D. has served as Vice President, Corporate Development and
Strategy since October 2004. From November 2003 to October 2004, Dr. Smith-Farrell served
as Senior Director, Strategic Marketing. Prior to joining Gene Logic, from July 2002 to
September 2003, Dr. Smith-Farrell served as President and Chief Executive Officer of
emGene, Inc., a privately-held biotechnology company. From prior to March 2000 to July
2002, Dr. Smith-Farrell served as Project Leader and Consultant for the Healthcare
Practice of The Boston Consulting Group, a management consulting firm. Dr. Smith-Farrell
holds a Ph.D. in physics from The Catholic University of America.

# AVAILABLE INFORMATION

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

17

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|ITEM 2. | Properties
|------- | ----------

The following table sets forth
information regarding the 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                  | Type of
Holding | Expiration
|---------------- | -------------------------- | -------------------------- | --------------- | ----------
|
|
|
|
|Gaithersburg, MD | 28,408                     | Administrative             | Lease           | 2013      
|Gaithersburg, MD | 57,410                     | Laboratory                 | Lease           | 2011      
|Gaithersburg, MD | 49,225                     | Administrative, Laboratory | Lease           | 2007      
|Gaithersburg, MD | 26,127                     | Laboratory                 | Lease           | 2011      
|Gaithersburg, MD | 29,900                     | Laboratory                 | Lease           | 2012      
|Gaithersburg, MD | 30,600                     | Laboratory                 | Lease           | 2010      
|Gaithersburg, MD | 16,406                     | Laboratory                 | Lease           | 2010      
|Cambridge, MA    | 19,093                     | Administrative, R&D        | Lease           | 2008      
|Berkeley, CA     | 4,820                      | Administrative             | Lease           | 2007      
|                 |                           
|                 | 261,989                    |                            |                 |           
|                 |                           

|ITEM 3. | Legal
Proceedings
|------- | -----------------

In September 2004, we hired a senior
level employee who had previously worked at Covance. In September 2004, litigation was
initiated by Covance and Gene Logic regarding the enforcement of the non-competition and
non-disclosure agreement to which the employee was a party while he worked for Covance. In
February 2005, the parties agreed to a settlement that imposed no obligations on Gene
Logic and requires the employee to comply with certain terms of confidentiality and
non-solicitation of Covance employees. Under the terms of the settlement, both the
Wisconsin and Federal suits were dismissed with prejudice.

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.

18

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# PART II

|ITEM 5. | Market
for the Registrant's Common Equity and Related Stockholder Matters
|------- | -------------------------------------------------------------------------

# PRICE RANGE OF COMMON
STOCK

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

|                             | High | Low
|---------------------------- | ---- | ---
|
|
|
|
|Year Ended December 31, 2003 |      |    
|First Quarter                |      |    
|Second Quarter               |      |    
|Third Quarter                |      |    
|Fourth Quarter               |      |    
|                             |      |    
|Year Ended December 31, 2004 |      |    
|First Quarter                |      |    
|Second Quarter               |      |    
|Third Quarter                |      |    
|Fourth Quarter               |      |    

# HOLDERS

On March 1, 2005, the last reported
sale price of our Common Stock on the NASDAQ Stock Market was $3.23. As of March 1, 2005,
there were approximately 430 registered holders of record of our Common Stock, including
one 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.

19

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|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, 2004, 2003 and 2002 and with respect to the consolidated balance
sheets as of December 31, 2004 and 2003 have been derived from audited consolidated
financial statements included as part of this Annual Report on Form 10-K (Form
10-K). The statements of operations data for the years ended December 31, 2001 and
2000 and the balance sheet data as of December 31, 2002, 2001 and 2000 are derived from
audited financial statements not included in this Form 10-K. The following selected
consolidated financial data includes, for 2004 and 2003 only, the results for our
preclinical contract research services business (resulting from the April 1, 2003
acquisition of TherImmune Research Corporation) 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,
|------------------------------------------------------------------------ | -----------------------
|
|
|
|
|Consolidated Statements of Operations Data:                              |                        
|Revenue                                                                  |                        
|Genomics and toxicogenomics services                                     |                        
|Preclinical contract research services                                   |                        
|                                                                         |                        
|Total revenue                                                            |                        
|                                                                         |                        
|Expenses:                                                                |                        
|Cost of preclinical contract research services                           |                        
|Database production                                                      |                        
|Research and development                                                 |                        
|Selling, general and administrative                                      |                        
|Amortization of goodwill                                                 |                        
|Purchased research and development                                       |                        
|                                                                         |                        
|Total expenses                                                           |                        
|                                                                         |                        
|Loss from operations                                                     |                        
|Interest (income), net                                                   |                        
|Other (income) expense                                                   |                        
|Write-down of equity investments                                         |                        
|                                                                         |                        
|Net loss before income tax expense, equity in net loss of                |                        
|unconsolidated investees and cumulative effect of                        |                        
|change in accounting principle                                           |                        
|Income tax expense                                                       |                        
|                                                                         |                        
|Net loss before equity in net loss of unconsolidated                     |                        
|investee and cumulative effect of change in                              |                        
|accounting principle                                                     |                        
|Equity in net loss of unconsolidated investee                            |                        
|                                                                         |                        
|Net loss before cumulative effect of change in                           |                        
|accounting principle                                                     |                        
|Cumulative effect of change in accounting principle                      |                        
|                                                                         |                        
|Net loss                                                                 |                        
|                                                                         |                        
|Amounts per share, basic and diluted:                                    |                        
|Net loss before cumulative effect of change in
     accounting principle |                        
|Cumulative effect of change in accounting principle                      |                        
|                                                                         |                        
|Net loss                                                                 |                        
|                                                                         |                        
|Shares used in computing basic and diluted net loss per share            |                        
|                                                                         |                        
|                                                                         |                        
|                                                                         |                        
|                                                                         |                        
|                                                                         |                        
|
|
|
|
|
|Consolidated Balance Sheets Data:                                        |                        
|Cash, cash equivalents and marketable securities                         |                        
|Working capital                                                          |                        
|Total assets                                                             |                        
|Total long-term debt and capital lease obligations                       |                        
|Total stockholders' equity                                               |                        

20

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|ITEM 7. | Management's
Discussion and Analysis of Results of Operations and Financial Condition
|------- | -------------------------------------------------------------------------------------

We provide drug discovery and
development solutions to the pharmaceutical industry, for use throughout the drug
development process, to assist in the development of therapeutic compounds in a more
timely, efficient, and cost-effective manner.

Our solutions consist of:

| |  | Genomics and
      Toxicogenomics Services: we help customers to discover and prioritize drug
      targets, identify biomarkers, and predict toxicity and provide insights
      into efficacy of specific compounds through the use of gene expression technologies,
      proprietary reference databases and bioinformatics software and professional
      services.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Preclinical
Contract Research Services: we enable customers to assess the safety and pharmacologic
effects of candidate compounds with the intention of gaining regulatory approval to
proceed with human trials on prioritized compounds, through the use of in-vivo animal
testing research studies and related laboratory services.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Drug
Repositioning and Selection Services: we can assist in (i) identifying alternative
indications for customers failed, stalled or deprioritized compounds, (ii)
expanding indications for customers currently marketed drugs, and (iii)
prioritizing and identifying indications for customers compounds entering
preclinical development.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

We expect that a large percentage of
our genomics and toxicogenomics services revenue will continue to be derived from
subscription agreements. Typically, our customers enter into multi-year agreements for our
larger databases, and annual or multi-year agreements for certain of our smaller
databases, to obtain non-exclusive access to all or parts of our gene expression and
toxicogenomics databases. These agreements may be for a full database or a portion of a
database tailored to a customers needs and most relevant to their drug development
strategy. Some of our subscription agreements contain periodic update requirements that,
if not met, could result in a reduction in license fees or possible breach of the
respective agreement. Certain customers also have an option, for additional consideration,
upon expiration of their subscription, to elect to retain and use certain information, but
without any right to further updates or services.

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

We also derive a smaller, but
growing, percentage of our revenue from sales of various toxicogenomics reports and data
generation and professional services. The scope of services provided is based on the
customers needs and pricing for these services is generally dependent upon such
issues as the number of samples or compounds analyzed, the type of analysis performed, the
starting material provided by the customer, the type 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.

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

Prior to 2005, we did not
  derive any revenue from our new drug repositioning and selection services, which
  are currently under development.

21

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We have incurred operating losses in
each year since our inception, including losses of $28.5 million in 2004, $24.8 million in
2003 and $24.1 million in 2002. At December 31, 2004, we had an accumulated deficit of
$212.7 million. Our losses have resulted principally from costs incurred in the
development, marketing and sale of our genomics and toxicogenomics services. These costs
have exceeded our revenue and we expect to incur additional operating losses in the
future.

# RESULTS OF OPERATIONS

YEARS ENDED DECEMBER 31,
2004 AND 2003

Total Revenue.Total
  revenue increased $6.4 million, or 9%, to $75.9 million in 2004 from $69.5 million
  in 2003. During 2004 and 2003, no customer accounted for 10% or more of our
  revenue. However, three customers accounted for approximately 21% of our total
  revenue in 2004, of which two are up for renewal in 2005. During 2004 and 2003,
  32% and 34% of our revenue, respectively, was from customers in the Pacific
  Rim, and 14% and 18% of our revenue, respectively, was from customers in Europe.

Genomics and Toxicogenomics
Services Revenue.Revenue from our genomics and toxicogenomics services,
which consisted primarily of fees from subscription agreements to our BioExpress System
and ToxExpress System databases, was $52.2 millionin 2004, an increase of $0.2
million, or less than 1%, from $52.0 million in 2003. The increase represents increased
revenue of $3.8 million, reflecting a full period of revenue from some existing customers
in 2004 as compared to 2003, $2.5 million resulting from the cumulative impact of a
favorable Japanese exchange rate in 2004, $0.9 million in fees for subscriptions from new
customers and expanded agreements and $0.9 million in fees for other services in 2004.
These increases were offset by reduced revenue of $5.3 million in subscription fees
resulting from the conclusion of agreements and $2.4 million from certain renewals at
reduced service levels. In 2005, subscription agreements with 10 customers will expire by
their terms, subject to possible renegotiation. These agreements accounted for 31% of our
2004 revenue. For 2005, we expect modest revenue growth in our genomics and toxicogenomics
services.

Preclinical Contract Research
Services Revenue.Revenue from our preclinical contract research services,
which consisted of fees from primarily preclinical safety and pharmacology studies and
related laboratory services, was $23.8 million in 2004, an increase of $6.2 million, or
35%, from $17.6 million in 2003. The increase reflects the recording of twelve months of
revenue in 2004, whereas in 2003 we recognized only nine months of revenue because we
acquired this business on April 1, 2003. We expect flat to reduced revenue for the
beginning of 2005, followed by significant improvement for the remainder of 2005, as we
begin to realize the impact of ongoing facilities renovation and increased capacity.

Cost of Preclinical Contract
Research Services Revenue.Cost of preclinical contract research services revenue,
which consisted of direct and indirect costs related to conducting preclinical safety and
pharmacology studies and related laboratory services, including direct and indirect labor,
study materials and facility costs and depreciation, increased to $24.1 million in 2004
from $15.4 million in 2003. The increase primarily reflects the recording of twelve months
of costs of preclinical contract research services revenue in 2004, whereas in 2003 we
recognized only nine months of costs because we acquired this business on April 1, 2003.
In addition, margins were impacted by adjustments in 2004 of $1.4 million, which included
a credit to a single customer, a write-down of fixed assets acquired in the TherImmune
acquisition and a loss of revenue resulting from a single customers inability to
pay, as well as the impact of our facility renovations and preparations for increased
capacity in 2005. The increase in cost of preclinical contract research services revenue
resulted in our gross margins decreasing to a negative 1% in 2004 from 12% in 2003. We
expect negative gross margins to continue for the beginning of 2005, but expect gradual
improvements throughout the rest of 2005, resulting from anticipated operational
efficiencies and increasing revenue from our expanded capacity.

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 the content
of the BioExpress System and ToxExpress System databases, decreased to $44.7 million in
2004 from $50.1 million in 2003. The decrease in 2004 consisted primarily of a $4.6
million reduction in database content generation expenses, primarily resulting from more
focused content development of our BioExpress System and ToxExpress System databases. For
2005, we expect database production expenses to decrease modestly, reflecting our
continuing efforts to focus content development in areas of most interest to our
customers.

Research and Development Expense.Research and development expenses, which consisted primarily of costs associated with
our efforts to improve the processes currently used in the production of our BioExpress
System and ToxExpress System databases and, in 2004, ongoing development of the drug
repositioning and selection technologies, as well as evaluations of alternative technology
platforms for the generation of gene expression data, increased to $2.3 million in 2004
from $2.1 million in 2003. For 2005, we expect research and development expenses to
increase significantly as we further develop our drug repositioning and selection
technologies (see Liquidity and Capital Resources).

22

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Selling, General and
Administrative Expense.Selling, general and administrative expenses, which consisted
primarily of costs of sales and marketing, finance and accounting, legal, human resources
and other general corporate operations, increased to $25.7 million in 2004 from $22.2
million in 2003. The increase was primarily due to the addition of costs associated with
our acquisition of our preclinical contract research services business. For 2005, we
expect selling, general and administrative expenses to increase due to increases in
employee costs and expenses related to efforts to commercialize our drug repositioning and
selection services.

Purchased Research and Development
Expense.In 2004, we incurred a one-time, expense of $8.8 million, from the purchase
of in-process research and development activities associated with the Horizon
technologies.

Net Interest Income.Net
interest income decreased to $1.4 million in 2004 from $1.7 million in 2003, due primarily
to a decline in our balance of cash, cash equivalents and marketable securities
available-for-sale.

Income Tax Expense.Income tax
expense, which historically consisted of a 10% withholding tax on certain payments by our
Japanese customers, decreased to $0.3 million in 2004 from $2.2 million in 2003,
reflecting the impact of the elimination of the withholding tax effective July 1, 2004, as
a result of the new tax treaty between the U.S. and Japan.

YEARS ENDED DECEMBER 31,
2003 AND 2002

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

Genomics and Toxicogenomics
Services Revenue.Revenue from our genomics and toxicogenomics services,
which consisted primarily of fees from subscription agreements to our BioExpress System
and ToxExpress System databases, was $52.0 millionin 2003, a decrease of $2.9
million, or 5%, from $54.8 million in 2002. The decrease in revenue consisted primarily of
reduced revenue of $11.4 million in subscription fees resulting from the conclusion or
reduction in scope of agreements with biotechnology and smaller pharmaceutical companies
and $2.2 million resulting from certain service deliverables in 2002 which did not recur
in 2003. These decreases were partially offset by increased revenue of $7.3 million in
subscription fees from new customers and expanded agreements with and additional fees from
existing customers and $3.8 million reflecting a full period of revenue from some existing
customers in 2003 as compared to 2002.

Preclinical Contract Research
Services Revenue.Revenue from our preclinical contract research services,
which consisted of fees from primarily preclinical safety and pharmacology studies and
related laboratory services and, to a lesser extent, Phase I clinical trial services, for
the period beginning April 2003 through December 2003, was $17.6 million as a result of
the acquisition of TherImmune on April 1, 2003. Revenue from our preclinical contract
research services business was $23.3 million on a pro forma basis in 2003 (assuming the
acquisition occurred on January 1, 2003 and excluding inter-company sales) as compared to
revenue reported by TherImmune of $24.5 million on a pro forma basis in 2002 (excluding
inter-company sales).

Cost of Preclinical Contract
Research Services Revenue.Cost of preclinical contract research services revenue,
which consisted of direct and indirect costs related to conducting preclinical safety and
pharmacology studies and related laboratory services, including direct and indirect labor,
study materials and facility costs and depreciation, for the period beginning April 2003
through December 2003 was $15.4 million as a result of the acquisition of TherImmune on
April 1, 2003, which resulted in a gross margin of 12%.

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 the content
of the BioExpress System and ToxExpress System databases, decreased to $50.1 million in
2003 from $57.9 million in 2002. The decrease in 2003 consisted primarily of an $8.1
million reduction in database content generation expenses, primarily resulting from more
focused content development of our BioExpress System and ToxExpress System databases,
partially offset by an increase of $1.5 million in related employee costs.

Research and Development Expense.Research and development expenses, which included the costs associated with our
efforts to improve the processes currently used in the production of our BioExpress System
and ToxExpress System databases, as well as evaluations of alternative technology
platforms for the generation of gene expression data, decreased to $2.1 million in 2003
from $2.4 million in 2002.

Selling, General and
Administrative Expense.Selling, general and administrative expenses, which consisted
primarily of costs of sales and marketing, finance and accounting, legal, human resources
and other general corporate operations, increased to $22.2 million in 2003 from $19.7
million in 2002. Excluding the $5.5 million in selling, general and administrative
expenses associated with our preclinical contract research services business, the
resulting decrease in 2003 was due primarily to continued cost savings efforts, including
a reduction in marketing expenses of $0.9 million, employee costs of $0.7 million and
travel expenses of $0.4 million.

23

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Net Interest Income.Net
interest income decreased to $1.7 million in 2003 from $3.1 million in 2002, due primarily
to a decline in our balance of cash, cash equivalents and marketable securities
available-for-sale, resulting from our use of cash to fund the TherImmune acquisition
completed on April 1, 2003, and, to a lesser degree, a decline in the rates of return.

Write-down of Equity Investments.We recorded a $4.3 million write-down of our investment in Neuralstem, Inc. in 2003
and a $0.8 million write-down of our investment in Metabometrix, Ltd. in 2002, due to
permanent declines in their estimated market values. These write-downs represented the
remaining book value of these investments.

Income Tax Expense.Income tax
expense, which consisted of a 10% withholding tax on certain payments by our Japanese
customers, increased to $2.2 million in 2003 from $1.5 million in 2002, as we recognized a
full year of activity in 2003 from such customers.

# LIQUIDITY AND CAPITAL
RESOURCES

From inception through December 31,
2004, we have financed our operations and acquisitions through the issuance and sale of
equity securities and payments from customers. As of December 31, 2004, we had
approximately $102.9 million in cash, cash equivalents and marketable securities
available-for-sale, compared to $111.8 million as of December 31, 2003.

Net cash used in operating activities
decreased to $0.3 million in 2004 from $7.8 million in 2003, primarily due to the timing
of customer and vendor payments.

In 2004 and 2003, our investing
activities consisted primarily of purchases, sales and maturities of available-for-sale
securities, capital expenditures, software development costs and, in 2003, the acquisition
of TherImmune. Capital expenditures in 2004 and 2003 amounted to $5.2 million and $4.2
million, respectively. The increase in capital expenditures was primarily due to costs of
expanding our facilities related to our preclinical contract research services business.
In 2005, we expect capital expenditures to amount to $15 million (including $6.5 million
committed at December 31, 2004), due to increases to our preclinical contract research
capacity and renovations, including equipment purchases, to our database production
facility.

We have capitalized software
development costs of $3.3 million and $6.6 million in 2004 and 2003, respectively. These
costs relate to ongoing efforts to enhance the software platform of our BioExpress System
and ToxExpress System databases. The decrease in software development costs was primarily
due to a reduction in our software development workforce in late 2003. Software
development costs are being amortized over their expected useful life of three years.
Software development costs are expected to continue in 2005, but at a slightly reduced
rate, as a result of ongoing efforts to further enhance the software platform of our
BioExpress System and ToxExpress System databases. In addition, in 2005 we expect to incur
approximately $5.5 million of database upgrade costs, as we enhance the content of our
BioExpress System database using the latest commercially available microarray platform
from Affymetrix. Database upgrade costs are being amortized over their useful life of two
years.

During 2003, we acquired TherImmune
for which we paid $30.4 million in cash to shareholders and optionholders of TherImmune,
paid $1.3 million in transaction costs related to the acquisition and acquired $1.2
million in cash from TherImmune. In addition, we issued 3,927,214 shares of our Common
Stock to such shareholders, with a value of $19.4 million, based on the average market
price of our Common Stock surrounding the measurement date.

Our financing activities, other than
the repayment of capital lease obligations and equipment loans, primarily consisted of the
exercise of stock options and participation in our Employee Stock Purchase Plan. In
connection with the TherImmune acquisition in 2003, we repaid $6.0 million of
TherImmunes debt.

In 2004, we purchased the Horizon
technologies and hired an associated research team from Millennium. As part of the
consideration, we agreed to pay $3.5 million in cash or stock, at our election, to
Millennium in 2006, and we paid $1 million in cash and stock to certain employees who left
Millennium and joined us. In addition, we also contractually agreed to spend at least $8.5
million over the first eighteen months to develop and commercialize the Horizon
technologies; however, we currently expect to invest substantially more. As of December
31, 2004, we had recorded $2.2 million in expenditures related to this commitment. In
addition, subject to achieving certain performance milestones by the end of the first
eighteen months and depending upon the level of spending in prior periods, we may be
required contractually to invest up to an additional $6.0 million over the subsequent
twelve months.

To generate our gene expression data,
we use Affymetrix microarrays, instrumentation and software. Our current supply and
license agreement with Affymetrix expires in December 2005, but may be terminated earlier
in the event of breach of the agreement by either party. After December 2005, we would
continue to have the right to use up our supply of previously purchased microarrays. Under
the terms of the agreement, we pay Affymetrix annual subscription fees for access to their
microarrays and a license to use their technology. We purchase microarrays and related
instrumentation and software and will pay royalties beginning in early 2005, upon meeting
certain revenue thresholds from subscriptions to our BioExpress System and ToxExpress
System databases. In 2004, we incurred payment obligations to Affymetrix in the aggregate
amount of $7.6 million. In 2005, we have agreed to purchase a minimum of $9.5 million in
products and services from Affymetrix; as a result, we expect our payment obligations to
range from $10.0 to $12.5 million, depending upon the quantities of microarrays purchased
and royalties owed.

24

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Commitments under other research and
license agreements do not represent significant expenditures in relation to our total
expenses.

As discussed in Notes 8 and 10 to our
Consolidated Financial Statements, the following table sets forth information as to
minimum payments we anticipate regarding specific future financial commitments:

|                                             | Total | 2005 | 2006 & 2007 | 2008 & 2009 | Beyond 2009
|-------------------------------------------- | ----- | ---- | ----------- | ----------- | -----------
|
|
|
|
|Capital lease obligations                    |       |      | $           | 379         |            
|Long-term debt                               |       |      |             | 668         |            
|Facility renovations and
equipment purchases |       |      |             | 6,526       |            
|Technology program funding commitment        |       |      |             | 6,317       |            
|Acquired technologies payable                |       |      |             | 3,500       |            
|Payment obligations to Affymetrix            |       |      |             | 10,000      |            
|Operating leases                             |       |      |             | 32,365      |            
|                                             |       |      |             |             |            
|Total                                        |       |      | $           | 59,755      |            
|                                             |       |      |             |             |            

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.

# 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

Genomics and Toxicogenomics
Services Revenue. Genomics and toxicogenomics services revenue consists primarily of
fees earned under subscription agreements for all or parts of our gene expression
reference databases, the BioExpress System and ToxExpress System. In addition, we derive a
smaller, but growing, percentage of revenue from providing other services, including
various toxicogenomics reports and data generation and professional services. Each of the
subscription agreements for our BioExpress and ToxExpress System customers is typically
for a specific multi-year term. Our revenue from such subscription agreements is
recognized ratably over the period during which the customer has access to the BioExpress
System and/or ToxExpress System databases. Such agreements provide for termination in the
event of a breach of the agreement by either party or a bankruptcy or insolvency of either
party. Certain subscription agreements include a right of early termination (which, in
some instances, is subject to conditions) by the customer, without penalty, on a specified
date prior to the normal expiration of the term. If an agreement has a right of early
termination, revenue is recognized ratably over the subscription term up to the possible
date of early termination, based on subscription fees earned under the agreement through
the possible date of early termination. If such early termination does not occur, the
balance of the subscription fees earned under the agreement is recognized as revenue
ratably over the remaining term of the agreement. Revenue from other services is
recognized when the reports and/or data have been delivered or when the services have been
performed.

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

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Revenue recognized for multiple
  element contracts is allocated to each element of the arrangement based on the
  relative fair value of the element. The determination of fair value of each
  element is based on our analysis of objective evidence from comparable sales
  of the individual element. If we are unable to determine evidence of fair value
  for any undelivered element of the arrangement, revenue for the arrangement is deferred and recognized ratably
  over the longest performance period of the elements.

Our revenue recognition policy is
significant because revenue is a key component of our results of operations. Revenue is
recognized in accordance with the Securities and Exchange Commissions Staff
Accounting Bulletin No. 104, Revenue Recognition (SAB 104). SAB
104 requires that four basic criteria be met before revenue can be recognized: 1)
persuasive evidence of an arrangement exists; 2) delivery has occurred or services
rendered; 3) the fee is fixed and determinable; and 4) collectability is reasonably
assured. As to 1), our business practices require that our services be performed pursuant
to contracts with our customers. As to 2), we recognize revenue when services are rendered
to our customers. Determination of 3) and 4) are based on managements judgments
regarding the fixed nature of our arrangements taking into account termination provisions
and the collectability of fees under our arrangements. In addition, management reviews
costs billed under our government contracts to ensure compliance with governmental
regulations and cost and profit estimates on uncompleted contracts. Should changes in
conditions cause management to determine these criteria are not met for certain future
arrangements, that billed costs under our government contracts are not allowed or that
cost or profit estimates change resulting in losses under such contracts, revenue
recognized for any reporting period would be adjusted and could be adversely affected.

GOODWILL AND INTANGIBLE
ASSETS IMPAIRMENT

In 2003, we recorded goodwill
  of $43.0 million and an intangible asset representing the value of customer
  relationships of $2.5 million as a result of the acquisition of TherImmune.
  In addition, weve previously recorded goodwill and other intangible assets,
  including licenses to technologies or data, patent costs and software development
  and database upgrade costs. The determination of whether or not these intangible
  assets are impaired involves significant judgment, including the following:
  (i) our licenses and internally developed intellectual property may not provide
  valid and economical competitive advantage; and (ii) services may become obsolete
  before we recover the costs incurred in connection with their development.

Under Statement of Financial
Accounting Standard No. 142, Goodwill and Other Intangible Assets, we are
required to perform an annual impairment test of our goodwill and periodic reviews of our
intangible assets. In addition, we are required to test for impairment at any point we
have an indication that impairment may exist. We have elected to perform our annual
impairment test of goodwill as of October 1. The goodwill impairment test that we have
selected consists of a ten-year discounted cash flow analysis, including the determination
of a terminal value, and requires management to make various judgments and assumptions,
including revenue growth rates and discount rates, which management believes are
reasonable. Our annual impairment test as of October 1, 2004 did not indicate an
impairment of our goodwill. There can be no guarantee that changing conditions in future
years would not result in a different conclusion.

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ACCOUNTS RECEIVABLE AND
UNBILLED SERVICES

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

INVENTORY

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

EQUITY INVESTMENTS

We hold equity investments in several
companies whose businesses may be complementary to our business. We record an investment
impairment charge when it is believed that an investment has experienced a decline in
value that is other than temporary. Future adverse changes in market conditions or poor
operating results of the underlying investee could result in our inability to recover the
carrying value of these investments that may not be reflected in an investments
current carrying value, thereby possibly requiring an impairment charge in the future.

# RECENTLY ISSUED
ACCOUNTING PRONOUNCEMENTS

In December 2004, the Financial
Accounting Standards Board (FASB) issued a revised Statement of Financial
Accounting Standards (SFAS) No. 123(R), Share-Based Payment, (SFAS
123(R)) which will be effective for reporting periods beginning after June 15, 2005. The
new statement requires all share-based payments to employees to be recognized in the
financial statements based on their fair values. We currently account for our share-based
payments to employees under the intrinsic value method of accounting set forth in
Accounting Principles Board Opinion No. 25, Accounting for Stock Issues to
Employees. Additionally, we comply with the stock-based employer compensation
disclosure requirements of SFAS No. 148, Accounting for Stock-Based
Compensation-Transition and Disclosure. SFAS 123(R) permits companies to adopt its
requirements using one of two methods:

| |  | A
modified prospective method in which compensation cost is recognized
beginning with the effective date (a) based on the requirements of SFAS 123(R) for all
share-based payments granted after the effective date and (b) based on the requirements
of SFAS 123 for all awards granted to employees prior to the effective date of SFAS
123(R) that remain unvested on the effective date.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | A
modified retrospective method which includes the requirements of the modified
prospective method described above, but also permits companies to restate based on the
amounts previously recognized under SFAS 123 for purposes of pro forma disclosures either
(a) all prior periods presented or (b) prior interim periods of the year of adoption.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

We plan to adopt SFAS 123(R) using
the modified-prospective method beginning July 1, 2005 and cannot currently estimate the
financial impact of adoption as we have not yet completed our evaluation.

In December 2003, the FASB issued a
revised Interpretation No. 46, Consolidation of Variable Interest Entities
(Interpretation No. 46), addressing consolidation of entities in which a
company is a primary beneficiary. Interpretation No. 46 was effective immediately for
arrangements entered into or modified after January 31, 2003 and during the quarter ended
March 31, 2004 for arrangements entered into or modified before February 1, 2003. We have
investments in several variable interest entities; however, we are not a primary
beneficiary in any of these entities. Accordingly, the adoption of Interpretation No. 46
had no impact on our financial position or results of operations.

# RISKS RELATED TO OUR
BUSINESS AND INDUSTRY

We operate in a rapidly changing
  environment that involves a number of risks, some of which are beyond our control.
  Set forth below are risks and uncertainties we have identified as material 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.

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

We have incurred operating losses in
each year since our inception, including losses of $28.5 million in 2004, $24.8 million in
2003 and $24.1 million in 2002. At December 31, 2004, we had an accumulated deficit of
$212.7 million. Our losses have resulted principally from costs incurred in the
development, marketing and sale of our genomics and toxicogenomics services. We expect to
incur additional losses in the future, including substantial losses relating to the
expense of development of our drug repositioning and selection services business, and
cannot provide any assurance as to if or when we will achieve profitability.

Our revenue is derived
  primarily from, and is subject to risks faced by, the pharmaceutical and biotechnology
  industry in the U.S., Japan, Europe and other foreign countries; 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 well as U.S. Government entities. As a consequence, our results of
operations may fluctuate substantially due to fluctuations or delays in our
customers research and development expenditures and other factors affecting their
purchasing decisions. These factors could include:

| |  | fluctuations
in current or potential customers research and development budgets, that may be
impacted by various factors including the degree of their business success;
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | changes
in national or international economic conditions;
| | - | ---------------------------------------------------------

| |  | access
to capital markets by current or potential biotechnology customers;
| | - | --------------------------------------------------------------------------

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

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

| |  | pressure
to limit  government  spending in sectors  relevant to our business or changes in
 government         procurement  practices,  including  the process for  determining
 reimbursement  rates  related to U.S.         Government contracts;
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | more
stringent application of FDA and other  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, our contracts with our Japanese customers will be payable in foreign currency
  and may be subject to fluctuations due to changes in currency exchange rates.

None of these factors is within our
control.

The development and value of the
Horizon technologies and our drug repositioning and selection services create risks and
uncertainties.

In 2004, we acquired the Horizon
technologies. We are developing these technologies and, in combination with our existing
capabilities, are creating a new portfolio of services for pharmaceutical customers
focused on drug repositioning and selection. We plan to negotiate and enter into
agreements with customers that have compounds that need to be evaluated or repurposed to
provide such services in exchange for fees, milestone payments upon attaining certain
interim goals and royalties based on sales or licenses of products resulting from new or
alternative uses for compounds identified by us. We may not be able to convince customers
that these novel services are desirable. We may not be able to negotiate terms of
agreements for the proposed services on the terms that we propose or for the types and
amounts of payments that we anticipate.

In certain instances, such as when a
customer declines to develop a compound for an indication we have found, we may acquire
rights to develop compounds for particular indications and, if we elect to pursue
development of any such compound, we would plan to derive revenue from such development.
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 can
license it out to a thirdparty for final development and commercialization. We have
not engaged in compound development to date and there can be 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.

The Horizon technologies were
acquired in various stages of development. As a result of the terms of the acquisition of
the Horizon technologies, and due to the nature of the technologies, we have committed to
spend and are spending considerable financial and other resources in their development, as
well as on initial sales and marketing efforts in an attempt to win customers for these
new services. Further development and marketing of these technologies will be required,
with significant ongoing investment, all of which could take longer or cost more than we
anticipate. The development of the technologies could prove to be less effective than we
need to in order to offer these services effectively. We may be unable to successfully
implement the technologies commercially at levels sufficient to generate enough compound
indications to allow for acceptable levels of future growth of our business. We may be
unable to identify new or alternative uses for compounds being evaluated using these
technologies. Furthermore, any customers we obtain may not be able to successfully develop
and commercialize a compound we assist them in selecting or repositioning and we may not
be able to derive significant revenue from a contract with that customer or with respect
to that compound.

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In addition, these technologies may
rely on inventions to which third parties have obtained or are obtaining patent or other
rights and we may need to in-license rights to use such inventions. We may not be able to
obtain license rights needed for one or more of these technologies on terms acceptable to
us.

To develop these technologies, we
need sophisticated scientific support. Although we believe such personnel are available to
work in our drug repositioning and selection group, we could find that the skills, talent
and experience we need will not be available to us on terms acceptable to us. We also must
integrate these services into our overall business and could find that the technologies
and personnel are not as compatible as we anticipate and that such integration will not be
as effective and productive as we anticipate.

Pharmaceutical companies
  and other companies and research organizations are developing individual technologies
  for better understanding the complex biological processes affected by compounds
  and selecting, purposing and repurposing compounds. Such other parties may elect
  to use such technologies internally, in lieu of using our services, or may successfully
  offer such services based on their technologies in competition against us. We
  do have license rights related to certain of the technologies that comprise
  the technology platform for our drug repositioning and selection business. We
  do not currently have issued patents to any of the technologies. However, we
  do have one patent application and will seek additional patents on other elements
  of the technologies. We also rely on our confidentiality agreements and other
  trade secret protective measures to protect the relevant technologies. There
  can be no assurance that others will not develop a technology platform similar
  to ours.

Our inability to successfully develop
or commercialize the Horizon technologies or our inability to derive adequate revenue from
the sale of the drug repositioning and selection services would have a material adverse
effect on our business, financial condition and results of operations.

The value of goodwill related to
the acquisition of TherImmune and of our long-term investments creates risk to our
financial performance.

As a result of the acquisition of
TherImmune, we recorded significant goodwill in our financial statements, which may be
subject to future impairment in the event, among others, that revenue and gross margins
from our preclinical contract research services fail to materialize at anticipated levels.
Such impairment could materially adversely affect our financial performance and stock
price.

We also have investments in two
entities (MetriGenix, Inc. and Avalon Pharmaceuticals, Inc.) for a combined book value of
$4.2 million. These investments are subject to periodic evaluation for impairment. Since
these are independent companies, the factors affecting an impairment analysis, which
include potential revenue, cost of capital and fair market value of the entity, are
generally not within our control.

Certain shares eligible for future sale
may have an adverse effect on the market value of our shares.

Future sales of Common Stock could adversely
affect the market price of our stock. There are approximately 1,800,000 shares of Common
Stock issued in April 2003 to former stockholders of TherImmune which, to our knowledge,
remain unsold, and which are deemed restricted securities, as defined under
Rule 144 of the Securities Act of 1933 (Rule 144). These restricted securities
may be sold in the public market under Rule 144, upon expiration of the applicable holding period in April and, if sold, could have a depressing
effect on our stock price.

# We operate in a
competitive industry.

Competitors providing technologies
and services that enable improvements to pharmaceutical and biotechnology research and
development include a broad range of private and public companies, educational and
research institutions and government agencies in the U.S. and other countries. Across our
business segments, there is competition for customers on the basis of many factors,
including the following:

| |  | scope
of services offering;
| | - | ---------------------------

| |  | price;
| | - | ------

| |  | strengths
in geographic locations;
| | - | ----------------------------------

| |  | size;
| | - | -----

| |  | alternative
technologies;
| | - | -------------------------

| |  | expertise
and experience in specific technological and scientific areas;
| | - | ------------------------------------------------------------------------

| |  | subject
focus of genomics and toxicogenomics data sets and technologies;
| | - | ------------------------------------------------------------------------

| |  | 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;
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | ability
to create efficient drug development processes and gene expression data generation
processes;
| | - | -----------------------------------------------------------------------------------------------------

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| |  | ability
to manage large volumes of complex, interrelated gene expression and clinical information;
| | - | --------------------------------------------------------------------------------------------------

| |  | ability
to integrate  proprietary gene expression data with publicly  available and other
 third-party              generated data sets;
| | - | ----------------------------------------------------------------------------------------------------------------------------------------

| |  | the
quality and capacity of research facilities;
| | - | ------------------------------------------------

| |  | reputation
for on-time, quality performance in completing preclinical research studies;
| | - | ---------------------------------------------------------------------------------------

| |  | ability
to acquire,  process,  analyze and report data from preclinical  studies in a timely,
 quality              controlled and accurate manner; and
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | availability
of animals for use in preclinical studies, including the fact that at least two major
competitors breed and raise animals and thus may have a more assured supply of animals.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

To generate growth in revenue, we
must retain existing and obtain additional customers for our genomics and toxicogenomics
services.

Our strategy depends, in
  part, on the continued growth in revenue from our genomics and toxicogenomics
  services. We must continue to enter into agreements with new customers, as well
  as renew subscriptions and expand the scope and revenue potential of agreements
  with existing customers. Each of the subscription agreements that we have with
  our genomics and toxicogenomics services customers is for a specific term. These
  agreements may be terminated by either party if the other party breaches the
  agreement or in the event of a bankruptcy of either party and, in some instances,
  our subscription agreements include a right of early termination (which in some
  cases is subject to conditions) by a customer, without penalty, on a specified
  date prior to the normal expiration of the term. In addition, certain agreements
  contain a right to obtain a permanent license to data existing at a specified
  time for a set fee, with no further rights to updates or support, which could
  result in some customers electing to buy a permanent license instead of renewing
  their subscriptions. Certain agreements require that we provide specified database
  content. If subscription agreements with major customers are terminated or expire
  and are not renewed, or existing customers fail to buy additional services,
  or if we fail to enter into subscription agreements with new customers, or if
  we fail to provide specific content based on contractual obligations with existing
  customers, our business could suffer. For 2005, subscription agreements for
  our BioExpress System and ToxExpress System databases with 10 customers are
  up for renewal. These customers accounted for 31% of our total 2004 revenue
  and 46% of our 2004 genomics and toxicogenomics revenue. To date, these customers
  have not renewed their subscriptions. The terms of any renewal may not necessarily
  be on the same terms as the prior agreement and could be on terms less favorable
  to us. In addition to our subscription agreements, a smaller, but growing, part
  of our genomics and toxicogenomics services includes sales of various toxicogenomics
  reports and data generation and professional services. These services are generally
  sold for a negotiated fee and may include interim payments. If customers are
  not satisfied with the cost or effectiveness of these services, the customers
  may not return for such services and we may not be able to sell such services
  to new customers.

Our genomics and toxicogenomics
database requires continual upgrading and expansion, which may be difficult or expensive.

To continue to build our genomics and
toxicogenomics services, we require ready and timely access to normal and diseased human
and animal tissue samples, other biological materials and related clinical and other
information. Specific tissue and blood samples that we believe will enhance the content of
our databases, or be required by content requirements of our customers, may be difficult
to obtain or may not be available on terms acceptable to us. In addition, government
regulation in the U.S. and foreign countries could restrict access to, or use of, human
and other tissue samples and related data. If we lose access to sufficient numbers or
sources of tissue samples or if tighter restrictions are imposed on our use of the
information generated from tissue samples and related data, our genomics and
toxicogenomics services business may suffer.

Approximately every two years,
certain changes in the microarray platforms that we use from Affymetrix may require us to
upgrade the content of our databases, which is time-consuming and requires significant
expense. Future upgrades could be more frequent, costly or difficult or some customers may
want the databases to be reproduced on a different technology platform, which would be
costly to implement. In 2005, we are in the process of upgrading our BioExpress System
database as a result of the introduction of Affymetrixs latest GeneChip microarray.

The genomics industry is
competitive and evolving rapidly, and our genomics and toxicogenomics services business
may become obsolete or fail to be sufficiently useful.

Competition exists among entities
attempting to identify genes associated with specific diseases, use genomics as a basis
for conducting toxicity testing of compounds and develop products and services based on
these discoveries. Our genomics and toxicogenomics services business directly competes in
these areas with pharmaceutical and biotechnology companies and other companies providing
services to these industries, academic and non-profit institutions and government or other
publicly funded agencies, both in the United States and abroad. We are aware that these
entities are using a variety of gene expression analysis methodologies, including the use
of microarrays, to attempt to identify disease-related genes and to develop and make
available databases of gene expression data. In some cases, such databases and other
genomic data may be publicly available, but to our knowledge none of such databases are
comparable in scope or utility to ours. In addition, certain pharmaceutical companies are
developing genomic research programs. To compete against existing and future technologies,
we will need to continue to be able to demonstrate to potential and existing customers
that the technologies and capabilities supporting our genomics and toxicogenomics services
business and, specifically the BioExpress System and ToxExpress System databases, are
superior to competing technologies and/or other gene expression-based resources.

30

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Our genomics and toxicogenomics
services could become less valuable compared to other drug discovery technologies. We may
not be able to make the enhancements to our technology necessary to compete successfully
with newly emerging technologies. The roles of genes in human biology and pathology are
still being discovered. Few therapeutic products based on gene discoveries have been
commercialized to date. If our customers fail to find genomics and/or toxicogenomics
information useful or such information becomes obsolete as a viable drug discovery and
development resource, our existing and potential customers may lose confidence in our
genomics and toxicogenomics services and our business may suffer.

The sales cycle for our genomics
and toxicogenomics services is lengthy; we may spend considerable resources on
unsuccessful sales efforts or may not be able to complete deals on the schedule we
anticipate.

Our ability to obtain new customers,
retain existing customers through subscription renewal, and sell additional services to
genomics and toxicogenomics services customers depends upon our existing and potential
customers belief that the content and capabilities of the underlying data of our
genomics and toxicogenomics databases and our related expertise can increase productivity
for their drug discovery and development efforts. The sales cycle for multi-year
subscriptions to our BioExpress System and ToxExpress System databases is estimated at 12
to 15 months, and in certain circumstances could be longer. The sales cycle for other less
costly services may not be as long but is still a matter of at least several months. The
lengthy sales cycle is caused by a number of factors, including our need to educate our
existing and potential customers and sell the benefits of our genomics and toxicogenomics
services to a variety of groups within such companies. In addition, each agreement may
involve the negotiation of unique terms. We may expend substantial effort with no
assurance that a new or renewed subscription or other agreement will result. Actual and
proposed consolidations of pharmaceutical and biotechnology companies have affected, and
may in the future affect, the timing and progress of our genomics and toxicogenomics
services sales efforts. Accordingly, our results will fluctuate because it is not always
possible to effectively time the initiation of new subscription agreements or renewals to
existing subscription agreements, or predict the timing of any potential resulting revenue
from such agreements.

We rely on microarrays and other
products supplied by Affymetrix to build the underlying genomics and toxicogenomics data
of our databases.

Our continuing ability to build and
update the gene expression data that are the foundation of our databases will depend in
part on the ability of Affymetrix to supply adequate quantities of high quality
microarrays and other products to us and to make available licenses of technologies to use
such products. Affymetrix provides us with microarrays and related instrumentation and
software under an agreement that expires on December 31, 2005. This agreement provides us
with nonexclusive access to GeneChip microarrays and instrumentation and software. We also
have purchased a reagent kit from Affymetrix made by Enzo BioChem. In late 2003, Enzo
terminated the distribution agreement with Affymetrix and filed suit against Affymetrix.
Subsequently, Affymetrix denied Enzos claims and also introduced a new alternative
reagent. We have begun using the new Affymetrix reagent kit, which appears acceptable.

Affymetrix or other providers may
develop new or improved technologies that may necessitate changes to our databases in
order to remain competitive, which could be costly and time consuming. If Affymetrix is
unable or unwilling to supply us with GeneChip microarrays and the related
instrumentation, software, kits and technology licenses, or if such products are not
available or are defective, we may incur additional database production costs and we may
need to obtain alternative technologies. Alternative technologies may not be available to
us, or may only be available to us on unfavorable terms. Restricted or curtailed access to
such products could cause our genomics and toxicogenomics services business to suffer by
preventing or delaying our ability to provide our services or increasing the cost to
populate and maintain our databases, as well as causing us to be delayed or unable to meet
content update obligations under existing genomics and toxicogenomics services
subscription agreements.

To generate significant revenue,
we must retain existing and obtain additional customers for our preclinical contract
research services.

Our strategy depends, in part, on the
continued growth in revenue from our preclinical contract research services business. We
must continue to establish contracts with new customers, as well as renew contracts with
existing customers for our preclinical contract research services. If we fail to do either
of these, our business could suffer.

To maintain adequate revenue
growth in our preclinical contract research business, we must be able to add new capacity
and/or upgrade existing capacity through further construction or expansion at reasonable
cost to us and on a timely basis.

Continued growth in our preclinical
contract research services business requires that we have the right level and type of room
capacity to conduct in-life animal studies. We are presently expanding our capacity,
including the renovation of existing rooms. However, in the future, we may not be able to
develop adequate capacity, through additional construction or acquisition, on terms or in
a time frame sufficiently acceptable to us, to allow us to achieve the level of business
growth in this segment which we presently anticipate and which may be needed to achieve an
acceptable level of profitability for this segment of our business.

31

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Our results of operations may
suffer if studies conducted by our preclinical contract research services business are
delayed or reduced in scope or terminated or if contracts are not priced properly.

All of our contracts for our
preclinical contract research services provide that services may be delayed, reduced in
scope or terminated upon written notice. Terminations, delays or reductions may occur for
a variety of reasons, including:

| |  | the
failure of products to satisfy safety requirements;
| | - | -------------------------------------------------------

| |  | unfavorable
interim test results of the study services;
| | - | -------------------------------------------------------

| |  | lack
of availability of test material;
| | - | --------------------------------------

| |  | the
 customer's  decision to  terminate  the  development  of a test  compound or to end a
 particular         study; and
| | - | -------------------------------------------------------------------------------------------------------------------------

| |  | our
failure to perform properly our duties under the study services contract.
| | - | -----------------------------------------------------------------------------

Any delay, reduction in scope or
termination could cause us to be unable to cover our costs or to realize profit on the
affected contract and could have a material adverse effect on our business. If a study is improperly performed, we may have to repeat the
study at our expense, reimburse the customer for the cost of the study and/or provide other remedies.

Under fixed price contracts, there is
the risk that we will improperly price one or more such contracts, which could result in
our not recovering our anticipated costs or profit from such contracts. Under cost plus
contracts with U.S. Government agencies, there is the risk of disallowance by such
agencies of certain costs as a result of specific regulations and audits. Although our
preclinical contract research services contracts may entitle us to receive costs through
the date of termination and, in some instances, a portion of our profit or a cancellation
fee, it may be difficult to collect such amounts from a customer who has decided to
terminate a study.

Failure to comply with existing
regulations could result in a loss of revenue, earnings or increased costs from our
preclinical contract research services business.

Our preclinical contract research
services business is subject to extensive regulation and we are subject to periodic audit
for compliance by regulatory authorities, including the FDA and the Drug Enforcement
Agency (DEA). Any failure on our part to comply with applicable regulations
could result in the termination of ongoing studies or the disqualification of data for
submission to regulatory authorities or other regulatory action. If this were to happen,
we could incur additional compliance costs or be subject to additional regulatory restrictions, we could be contractually required to repeat a
study at no further cost to our customer or to refund the cost of the study and customers
might choose not to enter into or to renew contracts for preclinical contract research or
other services in the future.

We are also accredited by an industry
approval group named The Association for Assessment and Accreditation of Laboratory Animal
Care International, commonly referred to as AAALAC. AAALAC is a private
nonprofit organization that promotes the humane treatment of animals in science through a
voluntary accreditation program. Generally, our customers insist that their vendors be
AAALAC accredited and, if we were to fail an inspection or lose our accreditation, our
preclinical research services business would be severely impacted.

On February 1, 2005, we received
  a Warning Letter (the FDA Letter) from the FDA focusing on two preclinical
  studies conducted in 2001 and 2002 by TherImmune Research Corporation, prior
  to its acquisition by us in 2003. We are working cooperatively with the product
  sponsors for the two studies to address the issues raised by the FDA Letter.
  We have submitted our response to the FDA addressing each of the violations
  cited in the FDA Letter, and identifying corrective actions we have taken, for
  further consideration by the FDA. There is no assurance that the FDA will not
  take further action. Such further action could range from requiring further
  work on the two studies at issue or refusal to accept the results of those studies
  to support regulatory approval for the products involved to more extreme actions
  such as follow-up confirmatory inspections of our facilities which could potentially
  lead to disruptions in our ability to conduct preclinical contract research
  services.

# We rely on third parties
to supply us with animals.

For our preclinical contract research
services, we purchase the animals used for our studies from a number of different
suppliers, two of which are our major competitors. We do not have long-term contracts with
any of these suppliers except for one vendor with whom we have an annual contract. In
general, we believe that we will continue to be able to purchase animals from our current
suppliers or others to meet the needs of our preclinical services operations. Most of the
animals used are bred and raised in the U.S. for research use. We dont generally
have problems with an adequate supply of these animals, although from time to time there
can be temporary shortages for a particular species due to unanticipated demand,
vendor-related events, health issues and other factors, which could lead to delays in
commencing studies or possible cancellation of studies. Certain large animals, which are
necessary to conduct certain studies and are only available abroad, may be more difficult to obtain.
The supply of these animals can be affected by factors beyond our control, including but
not limited to, export and import regulations and practices, natural disasters, disease
outbreaks, competition for supply and the limited number of potential suppliers and
sources. Such shortages could be of lengthy duration and could result in delays or
cancellations of higher value studies.

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We rely on third parties for
certain specialized testing capabilities for our preclinical contract research services
business; if we cannot ensure continued quality in the services provided by such third
parties, we may lose customers and our business may suffer.

We outsource specific, specialized
testing capabilities, which are a component of our preclinical contract research services.
Any failure of our third parties to provide timely and quality services, could result in
our inability to complete existing signed contracts or prevent us from winning new
preclinical research business, and as a result, our business would suffer.

Preclinical contract research
services may expose us to liability and related risks.

To the extent that our customers develop
or use products based on our studies, if studies are not properly performed, we may be
exposed to liability. Contractual indemnifications generally do not protect us against
liability arising from certain of our own actions, such as negligence or misconduct. We
could be materially and adversely affected if we were required to pay damages or bear the
costs of defending any claim which is not covered by a contractual indemnification
provision and is outside of or exceeds our insurance coverage or in the event that a party
who must indemnify us does not fulfill its indemnification obligations. While we currently
maintain professional liability insurance, our insurance coverage may not be adequate to
protect us against future claims. Furthermore, our customers may not indemnify us against
these types of claims or may not themselves be adequately insured or, in the case of
smaller companies, have a net worth sufficient to satisfy any liability claims.

# Actions of animal rights
extremists may affect our business.

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

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

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

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

We may be subject to future
litigation and patent infringement claims.

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

| |  | the
pending patent applications we have filed, or to which we have exclusive rights, may not
result in issued patents or may take longer than we expect to result in issued patents;
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | the
claims of any  patents  which are issued may not provide  commercially  meaningful
 protection  or         value;
| | - | ---------------------------------------------------------------------------------------------------------------------

| |  | the
patents licensed or issued to us may not allow us to preserve our freedom to operate;
| | - | -----------------------------------------------------------------------------------------

| |  | other
companies may challenge patents issued or licensed to us; and
| | - | -------------------------------------------------------------------

| |  | patents
issued to other organizations may restrict our ability to do business and we may be
unable to obtain or maintain licenses on acceptable terms.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------

We also rely on confidentiality
agreements and other trade secret protective measures to protect our interests in
proprietary know-how and technology that are not patentable or for which patents are
difficult to enforce. We have taken security measures to protect our proprietary know-how
and confidential data and continue to explore further methods of protection. While we
require all employees, consultants and customers with access to our trade secrets to enter
into confidentiality agreements, we cannot be certain that we will be able to protect our
trade secrets. Any material leak of confidential data into the public domain, or to third
parties, could cause our business, financial condition and results of operations to
suffer. It may be necessary for us to initiate litigation to protect and enforce our
intellectual property rights. Such litigation may involve substantial costs, diversion of
managements time and attention from the operations of our business and the risk of
an adverse outcome.

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

We could incur substantial litigation
costs to defend ourselves in patent suits brought by other companies or to initiate such
suits. In addition, litigation could cause disruption in our business activities and
divert managements time and attention from the operation of our business. In that
regard, we have in the past purchased reagents from Affymetrix made by Enzo BioChem, Inc.
(Enzo), and we also purchased such reagents directly from Enzo. In late 2003,
Enzo terminated the agreement under which Affymetrix distributed that reagent and filed
suit against Affymetrix. Affymetrix subsequently filed a counter suit and the two suits
were consolidated. In those suits, Enzo alleges, among other things, rights to certain
Affymetrix technologies and that Affymetrix had agreements with Gene Logic and other named
customers to supply the reagent for use in potential violation of their rights. Affymetrix
has denied Enzos claims and made its own counterclaims. We have not been made a
party to that suit; we cannot predict the outcome of this litigation, its effect on us or
the potential, if any, for claims being made against us. We have commenced using a new
Affymetrix reagent kit. Although we have had discussions with Enzo to attempt to resolve
any claims Enzo believes it may have with respect to our use of Enzos reagent, we
have not reached any agreement as of the date of this Form 10-K.

|ITEM 7A. | Quantitative
and Qualitative Disclosure about Market Risk
|-------- | ---------------------------------------------------------

We have limited exposure to financial
market risks, including changes in interest rates. At December 31, 2004, we had cash and
cash equivalents of approximately $53.2 million and marketable securities
available-for-sale of an additional $49.7 million. We invest our excess cash primarily in
money market funds, obligations of the United States government and its agencies and
marketable debt securities of companies with strong credit ratings. These instruments have
maturities of twenty-four months or less when purchased. We do not utilize derivative
financial instruments, derivative commodity instruments or other market risk sensitive
instruments, positions or transactions in any material fashion. Accordingly, we believe
that, while the instruments we hold are subject to changes in the financial standing of
the issuer of such securities, we are not subject to any material risks arising from
changes in foreign currency exchange rates, commodity prices, equity prices or other
market changes that affect market risk sensitive instruments. Based on our cash and cash
equivalents and marketable securities available-for-sale balances at December 31, 2004, a
100 basis point adverse movement in interest rates would have resulted in an increase in
the net loss for the year ended December 31, 2004 of approximately $1.0 million. Actual
changes in rates may differ from the hypothetical assumptions used in computing this
exposure.

As a result of changing our
  distribution arrangements in Japan, beginning in 2005, we will be subject to
  risk from changes in foreign exchange rates relating to revenue from our subscription
  agreements with our Japanese customers, as payments will be made in foreign
  currency and translated into U.S. dollars. Such changes could result in cumulative
  translation gains or losses. Revenue derived from the Pacific Rim as a percentage
  of total revenue was 32% for the year ended December 31, 2004 and was primarily
  derived from our customers in Japan. Exchange rate fluctuations between the
  U.S. dollar and the currencies of these countries could result in positive or
  negative fluctuations in the amounts relating to revenue reported in our consolidated
  financial statements. 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-21 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.

34

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|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.

# EVALUATION OF
DISCLOSURE CONTROLS AND PROCEDURES

During the first quarter
  of 2004, we installed a new accounting system (and modified our internal controls
  where necessary) that allowed us to eliminate two separate accounting systems,
  one for Gene Logic and one resulting from the acquisition of TherImmune. The
  new system has enabled us to maintain, and in certain instances improve, the
  effectiveness of our internal controls.

As of December 31, 2004,
  an evaluation was performed under the supervision and with the participation
  of our management, including the CEO and CFO, of the effectiveness of the design
  and operation of our disclosure controls and procedures (Disclosure
  Controls). These are controls and procedures designed to reasonably assure
  that information required to be disclosed in our reports filed under the Exchange
  Act, such as this Form 10-K, is recorded, processed, summarized and reported
  within the time periods specified in the U.S. Securities and Exchange Commissions
  (SECs) rules and forms. Disclosure Controls are also designed to reasonably
  assure that such information is accumulated and communicated to our management,
  including the CEO and CFO, as appropriate to allow timely decisions regarding
  required disclosure. Based on that evaluation, our CEO and CFO, have concluded
  that, as of December 31, 2004, our disclosure controls and procedures were effective
  to provide reasonable assurance that information required to be disclosed in
  our Exchange Act reports is recorded, processed, summarized and reported within
  the time periods specified by the SEC, and that material information relating
  to Gene Logic is made known to management, including the CEO and CFO, particularly
  during the period when our periodic reports are being prepared.

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

# 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, 2004 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, 2004
  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, 2004 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
  2004 that materially affected or are reasonably likely to materially affect
  our internal controls over financial reporting.

# 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 2005 Annual Meeting of Stockholders to be filed with the Securities and
Exchange Commission within 120 days after the end of the Companys fiscal year ended
December 31, 2004 (the Proxy Statement).

# IDENTIFICATION OF
EXECUTIVE OFFICERS

The information required by this item
is incorporated by reference to the information set forth in the section entitled
Executive Officers in Part I, Item 1 of this Annual Report on Form 10-K.

# 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.

35

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|ITEM 12. | Security
Ownership of Certain Beneficial Owners and Management and Related Matters
|-------- | ----------------------------------------------------------------------------------

The information required by this item
is incorporated by reference to the information set forth in the section entitled
Security Ownership of Certain Beneficial Owners and Management, contained in
the Proxy Statement.

|ITEM 13. | Certain
Relationships and Related Transactions
|-------- | ----------------------------------------------

The information required by this item
is incorporated by reference to the information set forth in the section entitled
Certain Transactions, contained in the Proxy Statement.

|ITEM 14. | Principal
Accountant Fees and Services
|-------- | --------------------------------------

The information required by this item
is incorporated by reference to the information set forth in the section entitled
Principal Accountant Fees and Services, contained in the Proxy Statement.

# PART IV

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

# (a)1. Financial
Statements

|Consolidated Financial Statements of Gene Logic Inc.                                                | Page
|--------------------------------------------------------------------------------------------------- | ----
|
|
|
|
|Report of Independent Registered Public Accounting Firm  Internal Control Over Financial Reporting | F-2 
|Report of Independent Registered Public Accounting Firm  Consolidated Financial Statements         | F-3 
|Consolidated Balance Sheets as of December 31, 2004 and 2003                                        | F-4 
|Consolidated Statements of Operations for the three years ended December 31, 2004                   | F-5 
|Consolidated Statements of Stockholders' Equity for the three years ended December 31, 2004         | F-6 
|Consolidated Statements of Cash Flows for the three years ended December 31, 2004                   | F-7 
|Notes 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
|-------------- | -----------------------

|2.1 |  | Agreement
 and Plan of Merger  dated  February  25,  2003,  by and among Gene Logic  Inc.,
 TherImmune  Research                     Corporation,  GLA II Corp., a Delaware
corporation and wholly owned subsidiary of Gene Logic Inc., and Edward J.
                    Krause, III, solely in his capacity as Securityholders'
Representative.(14)
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|3.1 |  | Amended
and Restated Certificate of Incorporation.(1)
|--- |  | -----------------------------------------------------

|3.2 |  | By-Laws, as
      amended and restated.(18)
|--- |  | -------------------------------------------

|4.1 |  | Reference
is made to Exhibits 3.1 and 3.2.
|--- |  | ------------------------------------------

|4.2 |  | Specimen
stock certificate.(1)
|--- |  | ------------------------------

|*10.1 |  | Form
of Indemnity Agreement entered into between Registrant and its directors and officers.(1)
|----- |  | ----------------------------------------------------------------------------------------------

|*10.2 |  | Registrant's
1997 Equity Incentive Plan, as amended (the "Stock Plan").(13)
|----- |  | ---------------------------------------------------------------------------

|*10.3 |  | Form
of Stock Option Agreement under the Stock Plan.(1)
|----- |  | -------------------------------------------------------

|*10.4 |  | Form
of Stock Option Grant Notice.(1)
|----- |  | -------------------------------------

|*10.5 |  | Registrant's
Employee Stock Purchase Plan, as amended, and related offering document.(13)
|----- |  | -----------------------------------------------------------------------------------------

|*10.6 |  | Registrant's
1997 Non-Employee Directors' Stock Option Plan, as amended.(2)
|----- |  | ---------------------------------------------------------------------------

|*10.7 |  | Form
of Nonstatutory Stock Option under the 1997 Non-Employee Directors' Stock Option Plan.(1)
|----- |  | ----------------------------------------------------------------------------------------------

36

---

---



|*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)
|----- |  | ----------------------------------------------------------------------------------------------

|10.22 | a | First
Amendment to Lease, dated July 21, 2000, between Registrant and ARE-708 Quince Orchard,
LLC.(7)
|----- | - | -----------------------------------------------------------------------------------------------------

|*10.45 |  | Amended
and Restated Employment Agreement, dated April 1, 1999, between Registrant and Y. Douglas
Dolginow.(3)
|------ |  | --------------------------------------------------------------------------------------------------------------

|10.50 |  | Agreement,
effective January 1, 2002, between Registrant and Affymetrix, Inc.(10)
|----- |  | ---------------------------------------------------------------------------------

|10.50 | a | Letter Agreement,
      amending Agreement effective January 1, 2002, between Registrant and Affymetrix,
      Inc.(B)
|----- | - | ----------------------------------------------------------------------------------------------------------------------

|*10.55 |  | Executive
Severance Plan, as amended February 2001.(8)
|------ |  | ------------------------------------------------------

|*10.58 |  | Employment
Agreement, dated October 11, 1999, between Registrant and Philip L. Rohrer, Jr.(4)
|------ |  | ---------------------------------------------------------------------------------------------

|*10.63 |  | Employment
Agreement, dated September 1, 1997, between Registrant and Victor M. Markowitz.(5)
|------ |  | ---------------------------------------------------------------------------------------------

|10.67 |  | Lease
Agreement, dated July 21, 2000 between Registrant and ARE-50 West Watkins Mill, LLC.(6)
|----- |  | ---------------------------------------------------------------------------------------------

|*10.75 |  | Employment
Agreement, dated May 30, 2002, between Registrant and F. Dudley Staples, Jr.(11)
|------ |  | -------------------------------------------------------------------------------------------

|*10.77 |  | Employment
Agreement dated April 1, 2003, between Registrant and Stephen J. Trevisan.(14)
|------ |  | -----------------------------------------------------------------------------------------

|10.78 |  | Settlement
      and Nonexclusive License Agreement, dated January 10, 2001, between Registrant
      and Incyte Corporation.(15)(A)
|----- |  | ------------------------------------------------------------------------------------------------------------------------------------

|10.79 |  | Lease
Agreement, dated November 20, 1999, between TherImmune Research Corporation and Rickman
Associates.(15)
|----- |  | -------------------------------------------------------------------------------------------------------------

|10.80 |  | Lease
Agreement,  dated October 26, 2000, between TherImmune  Research  Corporation and
Oxbridge  Development at                     Crown Pointe, L.C.(15)
|----- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------

|10.81 |  | Lease
Agreement,  dated June 22, 2001, between TherImmune Research Corporation and Oxbridge
Development at Crown                     Pointe, L.C., including amendments dated
September 25, 2001 and December 20, 2002.(15)
|----- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.81 | a | Third Amendment,
      to Lease dated June 22, 2001, between TherImmune Research Corporation and
      Oxbridge Development at Crown Pointe, L.C. (19)
|----- | - | ------------------------------------------------------------------------------------------------------------------------------------------------------

|*10.82 |  | Employment
Agreement, dated July 2, 2003, between Registrant and Robert R. Proulx.(16)
|------ |  | --------------------------------------------------------------------------------------

|*10.83 |  | Employment
Agreement, dated November 4, 2004, between Registrant and Dennis A. Rossi.(17)
|------ |  | -----------------------------------------------------------------------------------------

|*10.84 |  | Employment
Agreement, dated November 4, 2004, between Registrant and Joanne M. Smith-Farrell.(17)
|------ |  | -------------------------------------------------------------------------------------------------

|10.85 |  | Asset
Purchase Agreement, dated July 22, 2004, between Registrant and Millennium
Pharmaceuticals, Inc.(17)(B)
|----- |  | -------------------------------------------------------------------------------------------------------------

|10.86 |  | Lease
Agreement, dated July 31, 2004, between Registrant and Thirty-Eight Sidney Street Limited
Partnership.(17)
|----- |  | ----------------------------------------------------------------------------------------------------------------

|10.87 |  | Lease
Agreement, dated October 5, 2004, between Registrant and ARE-Maryland No. 23, LLC.
|----- |  | ----------------------------------------------------------------------------------------

|*10.88 |  | Employment
      Agreement, dated March 10, 2005, between Registrant and V.W. Brinkerhoff,
      III.(20)
|------ |  | ---------------------------------------------------------------------------------------------------------

|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 Proxy Statement with respect to the
               Annual Meeting of Stockholders held on June 6, 2002, filed on April 12,
2002,                and incorporated herein by reference.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(3) | Filed
as an exhibit to Registrants Quarterly Report on Form 10-Q for the
               quarter ended June 30, 1999, filed on August 13, 1999, and incorporated
herein                by reference.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(4) | Filed
as an exhibit to Registrants Annual Report on Form 10-K for the
               fiscal year ended December 31, 1999, filed on March 30, 2000, and
incorporated                herein by reference.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(5) | Filed
as an exhibit to Registrants Quarterly Report on From 10-Q for the
               quarter ended March 31, 2000, filed on May 15, 2000, and incorporated
herein by                reference.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(6) | Filed
as an exhibit to Registrants Quarterly Report on Form 10-Q for the
               quarter ended September 30, 2000, filed on November 14, 2000, and
incorporated                herein by reference.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(7) | Filed
as an exhibit to Registrants Annual Report on Form 10-K for the
               fiscal year ended December 31, 2000, filed on March 29, 2001, and
incorporated                herein by reference.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

37

---

---



|(8) | Filed
as an exhibit to Registrants Quarterly Report on Form 10-Q for the
               quarter ended March 31, 2001, filed on May 11, 2001, and incorporated
herein by                reference.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(9) | Filed
as an exhibit to Registrants Annual Report on Form 10-K for the
               fiscal year ended December 31, 2002, filed on March 19, 2003, and
incorporated                herein by reference.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(10) | Filed
as an exhibit to Registrants Annual Report on Form 10-K/A for the
               fiscal year ended December 31, 2001, filed on July 31, 2003, and
incorporated                herein by reference.
|---- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(11) | Filed
as an exhibit to Registrants Quarterly Report on Form 10-Q for the
               quarter ended June 30, 2002, filed on August 9, 2002, and incorporated
herein by                reference.
|---- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(12) | Filed
as an exhibit to Registrants Annual Report on Form 10-K for the
               fiscal year ended December 31, 2001, filed on March 28, 2002, and
incorporated                herein by reference.
|---- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(13) | Filed
as an exhibit to Registrants Proxy Statement with respect to the
               Annual Meeting of Stockholders held on June 5, 2003, filed on April 25,
2003,                and incorporated herein by reference.
|---- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(14) | Filed
as an exhibit to Registrants Current Report on Form 8-K with respect
               to the Companys acquisition of TherImmune Research Corporation,
filed on                April 3, 2003, and incorporated herein by reference.
|---- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(15) | Filed
as an exhibit to Registrants Quarterly Report on Form 10-Q for the
               quarter ended June 30, 2003, filed on August 14, 2003, and incorporated
herein                by reference.
|---- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(16) | Filed
as an exhibit to Registrants Quarterly Report on Form 10-Q for the
               quarter ended September 30, 2003, filed on November 13, 2003, and
incorporated                herein by reference.
|---- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(17) | Filed
as an exhibit to Registrants Quarterly Report on Form 10-Q for the
               quarter ended September 30, 2004, filed on November 9, 2004, and
incorporated                herein by reference.
|---- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(18) | Filed as an exhibit to Registrants Current Report
on Form 8-K with respect to the Companys amended By-Laws to provide for a non-executive Chairman of the
Board of Directors, filed on November 12, 2004, and incorporated herein by reference.
|---- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(19) | Filed as an exhibit to Registrants Annual
Report on Form 10-K for the fiscal year ended December 31, 2003, filed on March 15, 2004, and incorporated herein by reference.
|---- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(20) | Filed as an exhibit to Registrants Current Report on Form 8-K
with respect to the Companys hiring of V. W. Brinkerhoff, III as Senior Vice President and General Manager,
Gene Logic Laboratories, filed on March 10, 2005, and incorporated herein by reference.
|---- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(A) | Confidential
treatment has been granted with respect to certain portions of this           exhibit
pursuant to an Order Granting Application Under the Securities Exchange           Act of
1934 and Rule 24b-2 Thereunder Respecting Confidential Treatment dated           December
12, 2003.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(B) | Confidential
treatment has been requested with respect to certain portions of           this exhibit.
Omitted portions have been filed separately with the SEC.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------

|(b) | Reports
on Form 8-K
|--- | -------------------

During the three months ended
December 31, 2004, the Company filed the following reports:

The Current Report of Form 8-K, filed
October 22, 2004, with respect to the Companys financial results for the three
months ended September 30, 2004.

The Current Report of Form 8-K, filed
November 12, 2004, with respect to the Companys amended Bylaws to provide for a
non-executive Chairman of the Board of Directors and the election of J. Stark Thompson,
Ph.D., to serve as the non-executive Chairman of the Board of Directors.

The Current Report of Form 8-K, filed
December 1, 2004, with respect to the Companys appointment of Frank L. Douglas,
M.D., Ph.D., to its Board of Directors.

The Current Report of Form 8-K, filed
December 22, 2004, with respect to the Companys amended Non-Employee Directors
Compensation and Stock Option Plans.

The Current Report of Form 8-K, filed
December 29, 2004, with respect to the Companys amended supplier agreement with
Affymetrix, Inc.

38

---

---



# 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 16th day of March, 2005.

| |  | 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
(Mark D. Gessler) | Chief Executive Officer,
President and Director(Principal Executive Officer) | March
      16, 2005
|--------------------------------------------------- | ---------------------------------------------------------------------------- | --------------------

|/s/ PHILIP L. ROHRER, JR.
(Philip L. Rohrer, Jr.) | Chief Financial Officer(Principal Financial and
Accounting Officer) | March
      16, 2005
|--------------------------------------------------------------- | ------------------------------------------------------------------- | --------------------

|/s/ JULES BLAKE
(Jules Blake, Ph.D.) | Director | March
      16, 2005
|-------------------------------------------------- | -------- | --------------------

|/s/ MICHAEL J. BRENNAN
(Michael J. Brennan, M.D., Ph.D.) | Director | March
      16, 2005
|---------------------------------------------------------------------- | -------- | --------------------

|/s/ CHARLES L. DIMMLER, III
(Charles L. Dimmler, III) | Director | March
      16, 2005
|------------------------------------------------------------------- | -------- | --------------------

|/s/ FRANK L. DOUGLAS
(Frank L. Douglas, M.D, Ph.D.) | Director | March
      16, 2005
|----------------------------------------------------------------- | -------- | --------------------

|/s/ G. ANTHONY GORRY
(G. Anthony Gorry, Ph.D.) | Director | March
      16, 2005
|------------------------------------------------------------ | -------- | --------------------

|/s/ J. STARK THOMPSON
(J. Stark Thompson, Ph.D.) | Chairman of the Board | March
      16, 2005
|-------------------------------------------------------------- | --------------------- | --------------------

39

---

---



# Gene Logic Inc.
 Index to Consolidated Financial Statements

|                                                                                                    | 
|--------------------------------------------------------------------------------------------------- | 
|                                                                                                    | 
|Report of
Independent Registered Public Accounting Firm  Internal Control Over Financial Reporting | 
|Report of Independent Registered Public Accounting Firm   Consolidated Financial Statements        | 
|Consolidated Balance Sheets as of December 31, 2004 and 2003                                        | 
|Consolidated Statements of Operations for the three years ended December 31, 2004                   | 
|Consolidated Statements of Stockholders Equity for the three years ended December 31, 2004         | 
|Consolidated Statements of Cash Flows for the three years ended December 31, 2004                   | 
|Notes to Consolidated Financial Statements                                                          | 

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 in the Index at Item 9A, that
Gene Logic Inc. maintained effective internal control over financial reporting as of
December 31, 2004, 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, 2004, 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, 2004, 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, 2004 and 2003, and the related consolidated statements
  of operations, stockholders equity, and cash flows for each of the three
  years in the period ended December 31, 2004, and our report dated March 11,
  2005 expressed an unqualified opinion thereon.

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

Baltimore, Maryland
        March 11, 2005

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, 2004 and 2003, and the related consolidated statements of operations,
stockholders equity, and cash flows for each of the three years in the period ended
December 31, 2004. 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, 2004 and
2003, and the consolidated results of its operations and its cash flows for each of the
three years in the period ended December 31, 2004 in conformity with U.S. generally
accepted accounting principles. Also, in our opinion, the related financial statement
schedule, when considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.

We
  also have audited, in accordance with the standards of the Public Company Accounting
  Oversight Board (United States), the effectiveness of Gene Logic Inc.s
  internal control over financial reporting as of December 31, 2004, 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 11, 2005 expressed an unqualified opinion thereon.

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

Baltimore, Maryland
March 11, 2005

F-3



---

---

# Gene Logic Inc.

# Consolidated Balance Sheets
as of December 31, 2004 and 2003
(in thousands, except share data)

|                                                                                      |  |  |      |          |   |   |          |  
|------------------------------------------------------------------------------------- |  |  | ---- | -------- | - | - | -------- | -
|                                                                                      |  |  | 2004 | 2003    
|                                                                                      |  |  |      |         
|ASSETS                                                                               
|Current assets:                                                                       |  | 
|Cash and cash equivalents                                                             |  |  | $    | 53,237   |   | $ | 48,718   |  
|Marketable securities available-for-sale                                              |  |  |      | 49,678   |   |   | 63,105   |  
|Accounts receivable, net of allowance of $436 and $57 in 2004 and 2003, respectively  |  |  |      | 4,953    |   |   | 8,484    |  
|Unbilled services                                                                     |  |  |      | 6,406    |   |   | 4,745    |  
|Inventory, net                                                                        |  |  |      | 1,683    |   |   | 4,980    |  
|Prepaid expenses                                                                      |  |  |      | 2,210    |   |   | 1,966    |  
|Other current assets                                                                  |  |  |      | 2,185    |   |   | 1,480    |  
|                                                                                      |  |  |      |          |   |  
|Total current assets                                                                  |  |  |      | 120,352  |   |   | 133,478  |  
|Property and equipment, net                                                           |  |  |      | 23,034   |   |   | 23,911   |  
|Long-term investments                                                                 |  |  |      | 4,239    |   |   | 4,239    |  
|Goodwill                                                                              |  |  |      | 45,707   |   |   | 45,707   |  
|Intangibles, net                                                                      |  |  |      | 13,695   |   |   | 19,950   |  
|Other assets                                                                          |  |  |      | 54       |   |   | 81       |  
|                                                                                      |  |  |      |          |   |  
|Total assets                                                                          |  |  | $    | 207,081  |   | $ | 227,366  |  
|                                                                                      |  |  |      |          |   |  
|LIABILITIES AND STOCKHOLDERS EQUITY                                                 
|Current liabilities:                                                                  |  | 
|Accounts payable                                                                      |  |  | $    | 7,096    |   | $ | 6,676    |  
|Accrued expenses                                                                      |  |  |      | 6,779    |   |   | 6,541    |  
|Current portion of capital lease obligations                                          |  |  |      | 136      |   |   | 124      |  
|Current portion of long-term debt                                                     |  |  |      | 494      |   |   | 492      |  
|Deferred revenue                                                                      |  |  |      | 9,788    |   |   | 8,630    |  
|                                                                                      |  |  |      |          |   |  
|Total current liabilities                                                             |  |  |      | 24,293   |   |   | 22,463   |  
|Deferred revenue                                                                      |  |  |      | 3,595    |   |   | 2,346    |  
|Capital lease obligations, net of current portion                                     |  |  |      | 204      |   |   | 340      |  
|Long-term debt, net of current portion                                                |  |  |      | 174      |   |   | 218      |  
|Acquired technologies payable                                                         |  |  |      | 3,347    |   |   |         |  
|Other noncurrent liabilities                                                          |  |  |      | 2,640    |   |   | 2,410    |  
|                                                                                      |  |  |      |          |   |  
|Total liabilities                                                                     |  |  |      | 34,253   |   |   | 27,777   |  
|                                                                                      |  |  |      |          |   |  
|Commitments and contingencies                                                         |  |  |      |         |   |   |         |  
|Stockholders equity:                                                                 |  | 
|Preferred stock, $.01 par value; 10,000,000 shares authorized; and no shares issued   |  |  |      |          |   |   |          |  
|and outstanding as of December 31, 2004 and 2003                                      |  |  |      |         |   |   |         |  
|Common stock, $.01 par value; 60,000,000 shares authorized; 31,654,413 and 31,131,198 |  | 
|shares issued and outstanding as of December 31, 2004 and 2003, respectively          |  |  |      | 317      |   |   | 311      |  
|Additional paid-in capital                                                            |  |  |      | 385,313  |   |   | 383,377  |  
|Accumulated other comprehensive (loss) income                                         |  |  |      | (136     | ) |   | 47       |  
|Accumulated deficit                                                                   |  |  |      | (212,666 | ) |   | (184,146 | )
|                                                                                      |  |  |      |          |   |  
|Total stockholders equity                                                            |  |  |      | 172,828  |   |   | 199,589  |  
|                                                                                      |  |  |      |          |   |  
|Total liabilities and stockholders equity                                            |  |  | $    | 207,081  |   | $ | 227,366  |  
|                                                                                      |  |  |      |          |   |  

See accompanying notes.

F-4



---

---

# Gene Logic Inc.

# Consolidated Statements of Operations
for the Years Ended December 31, 2004, 2003 and 2002
(in thousands, except per share data)

|                                                              |  |  |      |         |      |   |         |   |   |         |  
|------------------------------------------------------------- |  |  | ---- | ------- | ---- | - | ------- | - | - | ------- | -
|                                                              |  |  | 2004 |         | 2003 |   | 2002   
|                                                              |  |  |      |         |      |   |        
|Revenue:                                                      |  |  |      |         |      |   |         |   |   |         |  
|Genomics and toxicogenomics services                          |  |  | $    | 52,171  |      | $ | 51,960  |   | $ | 54,848  |  
|Preclinical contract research services                        |  |  |      | 23,766  |      |   | 17,559  |   |   |        |  
|                                                              |  |  |      |         |      |   |         |  
|Total revenue                                                 |  |  |      | 75,937  |      |   | 69,519  |   |   | 54,848  |  
|Expenses:                                                     |  | 
|Cost of preclinical contract research services                |  |  |      | 24,080  |      |   | 15,399  |   |   |        |  
|Database production                                           |  |  |      | 44,675  |      |   | 50,067  |   |   | 57,941  |  
|Research and development                                      |  |  |      | 2,317   |      |   | 2,091   |   |   | 2,367   |  
|Selling, general and administrative                           |  |  |      | 25,676  |      |   | 22,198  |   |   | 19,734  |  
|Purchased research and development                            |  |  |      | 8,817   |      |   |        |   |   |        |  
|                                                              |  |  |      |         |      |   |         |  
|Total expenses                                                |  |  |      | 105,565 |      |   | 89,755  |   |   | 80,042  |  
|                                                              |  |  |      |         |      |   |         |  
|Loss from operations                                          |  |  |      | (29,628 | )    |   | (20,236 | ) |   | (25,194 | )
|Interest (income), net                                        |  |  |      | (1,395  | )    |   | (1,652  | ) |   | (3,139  | )
|Other (income) expense                                        |  |  |      |        |      |   | (327    | ) |   | (250    | )
|Write-down of equity investments                              |  |  |      |        |      |   | 4,268   |   |   | 753     |  
|                                                              |  |  |      |         |      |   |         |  
|                                                              |  |  |      |         |      |   |         |  
|Net loss before income tax expense                            |  |  |      | (28,233 | )    |   | (22,525 | ) |   | (22,558 | )
|Income tax expense                                            |  |  |      | 287     |      |   | 2,246   |   |   | 1,492   |  
|                                                              |  |  |      |         |      |   |         |  
|Net loss                                                      |  |  | $    | (28,520 | )    | $ | (24,771 | ) | $ | (24,050 | )
|                                                              |  |  |      |         |      |   |         |  
|                                                              |  |  |      |         |      |   |         |  
|Basic and diluted net loss per share                          |  |  | $    | (0.91   | )    | $ | (0.82   | ) | $ | (0.89   | )
|                                                              |  |  |      |         |      |   |         |  
|                                                              |  |  |      |         |      |   |         |  
|Shares used in computing basic and diluted net loss per share |  |  |      | 31,493  |      |   | 30,112  |   |   | 26,948  |  
|                                                              |  |  |      |         |      |   |         |  

See accompanying notes.

F-5

---

---

Gene Logic Inc.

Consolidated Statements
 of Stockholders Equity  
for the Years Ended December 31, 2002, 2003 and 2004
(in thousands, except number of shares)

|                                               |  |  |                      |            |            |             |         |  |               |         |             |   |               |   |   |          |   |   |         |  
|---------------------------------------------- |  |  | -------------------- | ---------- | ---------- | ----------- | ------- |  | ------------- | ------- | ----------- | - | ------------- | - | - | -------- | - | - | ------- | -
|                                               |  |  | Stockholders Equity
|                                               |  |  | Common Stock         |            |            | Accumulated |         |  |               |         |             |   |              
|                                               |  |  |                      |            | Additional |             | Other   |  |               |         |             |   |               |  
|                                               |  |  | Number               |            | Par        |             | Paid-In |  | Comprehensive |         | Accumulated |   | Comprehensive |  
|                                               |  |  | of Shares            |            | Value      |             | Capital |  | Income (Loss) |         | Deficit     |   | Loss          |  
|Balance at January 1, 2002                     |  |  |                      | 26,767,837 |            | $           | 268     |  | $             | 361,067 |             | $ | 17            |   | $ | (135,325 | ) |   |         |  
|Issuance of common stock in connection with    |  | 
|exercise of stock options                      |  |  |                      | 149,873    |            |             | 2       |  |               | 881     |             |   |              |   |   |         |  
|Issuance of common stock in connection with    |  |  |                      |            |            |             |         |  |               |         |             |   |               |   |   |          |   |   |         |  
|Employee Stock Purchase Plan                   |  |  |                      | 138,777    |            |             | 1       |  |               | 1,346   |             |   |              |   |   |         |   |   |         |  
|Net change in unrealized gains from marketable |  | 
|securities                                     |  |  |                      |           |            |             |        |  |               |        |             |   | 231           |   |   |         |   | $ | 231     |  
|Net loss                                       |  |  |                      |           |            |             |        |  |               |        |             |   |              |   |   | (24,050  | ) |   | (24,050 | )
|                                               |  |  |                      |            |            |             |         |  |               |         |             |  
|Comprehensive loss                             |  |  |                      |           |            |             |        |  |               |        |             |   |              |   |   |         |   | $ | (23,819 | )
|                                               |  |  |                      |            |            |             |         |  |               |         |             |  
|Balance at December 31, 2002                   |  |  |                      | 27,056,487 |            |             | 271     |  |               | 363,294 |             |   | 248           |   |   | (159,375 | ) |   |         |  
|Issuance of common stock in connection with    |  | 
|exercise of stock options                      |  |  |                      | 28,425     |            |             |        |  |               | 118     |             |   |              |   |   |         |  
|Issuance of common stock in connection with    |  |  |                      |            |            |             |         |  |               |         |             |   |               |   |   |          |   |   |         |  
|Employee Stock Purchase Plan                   |  |  |                      | 119,072    |            |             | 1       |  |               | 604     |             |   |              |   |   |         |   |   |         |  
|Issuance of common stock in connection with    |  |  |                      |            |            |             |         |  |               |         |             |   |               |   |   |          |   |   |         |  
|TherImmune acquisition                         |  |  |                      | 3,927,214  |            |             | 39      |  |               | 19,361  |             |   |              |   |   |         |  
|Net change in unrealized gains from marketable |  |  |                      |            |            |             |         |  |               |         |             |   |               |   |   |          |   |   |         |  
|securities                                     |  |  |                      |           |            |             |        |  |               |        |             |   | (201          | ) |   |         |   | $ | (201    | )
|Net loss                                       |  |  |                      |           |            |             |        |  |               |        |             |   |              |   |   | (24,771  | ) |   | (24,771 | )
|                                               |  |  |                      |            |            |             |        
|Comprehensive loss                             |  |  |                      |           |            |             |        |  |               |        |             |   |              |   |   |         |   | $ | (24,972 | )
|                                               |  |  |                      |            |            |             |         |  |               |         |             |  
|Balance at December 31, 2003                   |  |  |                      | 31,131,198 |            |             | 311     |  |               | 383,377 |             |   | 47            |   |   | (184,146 | )
|Issuance of common stock in connection with    |  |  |                      |            |            |             |         |  |               |         |             |   |               |   |   |          |   |   |         |  
|exercise of stock options                      |  |  |                      | 255,479    |            |             | 3       |  |               | 948     |             |   |              |   |   |         |   |   |         |  
|Issuance of common stock in connection with    |  | 
|Employee Stock Purchase Plan                   |  |  |                      | 120,215    |            |             | 1       |  |               | 445     |             |   |              |   |   |         |  
|Issuance of common stock in connection with    |  | 
|the Horizon technologies acquisition           |  |  |                      | 147,521    |            |             | 2       |  |               | 543     |             |   |              |   |   |         |   |   |         |  
|Net change in unrealized gains from marketable |  | 
|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 | ) |   |         |  
|                                               |  |  |                      |            |            |             |         |  |               |         |            
|                                               |  | 

See accompanying notes.

F-6

---

---

Gene Logic Inc.

Consolidated Statements of Cash Flows  
for the Years Ended December 31, 2004, 2003 and 2002
(in thousands)

|                                                                                                                                                                                              |  |  |      |         |      |   |          |   |   |         |  
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  |  | ---- | ------- | ---- | - | -------- | - | - | ------- | -
|                                                                                                                                                                                              |  |  | 2004 |         | 2003 |   | 2002    
|Cash flows from operating activities:                                                                                                                                                         |  |  |      |         |      |   |          |   |   |         |  
|Net loss                                                                                                                                                                                      |  |  | $    | (28,520 | )    | $ | (24,771  | ) | $ | (24,050 | )
|Adjustments to reconcile net loss to net cash flows from operating activities:                                                                                                                |  | 
|Depreciation and amortization                                                                                                                                                                 |  |  |      | 16,626  |      |   | 16,778   |   |   | 13,535  |  
|Non-cash purchased research and development                                                                                                                                                   |  |  |      | 7,971   |      |   |         |   |   |        |  
|Gain from the sale of equity investment                                                                                                                                                       |  |  |      |        |      |   |         |   |   | (250    | )
|Write-down of equity investments                                                                                                                                                              |  |  |      |        |      |   | 4,268    |   |   | 753     |  
|Loss on abandonment of patents                                                                                                                                                                |  |  |      | 275     |      |   | 257      |   |   | 1,147   |  
|Loss on disposal of property and equipment                                                                                                                                                    |  |  |      | 335     |      |   | 56       |   |   | 71      |  
|Changes in operating assets and liabilities:                                                                                                                                                  |  | 
|Accounts receivable and unbilled services                                                                                                                                                     |  |  |      | 1,870   |      |   | (2,532   | ) |   | (2,333  | )
|Inventory                                                                                                                                                                                     |  |  |      | 3,297   |      |   | 3,956    |   |   | (2,839  | )
|Prepaids and other assets                                                                                                                                                                     |  |  |      | (930    | )    |   | (150     | ) |   | 3,140   |  
|Accounts payable                                                                                                                                                                              |  |  |      | 420     |      |   | (5,056   | ) |   | (254    | )
|Accrued expenses and other noncurrent liabilities                                                                                                                                             |  |  |      | 468     |      |   | 1,676    |   |   | 213     |  
|Deferred revenue                                                                                                                                                                              |  |  |      | (2,092  | )    |   | (2,282   | ) |   | (9,249  | )
|                                                                                                                                                                                              |  |  |      |         |      |  
|Net cash flows from operating activities                                                                                                                                                      |  |  |      | (280    | )    |   | (7,800   | ) |   | (20,116 | )
|                                                                                                                                                                                              |  |  |      |         |      |  
|Cash flows from investing activities:                                                                                                                                                         |  | 
|Purchases of property and equipment                                                                                                                                                           |  |  |      | (5,211  | )    |   | (4,157   | ) |   | (1,944  | )
|Sale of equity investment                                                                                                                                                                     |  |  |      |        |      |   |         |   |   | 1,250   |  
|Purchases of licenses and patent costs                                                                                                                                                        |  |  |      | (569    | )    |   | (710     | ) |   | (1,810  | )
|Software development costs                                                                                                                                                                    |  |  |      | (3,327  | )    |   | (6,596   | ) |   | (7,141  | )
|Database upgrade costs                                                                                                                                                                        |  |  |      | (569    | )    |   |         |   |   | (3,885  | )
|Repayments of notes receivable from employees                                                                                                                                                 |  |  |      |        |      |   | 37       |   |   | 57      |  
|Cash paid to acquire TherImmune, net of cash acquired                                                                                                                                         |  |  |      |        |      |   | (30,433  | ) |   |        |  
|Proceeds from sale and maturity of marketable securities available-for-sale                                                                                                                   |  |  |      | 83,372  |      |   | 140,219  |   |   | 79,870  |  
|Purchase of marketable securities available-for sale                                                                                                                                          |  |  |      | (70,128 | )    |   | (143,380 | ) |   | (70,239 | )
|                                                                                                                                                                                              |  |  |      |         |      |  
|Net cash flows from investing activities                                                                                                                                                      |  |  |      | 3,568   |      |   | (45,020  | ) |   | (3,842  | )
|                                                                                                                                                                                              |  |  |      |         |      |  
|Cash flows from financing activities:                                                                                                                                                         |  | 
|Proceeds from issuance of common stock to employees                                                                                                                                           |  |  |      | 1,397   |      |   | 723      |   |   | 2,230   |  
|Proceeds from issuance of note payable                                                                                                                                                        |  |  |      |        |      |   |         |   |   | 450     |  
|Cash used to repay TherImmune debt                                                                                                                                                            |  |  |      |        |      |   | (6,017   | ) |   |        |  
|Repayments of capital lease obligations and equipment loans                                                                                                                                   |  |  |      | (166    | )    |   | (125     | ) |   | (38     | )
|                                                                                                                                                                                              |  |  |      |         |      |  
|Net cash flows from financing activities                                                                                                                                                      |  |  |      | 1,231   |      |   | (5,419   | ) |   | 2,642   |  
|                                                                                                                                                                                              |  |  |      |         |      |  
|Net increase (decrease) in cash and cash equivalents                                                                                                                                          |  |  |      | 4,519   |      |   | (58,239  | ) |   | (21,316 | )
|Cash and cash equivalents, beginning of period                                                                                                                                                |  |  |      | 48,718  |      |   | 106,957  |   |   | 128,273 |  
|                                                                                                                                                                                              |  |  |      |         |      |  
|Cash and cash equivalents, end of period                                                                                                                                                      |  |  | $    | 53,237  |      | $ | 48,718   |   | $ | 106,957 |  
|                                                                                                                                                                                              |  |  |      |         |      |  
|Supplemental disclosure:                                                                                                                                                                      |  | 
|Taxes paid                                                                                                                                                                                    |  |  | $    | 569     |      | $ | 2,209    |   | $ | 1,316   |  
|                                                                                                                                                                                              |  |  |      |         |      |  
|Interest paid                                                                                                                                                                                 |  |  | $    | 49      |      | $ | 48       |   | $ | 16      |  
|                                                                                                                                                                                              |  |  |      |         |      |  
|Non-cash transactions:                                                                                                                                                                        |  | 
|In connection with the acquisition of the Horizon technologies:                                                                                                                               |  | 
|Purchase of research and development and purchase of laboratory equipment, in exchange
for issuance of common stock, acquired technology payable and a ToxExpress System subscription license |  |  | $    | 7,971   |      | $ |         |   | $ |        |  
|                                                                                                                                                                                              |  |  |      |         |      |  
|Issuance of common stock in TherImmune Research Corporation acquisition                                                                                                                       |  |  | $    |        |      | $ | 19,400   |   | $ |        |  
|                                                                                                                                                                                              |  |  |      |         |      |  
|Equity investments received as payments for BioExpress and/or ToxExpress   subscriptions                                                                                                      |  |  | $    |        |      | $ | 3,186    |   | $ | 1,000   |  
|                                                                                                                                                                                              |  |  |      |         |      |  

See accompanying notes.

F-7

---

---

# Gene Logic Inc.

# Notes to Consolidated
Financial StatementsDecember 31, 2004, 2003 and 2002
(in thousands, except share and per share data)

# Note 1 
Organization and summary of significant accounting policies

Description of Business

Gene
  Logic Inc., including its wholly owned subsidiaries, Gene Logic Laboratories
  Inc. (formerly TherImmune Research Corporation), Gene Logic Ltd. (our United
  Kingdom subsidiary) and Gene Logic K.K. (our Japan subsidiary), (collectively
  Gene Logic or the Company), provides drug discovery
  and development services to pharmaceutical and biotechnology companies worldwide
  and U.S. Government entities. From April 1, 2003 to December 31, 2004, the Companys
  services were organized into two business segments: genomics and toxicogenomics
  services and preclinical contract research services. The genomics and toxicogenomics
  services business consists of proprietary gene expression and toxicogenomics
  databases, software tools, various toxicogenomics reports and data generation
  and professional services for use in discovering and prioritizing drug targets,
  identifying biomarkers, and predicting toxicity and providing insights into
  efficacy of specific compounds for customers. The preclinical contract research
  services business, operated through the Companys wholly owned subsidiary,
  Gene Logic Laboratories Inc., consists of in-vivo animal testing research
  studies and related laboratory services, and to a lesser extent, Phase I clinical
  trial services, used to assess the safety and pharmacologic effects of compounds
  for customers. During 2004, the Company acquired certain technologies (the Horizon
  technologies) (see Note 3), which are being developed to build a new drug
  repositioning and selection services, to assist customers in (i) identifying
  alternative indications for failed, stalled or deprioritized compounds, (ii)
  expanding indications for currently marketed drugs, and (iii) prioritizing and
  identifying indications for compounds entering preclinical development.

The
combination of the Companys genomics and toxicogenomics services and preclinical
contract research services may sometimes be referred to as its historical
business.

Basis of Presentation and
Principles of Consolidation

On
April 1, 2003, TherImmune Research Corporation (TherImmune) was merged into
Gene Logics wholly owned subsidiary, GLA II Corp., renamed Gene Logic Laboratories
Inc. (Gene Logic Labs). The acquisition of TherImmune has been accounted for
under the purchase method of accounting, and consolidated financial statements herein
reflect the inclusion of Gene Logic Labs operating results since the acquisition
date. As part of the Companys strategy for international expansion, during the first
quarter of 2004, Gene Logic Ltd. was formed in the United Kingdom to provide sales support
and customer service support in Europe, and during the third quarter of 2004, Gene Logic
K.K. was formed in Japan to provide customer service support in Japan. All material
intercompany accounts and transactions have been eliminated in consolidation.

Use of Estimates

The
preparation of consolidated financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the consolidated financial statements and
the reported amounts of revenue and expenses during the reporting period. Actual results
could differ from those estimates.

Comprehensive Loss

The
Company accounts for comprehensive loss as prescribed by Statement of Financial Accounting
Standards No. 130, Reporting Comprehensive Income. Comprehensive loss is the
total net loss plus all changes in equity during the period except those changes resulting
from investment by owners and distribution to owners. Total comprehensive loss was
$28,703, $24,972 and $23,819 for the years ended December 31, 2004, 2003 and 2002,
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.

F-8

---

---

Cash and Cash Equivalents

Cash
and cash equivalents are defined as liquid investments with maturities of 90 days or less
when purchased. All other investments are reported as marketable securities
available-for-sale. Cash and cash equivalents as of December 31 are comprised of:

|                   | 2004 |  | 2003
|------------------ | ---- |  | ----
|Cash               |      |  | $   
|Money market funds |      |  |     
|Commercial paper   |      |  |     
|                   |      |  |     
|Total              |      |  | $   
|                   |      |  |     

Marketable Securities
Available-for-Sale

All
marketable securities are classified as available-for-sale. Available-for-sale securities
are carried at fair value, with unrealized gains and losses reported as accumulated other
comprehensive (loss) income 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 2004 and 2002, realized
gains and/or losses resulting from the sale of marketable securities were immaterial. In
2003, marketable securities were sold for total proceeds of $65,114, resulting in net
realized gains of $327.

As
of December 31, 2004, the Companys investment portfolio consisted of commercial
paper, corporate bonds and mortgage-backed securities of U.S. Government agencies. All
marketable securities had original maturities greater than 90 days, but less than two
years. All investments in corporate bonds mature in 2005. All marketable securities with a
gross unrealized loss as of December 31, 2004 have been in an unrealized loss position for
less than 12 months. The Company reviews marketable securities for impairment based on
criteria that include the extent to which the investments carrying value exceeds its
related market value, the duration of the market decline, the Companys ability to
hold the investment to recovery and the financial strength and specific prospects of the
issuer of the security. As of December 31, 2004, all of the Companys investments
were classified as current because the Company may not hold its investments until maturity
in order to take advantage of market conditions. Marketable securities available-for-sale
as of December 31 are comprised of:

|                                                   | 2004 | 2003
|-------------------------------------------------- | ---- | ----
|
|
|
|Commercial paper                                   |      |     
|Corporate bonds                                    |      |     
|U.S. Government     mortgage-backed     securities |      |     
|                                                   |      |     
|Total                                              |      |     
|                                                   |      |     

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 and historical bad debt trends. Actual collection experience
has not varied significantly from the Companys estimates, due primarily to
collection policies and the financial strength of the Companys customers.
Receivables that are ultimately deemed uncollectible are written-off as a reduction of
accounts receivable and the allowance for doubtful accounts.

F-9

---

---

Inventory

Inventory
is stated at the lower of cost or market. Cost for microarrays and laboratory reagents is
determined using the first-in, first-out method; 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:

|                              | 2004 |  | 2003
|----------------------------- | ---- |  | ----
|
|Microarrays                   |      |  | $   
|Laboratory reagents           |      |  |     
|Tissue samples                |      |  |     
|                              |      |  |     
|                              |      |  |     
|Less  tissue sample reserves |      |  |     
|                              |      |  |     
|Inventory, net                |      |  | $   
|                              |      |  |     

Property and Equipment

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

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

Long-Term Investments

The
Company has made equity investments in companies whose businesses may be complementary to
the Companys business. All of the Companys current equity investments are
accounted for under the cost method of accounting, as the Company holds less than 20% of
the voting stock outstanding under such arrangements and does not exert significant
influence over these companies.

Goodwill

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

The
  Company adopted the provisions of Financial Accounting Standards Board Statement
  No. 142, Goodwill and Other Intangible Assets (SFAS 142)
  effective January 1, 2002 and, as a result, discontinued the amortization of
  goodwill. As a result, since January 1, 2002, no amortization has been recorded.
  Based on the initial impairment test performed as of January 1, 2002 and the
  subsequent annual impairment tests as of October 1 of each year, no impairment
  existed in the carrying value of goodwill. The goodwill impairment test involves
  a two-step approach. Under the first step, the Company determines the fair value
  of each reporting unit to which goodwill has been assigned. The Company then
  compares the fair value of each reporting unit to its carrying value, including
  goodwill. The Company estimates the fair value of each reporting unit by estimating
  the present value of the reporting units future cash flows. If the fair
  value exceeds the carrying value, no impairment loss is recognized. If the carrying
  value exceeds the fair value, the goodwill of the reporting unit is considered
  potentially impaired and the second step is completed in order to measure the
  impairment loss. Under the second step, the Company calculates the implied fair
  value of goodwill by deducting the fair value of all tangible and intangible
  net assets, including any unrecognized intangible assets, of the reporting unit
  from the fair value of the reporting unit as determined in the first step. The
  Company then compares the implied fair value of goodwill to the carrying value
  of goodwill. If the implied fair value of goodwill is less than the carrying
  value of goodwill, the Company recognizes an impairment loss equal to the difference.

Intangibles and Other
Assets

Intangibles
and other assets consist primarily of licenses, patent costs, software development costs,
customer relationships and database upgrade costs.

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

F-10

---

---

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 $275,
$257 and $1,147 during 2004, 2003 and 2002, respectively, after determining that the
technologies underlying such patents and applications would no longer be utilized in the
Companys business.

In
accordance with the provisions of the Financial Accounting Standards Board Statement No.
86, Accounting for the Costs of Computer Software to be Sold, Leased or Otherwise
Marketed, the Company has capitalized certain software development costs incurred in
developing software upon the demonstration of technological feasibility. The Company
ceases capitalizing such costs when the software is available for general release to our
customers. Software development costs are being amortized over their expected useful life
of three years, commencing upon release of the software or upgrades.

In
connection with the TherImmune acquisition, the Company recorded the estimated fair value
of acquired customer relationships as an intangible asset, and such intangible asset is
being amortized on a straight-line basis over 2 years, which was the Companys
estimate of the aggregate expected term of its customer relationships at the date of
acquisition.

Database
upgrade costs include purchases of data to integrate into the Companys gene
expression databases and upgrades of existing gene expression data utilizing
Affymetrixs most recent microarrays. Costs capitalized from upgrades are primarily
microarrays and related reagents. These costs are capitalized and amortized over their
expected useful life of two years, commencing upon release of the update.

Impairment of Long-Lived
Assets

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

Research and Development

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

Database Production

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

Revenue Recognition

Genomics
and toxicogenomics services revenue consists primarily of fees earned under subscription
agreements for all or parts of the Companys gene expression reference databases, the
BioExpress System and ToxExpress System. In addition, the Company derives a smaller, but
growing, percentage of revenue from providing other services, including various
toxicogenomics reports and data generation and professional services. Each of the
subscription agreements with our BioExpress System and ToxExpress System customers is
typically for a specific multi-year term. The Companys revenue from such
subscription agreements is recognized ratably over the period during which the customer
has access to the BioExpress System and/or ToxExpress System databases. Such agreements
provide for termination in the event of a breach of the agreement by either party or a
bankruptcy or insolvency of either party. Certain subscription agreements include a right
of early termination (which, in some instances, is subject to conditions) by the customer,
without penalty, on a specified date prior to the normal expiration of the term. If an
agreement has a right of early termination, revenue is recognized ratably over the
subscription term up to the possible date of early termination, based on subscription fees
earned under the agreement through the possible date of early termination. If such early
termination does not occur, the balance of the subscription fees earned under the
agreement is recognized as revenue ratably over the remaining term of the agreement.
Revenue from other services is recognized when the reports and/or data have been delivered
or when the services have been performed. For 2005, revenue recorded from our Japanese
customers may be impacted by fluctuations in foreign currency exchange rates.

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

F-11

---

---

Revenue
recognized for multiple element contracts is allocated to each element of the arrangement
based on the relative fair value of the element. The determination of fair value of each
element is based on the Companys analysis of objective evidence from comparable
sales of the individual element. If the Company is unable to determine evidence of fair
value for any undelivered element of the arrangement, revenue for the arrangement is
deferred and recognized ratably over the longest performance period of the elements.

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.

Income Taxes

The
Company accounts for income taxes under the provisions of Statement of Financial
Accounting Standards No. 109, Accounting for Income Taxes (SFAS
109). Under the asset and liability method of SFAS 109, deferred tax assets and
liabilities are recognized for the future tax consequences attributable to differences
between the financial statement carrying amounts of existing assets and liabilities and
their respective tax bases and net operating loss and tax credit carryforwards. Deferred
tax assets and liabilities are measured using enacted tax rates expected to apply to
taxable income in the years in which those temporary differences are expected to be
recovered or settled. Under SFAS 109, the effect on deferred tax assets and liabilities of
a change in tax rates is recognized in operations in the period that includes the
enactment date.

Basic and Diluted Net
Loss Per Share

Net
loss per share is computed using the weighted average number of shares of Common Stock
outstanding. Common equivalent shares from all outstanding stock options and warrants are
excluded from the computation, as their effect is antidilutive.

Stock-Based Compensation
Plans

At
December 31, 2004, the Company has three stock-based compensation plans: 1997 Equity
Incentive Plan (the Stock Plan), 1997 Non-Employee Directors Stock
Option Plan (the Directors Plan) and Employee Stock Purchase Plan (the
ESPP). The Company accounts for these plans under the recognition and
measurement principles of Accounting Principles Board Opinion No. 25, Accounting for
Stock Issued to Employees (APB 25), and related interpretations. Under
APB 25, compensation expense for grants that are compensatory are recorded over the
vesting period only to the extent that the fair value of the underlying stock on the date
of grant exceeds the exercise or acquisition price of the stock or stock-based award.
Stock options granted under the Companys Stock Plan and Directors Plan are
considered compensatory and are granted with an exercise price equal to the fair value on
the grant date. Common stock issued under the ESPP is considered non-compensatory under
APB 25 and is purchased at 85% of the lesser of the market price of the shares at the time
of purchase or the market price on the beginning date of an offering, as defined under the
plan (or, if later, the date during the offering when the employee was first eligible to
participate).

The
following table illustrates the effect on net loss and loss per share as if the Company
had applied the fair value recognition provisions of Statement of Financial Accounting
Standards No. 123, Accounting for Stock-Based Compensation (SFAS
123), to stock-based employee compensation for the years ended December 31:

|                                                                            | 2004 |  | 2003 |         | 2002
|--------------------------------------------------------------------------- | ---- |  | ---- | ------- | ----
|                                                                            |      |  |      |         |     
|Net loss, as reported                                                       |      |  | $    | (28,520 | )   
|Add: Stock-based employee compensation expense included in reportednet loss |      |  |      |        |     
|Deduct: Stock-based employee compensation expense determined under         
|fair value based method for all awards                                      |      |  |      | (2,513  | )   
|                                                                            |      |  |      |         |     
|Pro forma net loss                                                          |      |  | $    | (31,033 | )   
|                                                                            |      |  |      |         |     
|Basic and diluted net loss per share:                                      
|As reported                                                                 |      |  | $    | (0.91   | )   
|Pro forma                                                                   |      |  | $    | (0.99   | )   

F-12

---

---

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, 2004, 2003 and 2002, with the
following assumptions:

|                        | 2004 | 2003 | 2002
|----------------------- | ---- | ---- | ----
|
|Expected volatility     |      |      |     
|Risk-free interest rate |      |      |     
|Expected lives          |      |      |     
|Dividend rate           |      |      |     
|                        |      |      |     

Reclassifications

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

New Accounting
Pronouncements

In
December 2004, the Financial Accounting Standards Board (FASB) issued a
revised Statement of Financial Accounting Standards (SFAS) No. 123(R),
Share-Based Payment, (SFAS 123(R)) which will be effective for reporting
periods beginning after June 15, 2005. The new statement requires all share-based payments
to employees to be recognized in the financial statements based on their fair values. The
Company currently accounts for its share-based payments to employees under the intrinsic
value method of accounting set forth in Accounting Principles Board Opinion No. 25,
Accounting for Stock Issues to Employees. Additionally, the Company complies
with the stock-based employer compensation disclosure requirements of SFAS No. 148,
Accounting for Stock-Based Compensation-Transition and Disclosure. SFAS 123(R)
permits companies to adopt its requirements using one of two methods:

|· |  | A modified prospective method in which compensation cost is recognized
beginning with the effective date (a) based on the requirements of SFAS 123(R) for all
share-based payments granted after the effective date and (b) based on the requirements of
SFAS 123 for all awards granted to employees prior to the effective date of SFAS 123(R)
that remain unvested on the effective date.
|- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|· |  | A modified retrospective method which includes the requirements of the
modified prospective method described above, but also permits companies to restate based
on the amounts previously recognized under SFAS 123 for purposes of pro forma disclosures
either (a) all prior periods presented or (b) prior interim periods of the year of
adoption.
|- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

The
Company plans to adopt SFAS 123(R) using the modified-prospective method beginning July 1,
2005 and cannot currently estimate the financial impact of adoption as the Company has not
yet completed its evaluation.

In
December 2003, the FASB issued a revised Interpretation No. 46, Consolidation of
Variable Interest Entities (Interpretation No. 46), addressing
consolidation of entities in which a company is a primary beneficiary. Interpretation No.
46 was effective immediately for arrangements entered into or modified after January 31,
2003 and during the quarter ended March 31, 2004 for arrangements entered into or modified
before February 1, 2003. The Company has investments in several variable interest
entities; however, the Company is not a primary beneficiary in any of these entities.
Accordingly, the adoption of Interpretation No. 46 had no impact on the Companys
financial position or results of operations.

# Note 2 
Acquisition of TherImmune

On
April 1, 2003, the Company acquired by merger 100% of the outstanding common stock of
TherImmune for a total purchase price of $51,081, which consisted of cash paid of $30,405
to TherImmune securityholders, 3,927,214 shares of Gene Logic Common Stock, valued at
$19,400, issued to TherImmune shareholders, and approximately $1,276 in transaction costs.
The value of the shares issued was based on the average market price of the Companys
Common Stock surrounding the measurement date. The approximately 5% of the total
consideration that was held in escrow to satisfy potential indemnification obligations of
the TherImmune securityholders was paid in 2004.

The
acquisition was recorded using the purchase method of accounting, and the Consolidated
Statements of Operations reflect the inclusion of TherImmunes operating results
since the acquisition date. The total purchase price was allocated as follows:

|Current assets                                                        |  |  | $ | 8,103   |  
|--------------------------------------------------------------------- |  |  | - | ------- | -
|Property and equipment                                                |  |  |   | 11,130  |  
|Customer relationships (estimated useful life, 2 years)               |  |  |   | 2,500   |  
|Liabilities assumed                                                   |  |  |   | (13,682 | )
|Goodwill (allocated to preclinical contract researchservices segment) |  |  |   | 43,030  |  
|                                                                      |  | 
|                                                                      |  |  | $ | 51,081  |  
|                                                                      |  | 

F-13

---

---

The
  following unaudited pro forma financial information gives effect to Gene Logics
  acquisition by merger of TherImmune as if the transaction had occurred at January
  1, 2003 and is based on the historical statements of Gene Logic and TherImmune
  during the year ended December 31:

|                                     | 2003
|------------------------------------ | ----
|
|Total revenue                        |     
|Net loss                             |     
|                                    
|Basic and diluted net loss per share |     
|Weighted average shares outstanding  |     

The
pro forma adjustments used herein are based upon available information and various
assumptions that management believes are reasonable. These adjustments give effect to
events directly attributable to the transaction and do not reflect any integration costs
or other synergies that management expects to realize as a result of the transaction. Such
unaudited pro forma financial information is not necessarily indicative of what the actual
consolidated results of the operations might have been had the acquisition been effective
at the beginning of each period presented.

# Note 3  Horizon
technologies acquisition

In
July 2004, the Company acquired certain technology and related assets (the Horizon
technologies) and hired an associated research team from Millennium Pharmaceuticals,
Inc. (Millennium). The Horizon technologies, which are currently under
development, include: in-vivo compound imaging, in-vitro pathway screening,
predictive and genetic ADME capabilities and metabolomics technologies for use in
preclinical and clinical drug development. In addition, the Company has a drug development
agreement with Millennium, certain terms of which are currently under renegotiation. Under
the drug development agreement, the Company will use the newly acquired Horizon
technologies to reposition a Millennium compound in exchange for up-front fees. If the
compound reenters Millenniums drug development pipeline, the Company could receive
milestone payments and royalties on commercial sales.

Consideration
paid by the Company includes: (i) $3,500 payable in cash or stock, at the Companys
election, to Millennium in 2006 (recorded net of discount of $153 at December 31, 2004);
(ii) $1,000 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,
valued at $4,500, for which the Company recorded $452 in revenue in 2004. The Company also
contractually agreed to spend at least $8,500 over the next eighteen months to develop and
commercialize the acquired technologies and, subject to achieving certain performance
milestones by the end of the first eighteen months, an additional $6,000 over the
subsequent twelve months. After completing its evaluation of the acquired Horizon
technologies and purchased in-process research and development activities, and in order to
reflect the cost of acquiring the Horizon technologies, the Company recorded an $8,817,
one-time, purchased research and development expense within Operating Expenses in the
Companys Consolidated Statements of Operations.

# Note 4  Property
and equipment

Property
and equipment includes the following as of December 31:

|                                                 | 2004 | 2003
|------------------------------------------------ | ---- | ----
|                                                 |     
|Furniture                                        |      |     
|Computer and office equipment                    |      |     
|Laboratory equipment                             |      |     
|Leasehold improvements                           |      |     
|                                                 |      |     
|                                                 |      |     
|Less  accumulated depreciation and amortization |      |     
|                                                 |      |     
|Property and equipment, net                      |      |     
|                                                 |      |     

Depreciation
expense was $6,174, $6,094 and $5,451 for the years ended December 31, 2004, 2003 and
2002, respectively.

# Note 5  Long-term
investments

The
Company accounts for its investment in Neuralstem, Inc. (Neuralstem) under the
cost method of accounting. During 2003, the Company recorded a $4,268 write-down of its
investment in Neuralstem due to a permanent decline in Neuralstems estimated market
value, which represented the remaining book value of this investment.

F-14

---

---

In
November 2003, our subsidiary then named MetriGenix, Inc. (which has since been
dissolved), sold substantially all of its assets for cash to a privately held company (the
Buyer, referred to herein as MetriGenix). The proceeds of sale
were used to satisfy then known liabilities of the former MetriGenix, Inc. In connection
with the sale, MetriGenix received a fully paid BioExpress System subscription with a term
through December 31, 2006, which thereafter renews automatically on an annual basis unless
either party elects not to renew, under 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 MetriGenix, valued at $2,911, representing 15.3% of the equity of the
MetriGenix, and a warrant, valued at $275, exercisable at $0.0001 per additional share,
intended to enable the Company to maintain a 15% equity interest in MetriGenix. If the
Companys equity interest is diluted below 15%, MetriGenix must either terminate the
subscription agreement or pay fees for the subscription. The Company may not terminate the
subscription prior to December 31, 2006, except in the event of a breach by MetriGenix.
The Company also received the right to appoint a person to the Board of Directors of the
Buyer. The Company accounts for its investment in MetriGenix using the cost method of
accounting and is recording the investment value, $3,186, as revenue over the estimated
term of the subscription agreement of approximately three years. During 2004 and 2003, the
Company recorded $1,060 and $96, respectively, in revenue relating to this subscription
agreement.

The
Company accounts for its investment in Avalon Pharmaceuticals, Inc. (Avalon)
under the cost method of accounting. During 2002, the Company sold 50% of its Avalon
holdings for a gain of $250. At December 31, 2004 and 2003, the value of the
Companys remaining investment in Avalon was $1,000.

The
Company accounts for its investment in Metabometrix, Ltd. (Metabometrix) using
the cost method of accounting. During 2002, the Company recorded a $753 write-down of its
entire investment in Metabometrix, due to a permanent decline in its estimated market
value.

# Note 6  Intangible
assets

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

|                               | 2004 |  | 2003
|------------------------------ | ---- |  | ----
|                               |      |  |     
|Carrying amount:               |      |  |     
|Licenses                       |      |  | $   
|Patent costs                   |      |  |     
|Software development costs     |      |  |     
|Customer relationships         |      |  |     
|Database upgrade costs         |      |  |     
|                               |      |  |     
|Total carrying amount          |      |  | $   
|                               |      |  |     
|Accumulated amortization:      |      | 
|Licenses                       |      |  | $   
|Patent costs                   |      |  |     
|Software development costs     |      |  |     
|Customer relationships         |      |  |     
|Database upgrade costs         |      |  |     
|                               |      |  |     
|Total accumulated amortization |      |  | $   
|                               |      |  |     
|Net carrying value:           
|Licenses                       |      |  | $   
|Patent costs                   |      |  |     
|Software development costs     |      |  |     
|Customer relationships         |      |  |     
|Database upgrade costs         |      |  |     
|                               |      |  |     
|Total net carrying value       |      |  | $   
|                               |      |  |     

F-15

---

---

Amortization
expense for the years ended December 31, 2004, 2003 and 2002 was $10,452, $10,684 and
$8,084, respectively, including amortization of software development costs of $6,600,
$5,680 and $4,349, respectively. Estimated amortization expense for existing intangible
assets for each of the five succeeding years ending December 31 will be as follows:

|2005 |  |  | $ | 6,905 | 
|---- |  |  | - | ----- | 
|2006 |  |  |   | 3,462 | 
|2007 |  |  |   | 759   | 
|2008 |  |  |   | 162   | 
|2009 |  |  |   | 65    | 
|     | 

# Note 7  Accrued
expenses

Accrued
expenses consist of the following as of December 31:

|                                  | 2004 |  | 2003
|--------------------------------- | ---- |  | ----
|Property additions                |      |  | $   
|Professional fees                 |      |  |     
|Accrued vacation                  |      |  |     
|Payroll, taxes and other benefits |      |  |     
|Consulting fees                   |      |  |     
|                                  |      |  |     
|Accrued expenses                  |      |  | $   
|                                  |      |  |     

# Note 8  Long-term
debt

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

|                                                                                     | 2004 |  | 2003
|------------------------------------------------------------------------------------ | ---- |  | ----
|Facility loan  bearing interest at 5.0% per annum and due in quarterly installments |      |  |     
|through September 2009                                                               |      |  | $   
|Facility loan  bearing interest at 4.5% and due upon demand                         |      |  |     
|                                                                                     |      |  |     
|                                                                                     |      |  |     
|Less  current portion                                                               |      |  |     
|                                                                                     |      |  |     
|Long-term debt                                                                       |      |  | $   
|                                                                                     |      |  |     

As
of December 31, 2004, principal payments on long-term debt for the years ending December
31 are as follows:

|2005 |  |  | $ | 494 | 
|---- |  |  | - | --- | 
|2006 |  |  |   | 47  | 
|2007 |  |  |   | 49  | 
|2008 |  |  |   | 51  | 
|2009 |  |  |   | 27  | 
|     |  | 
|     |  |  | $ | 668 | 
|     |  | 

Interest
expense was $49, $48 and $16 for the years ended December 31, 2004, 2003 and 2002,
respectively.

F-16

---

---

# Note 9  Income
taxes

Income
tax expense reflected in the 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, 2004, 2003 and 2002 is different from
the amount computed by applying the statutory federal income tax rates to losses before
income tax expense. The reconciliation of these differences for the years ended December
31 is as follows:

|                                                     | 2004 |  | 2003 |        | 2002
|---------------------------------------------------- | ---- |  | ---- | ------ | ----
|                                                     |      |  |     
|Tax benefit at federal statutory rate                |      |  | $    | (9,599 | )   
|State income taxes, net of federal income tax effect |      |  |      | (1,304 | )   
|Benefit from stock option compensation               |      |  |      |       |     
|Other                                                |      |  |      | (2,314 | )   
|Increase in valuation allowance                      |      |  |      | 13,504 |     
|                                                     |      |  |      |        |     
|Income tax expense                                   |      |  | $    | 287    |     
|                                                     |      |  |      |        |     

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

|                                          | 2004 |  | 2003
|----------------------------------------- | ---- |  | ----
|
|Deferred
      tax assets:                |      |  |     
|NOL
      and tax credit carryforwards    |      |  | $   
|Contract
      revenue                    |      |  |     
|Net
      loss in unconsolidated investee |      |  |     
|Purchased
      research and development  |      |  |     
|Depreciation                              |      |  |     
|Accrued
      vacation                    |      |  |     
|Other                                     |      |  |     
|                                          |      |  |     
|                                          |      |  |     
|Less
       valuation allowance          |      |  |     
|                                          |      |  |     
|Net
      deferred tax assets             |      |  | $   
|                                          |      |  |     
|                                          |      | 
|Deferred
      tax liabilities:           |      | 
|Capitalized
      software costs          |      |  | $   
|Unrealized
      gains                    |      |  |     
|Other                                     |      |  |     
|                                          |      |  |     
|Net
      deferred tax liabilities        |      |  | $   
|                                          |      |  |     

At
December 31, 2004, net operating loss carryforwards (NOLs) for income tax
purposes were $212,004, 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 $7,972 as of December 31, 2004. The carryforwards,
if not utilized, will expire in increments from 2008 through 2024. Utilization of the net
operating losses and credits may be subject to an annual limitation as provided by the
Internal Revenue Code of 1986, and there can be no guarantee that such NOLs and tax
credits will ever be fully utilized. As a result of cumulative losses, the Company has
recorded a full valuation allowance against its net deferred tax assets as management
believes it is more likely than not that the assets will not be realizable.

# Note 10 
Commitments and contingencies

Operating Leases

The
Company conducts all of its operations from leased facilities in Gaithersburg, Maryland,
Cambridge, Massachusetts and Berkeley, California, under operating leases with varying
terms expiring through 2013. These leases obligate the Company to pay building operating
costs and also contain renewal provisions which may extend their term. Future minimum
lease payments under all operating lease agreements for the years ending December 31 are
as follows:

|                    | 
|------------------- | 
|2005                | 
|2006                | 
|2007                | 
|2008                | 
|2009                | 
|2010 and thereafter | 
|                    | 
|                    | 
|                    | 

F-17

---

---

Rent
expense for the years ended December 31, 2004, 2003 and 2002, was $4,377, $4,476 and
$2,939, respectively.

Capital Leases

The
Company leases certain equipment under capital leases. Capital leases are recorded at the
present value of the future minimum lease payments. Future minimum capital lease payments
under all capital lease agreements for the years ending December 31 are as follows:

|                                                                               | 
|------------------------------------------------------------------------------ | 
|2005                                                                           | 
|2006                                                                           | 
|2007                                                                           | 
|                                                                               | 
|                                                                               | 
|Less  amounts representing interest (weighted average effective rate of 8.9%) | 
|                                                                               | 
|Present value of net minimum lease payments                                    | 
|Less  current portion of capital lease obligations                            | 
|                                                                               | 
|Long-term portion of capital lease obligations                                 | 
|                                                                               | 

Contingencies

The Companys preclinical
  contract research services business is required to comply with applicable Government
  regulations. Failure to comply could result in the disqualification of data
  for submission to regulatory authorities, the loss of on-going or future studies,
  damage to the Companys reputation and other sanctions. Further, if a study
  is improperly performed, the Company may have to repeat the study at its expense,
  reimburse the client for the cost of the study and/or provide other remedies.
  In 2005, the Company received a Warning Letter (the FDA Letter)
  from the FDA focusing on two preclinical studies conducted in 2000 and 2001
  by TherImmune Research Corporation, prior to its acquisition by the Company
  in 2003. The FDA Letter addressed issues relating to the conduct of and record
  keeping for these two studies. Since the receipt of the FDA Letter, the Company
  has been working cooperatively with the product sponsors to address the issues
  raised. Based on the Companys knowledge, the Company does not expect that
  the costs for resolving the issues specific to these two studies will have a
  material effect on its financial condition or results of operations, but cannot
  predict how the receipt of the FDA Letter may affect its business more generally.
  The Company has submitted its response, addressing each of the violations cited
  and identifying corrective actions to be taken, for further consideration by
  the FDA. There is no assurance that the FDA will not take further action. Such
  further action could range from requiring further work on the two studies at
  issue or FDA refusal to accept the results of those studies to support regulatory
  approval for the products involved to more extreme actions such as follow-up
  confirmatory inspections of the Companys facilities which could potentially
  lead to disruptions on the Companys ability to conduct preclinical research
  services. If this were to happen, the Company could incur material financial
  losses.

Commitments

The
Company incurs payment obligations under its supply and license agreement with Affymetrix,
Inc. In 2005, the Company agreed to purchase from Affymetrix a minimum of $9,500 in
products and services in addition to its annual payment obligation of $500 plus applicable
royalties, which are anticipated to begin in early 2005, in accordance with the terms of
the agreement.

In
connection with the acquisition of the Horizon technologies, the Company contractually
agreed to spend at least $8,500 over the first eighteen months to develop and
commercialize the acquired technologies. As of December 31, 2004, the Company has recorded
$2,183 in expenditures related to this commitment. In addition, subject to achieving
certain performance milestones by the end of the first eighteen months and depending upon
the level of spending in prior periods, the Company has agreed to spend an additional
$6,000 over the subsequent twelve months.

As
of December 31, 2004, the Company was committed to spend approximately $6,526 to complete
facility renovations and equipment purchases.

Litigation

In
2005, the Company settled litigation between the Company and one of its senior-level
employees and Covance Laboratories, Inc. (Covance) in connection with the
employees non-competition and nondisclosure agreements with the employees
former employer, Covance. The settlement agreement imposes no obligations on the Company.

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.

F-18

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# 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 15% of their eligible compensation. Employee contributions
are 100% vested. Prior to 2004, the Company was not required to and did not make any
contributions to the 401(k) Plan. In 2004, the Company initiated a matching contribution
in the amount of 25% of up to 3% of an employees eligible compensation, which for
all new employees vests ratably over 3 years, and for all employees hired before January
1, 2004 is fully vested. These matching contributions amounted to $152 in 2004.

# Note 12  Segment
Information

From
April 1, 2003 to December 31, 2004, the Company managed its business as two business
segments: genomics and toxicogenomics services and preclinical contract research services.
Prior to this date, the Company operated as one business segment, genomics and
toxicogenomics services. Genomics and toxicogenomics services are based on the
Companys gene expression reference databases, the BioExpress System and ToxExpress
System, for research related to drug discovery and optimization. Preclinical contract
research services consists of services related to drug development including, primarily
preclinical toxicity and pharmacology studies and related laboratory services and, to a
lesser extent, Phase I clinical trial services.

The
following table presents the results of operations by segment used by management to
evaluate performance. Genomics and toxicogenomics services segment operating loss consists
of revenue for this segment less database production, research and development and
purchased research and development expenses. Preclinical contract research services
segment operating income (loss) consists of revenue for this segment less costs related to
preclinical contract research services. Through 2004, the Company did not identify or
allocate, nor did management evaluate, selling, general and administrative expenses and
assets by business segment. Inter-segment transactions are eliminated in the determination
of segment operating income (loss). Amortization and depreciation is allocated by business
segment as identified below. The following table sets forth information on reportable
segments for the years ended December 31:

|                                       |  | 2004 |   | 2003   |   | 2002
|-------------------------------------- |  | ---- | - | ------ | - | ----
|Genomics and toxicogenomics services   |  |      |   |        |   |     
|Revenue                                |  |      | $ | 52,171 |   | $   
|Operating loss(1)                      |  |      |   | (3,638 | ) |     
|                                       |  |      |   |        |   |     
|Preclinical contract research services |  |     
|Revenue                                |  |      | $ | 23,766 |   | $   
|Operating income (loss)(2)             |  |      |   | (314   | ) |     

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

|                                             |  | 2004 |   | 2003    |   | 2002
|-------------------------------------------- |  | ---- | - | ------- | - | ----
|Segment operating income (loss)              |  |      |   |         |   |     
|Genomics and toxicogenomics services         |  |      | $ | (3,638  | ) | $   
|Preclinical contract research services       |  |      |   | (314    | ) |     
|                                             |  |      |   |         |   |     
|                                             |  |      |   | (3,952  | ) |     
|Selling, general and administrative expenses |  |      |   | 25,676  |   |     
|Interest (income), net                       |  |      |   | (1,395  | ) |     
|Other (income) expense                       |  |      |   |        |   |     
|Write-down of equity investments             |  |      |   |        |   |     
|                                             |  |      |   |         |   |     
|Net loss before income tax expense           |  |      | $ | (28,233 | ) | $   
|                                             |  |      |   |         |   |     

(1)  Includes an allocation of amortization and depreciation of $12,450, $13,724 and
          $12,643 for the years ended December 31, 2004, 2003 and 2002, respectively.(2)  Includes an allocation of amortization and depreciation of $1,926
          and $1,172 for the years ended December 31, 2004 and 2003, respectively.

F-19

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For
2004, 2003 and 2002, no customer accounted for 10% or more of the Companys revenue.
The following is a breakdown of the Companys total revenue by geographic region:

|                  | NorthAmerica | Pacific Rim | Europe
|----------------- | ------------ | ----------- | ------
|December 31, 2004 |              |             |       
|December 31, 2003 |              |             |       
|December 31, 2002 |              |             |       

# Note 13 
Stock-based compensation

During
1997, the Company instituted a stock plan (the Stock Plan), which has been
amended. The Stock Plan replaced a similar plan adopted in 1996. Under the Stock Plan, the
Compensation Committee (the Committee) of the Companys Board of
Directors, at its discretion, can grant options, award stock bonuses or provide
opportunities to make direct purchases of restricted stock to employees, certain directors
and consultants of the Company and related corporations. The Stock Plan currently
authorizes the grant of options for up to 10,600,000 shares of Common Stock. In 2002, the
Board of Directors amended the Stock Plan to eliminate future stock bonuses and grants of
restricted stock. At December 31, 2004, there were 1,793,568 shares available for issuance
under the Stock Plan.

During
1997, the Company adopted a Directors stock plan (the Directors
Plan) to provide for granting of options to purchase up to 575,000 shares of Common
Stock to non-employee directors of the Company. At December 31, 2004, there were 147,500
shares available for issuance under the Directors Plan. Options are to be granted at
the fair market value of the Common Stock at the grant date.

The
options, awards and opportunities to purchase stock under the Stock Plan and the
Directors Plan expire at the earlier of termination or the date specified by the
Committee at the date of grant, but not more than ten years from such grant date.

During
1997, the Company adopted an Employee Stock Purchase Plan (the Purchase Plan),
which currently covers an aggregate of 1,250,000 shares of Common Stock. The Purchase Plan
allows 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 date an Offering began (or, if later, the date during the Offering
when the employee was first eligible to participate). In 2002, the Board imposed a limit
of 600 shares per purchaser per purchase date. At December 31, 2004, there were 510,792
shares available for issuance under the Purchase Plan. In 2005, the Purchase Plan has been
suspended, as a result of our pending adoption of SFAS 123(R).

The
following is a summary of option activity for the years ended December 31, 2004, 2003 and
2002:

|                             |  | Shares Subject toOutstanding Options
|---------------------------- |  | ------------------------------------
|                             |  |                                     
|Balance at January 1, 2002   |  |                                     
|Additional authorization     |  |                                     
|Options granted              |  |                                     
|Options exercised            |  |                                     
|Options cancelled            |  |                                     
|                             |  |                                     
|Balance at December 31, 2002 |  |                                     
|Additional authorization     |  |                                     
|Options granted              |  |                                     
|Options exercised            |  |                                     
|Options cancelled            |  |                                     
|                             |  |                                     
|Balance at December 31, 2003 |  |                                     
|Options granted              |  |                                     
|Options exercised            |  |                                     
|Options cancelled            |  |                                     
|                             |  |                                     
|Balance at December 31, 2004 |  |                                     
|                             |  |                                     

Options
  to purchase a total of 3,829,996, 3,988,802 and 2,092,207 at December 31, 2004,
  2003 and 2002, respectively, were exercisable. The weighted-average grant-date
  fair value of options granted during the years ended December 31, 2004, 2003
  and 2002 was $1.67, $3.14 and $6.85, respectively.

F-20

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During
2002, the Company initiated a tender offer for outstanding stock options held by employees
of the Company. Under the terms of the tender offer, eligible employees could tender stock
options that were granted with an exercise price equal to or greater than $11.00 per
share, subject to additional requirements for any stock option granted after May 4, 2002.
Once tendered and accepted, the old stock options were cancelled and each employee who
tendered stock options was entitled, subject to meeting certain conditions, to receive new
stock options for 80% of the number of shares available under the cancelled stock options
at the fair market value on the date of grant. One of the conditions to receiving the new
stock options was that the individual was required to be employed by the Company on the
date of grant. Of the eligible stock options, options for 2,290,207 shares were tendered
and cancelled, and on June 13, 2003, the Company granted new options for 1,794,847 shares
with an exercise price of $7.21, the fair value on the date of grant.

The
following table summarizes information about stock options outstanding at December 31,
2004:

|             | Options Outstanding | Options Exercisable
|------------ | ------------------- | -------------------
|             |                     |                    
|$0.15$4.50  |                     |                    
|$4.51$6.00  |                     |                    
|$6.01$7.20  |                     |                    
|$7.21$62.88 |                     |                    
|             |                     |                    
|$0.15$62.88 |                     |                    
|             |                     |                    

# Note 14  Related
party transactions

In
  connection with the July 2001 formation of MetriGenix, entities that were then
  affiliated with two members of the Companys Board of Directors purchased
  an aggregate of 73.3% of MetriGenixs preferred stock and the Company entered
  into an agreement to provide certain administrative services and subleased space.
  Fees charged to MetriGenix for administrative services and subleased space totaled
  $678 and $793 for the years ended December 31, 2003 and 2002, respectively,
  which were accounted for as a reduction to operating expenses. In addition,
  certain executive officers and a director of the Company purchased restricted
  shares of common stock of MetriGenix and the Company issued promissory notes
  to four of these executive officers representing loans issued to them to fund
  payment for the shares. In 2003, all loans were satisfied in accordance with
  their terms. In November 2003, MetriGenix, which has since been dissolved, sold
  substantially all of its assets (see Note 5).

During
2004, the Company did not enter into any related party transactions.

# Note 15  Quarterly
results of operations (unaudited)

The
following is a summary of the quarterly results of operations for the years ended December
31, 2004 and 2003.

|                                     |  |  |   |        |   |   |        |   |   |         |   |   |        |  
|------------------------------------ |  |  | - | ------ | - | - | ------ | - | - | ------- | - | - | ------ | -
|                                     |  |  |   |       
|2004                                 |  |  |   |        |  
|Revenue                              |  |  | $ | 20,221 |   | $ | 18,622 |   | $ | 17,030  |   | $ | 20,068 |  
|Net loss                             |  |  | $ | (5,510 | ) | $ | (4,392 | ) | $ | (14,609 | ) | $ | (4,009 | )
|                                     |  |  |   |        |   |   |        |  
|                                     |  | 
|Basic and diluted net loss per share |  |  | $ | (0.18  | ) | $ | (0.14  | ) | $ | (0.46   | ) | $ | (0.13  | )
|                                     |  |  |   |        |   |   |        |  
|                                     |  | 
|2003                                 |  |  |   |        |  
|Revenue                              |  |  | $ | 12,724 |   | $ | 19,432 |   | $ | 17,710  |   | $ | 19,653 |  
|Net loss                             |  |  | $ | (5,801 | ) | $ | (3,970 | ) | $ | (10,111 | ) | $ | (4,889 | )
|                                     |  |  |   |        |   |   |        |  
|                                     |  | 
|Basic and diluted net loss per share |  |  | $ | (0.21  | ) | $ | (0.13  | ) | $ | (0.33   | ) | $ | (0.16  | )
|                                     |  |  |   |        |   |   |        |  

F-21

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# Gene Logic Inc.

# Schedule II 
Valuation and Qualifying AccountsDecember 31, 2004, 2003 and 2002(in thousands)

# Reserve for Tissue
samples:

|                  | Balance atBeginningof Year | NewReserves | Balance atEnd of Year
|----------------- | -------------------------- | ----------- | ---------------------
|December 31, 2004 |                            |             | $                    
|December 31, 2003 |                            |             |                      
|December 31, 2002 |                            |             |                      

# Allowance for Doubtful
Accounts:

|                  | Balance atBeginningof Year | NewReserves | ReservesDue toAcquisition (1) | AccountsWritten-Off | Adjustmentto Reserves | Balance atEnd of Year
|----------------- | -------------------------- | ----------- | ----------------------------- | ------------------- | --------------------- | ---------------------
|December 31, 2004 |                            |             | $                             | 57                  |                       | $                    
|December 31, 2003 |                            |             |                               |                    |                       |                      
|December 31, 2002 |                            |             |                               |                    |                       |                      

Notes:

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

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