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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K

OR

Commission File Number: 0-23317

GENE LOGIC INC.

(Exact name of registrant as specified in its charter)

610 Professional Drive
Gaithersburg, Maryland 20879
(Address of principal executive offices)
Registrant’s phone number, including area code: (301) 987-1700
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, $.01 PAR VALUE
(Title of Class)

        Indicate by check mark 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.

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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 System^TM and ToxShield^TM are trademarks of Gene Logic. GeneChip^® is a registered trademark of Affymetrix, Inc. Viagra^® is a registered trademark of Pfizer Inc.

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:

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.

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STRATEGY

Our business strategy is to:

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

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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.

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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:

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:

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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.

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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:

        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.

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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:

        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.

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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-vivo assessments 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:

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

         Indication-seeking technologies

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         Patient Variable Drug Response Technologies

         Safety Technologies

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:

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.

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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:

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.

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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.

        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.

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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).

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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.

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.

None.

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PART II

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.

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.

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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.

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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:

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.

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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 million in 2004, an increase of $0.2 million, or less than 1%, from $52.0 million in 2003. The increase represents increased revenue of $3.8 million, reflecting a full period of revenue from some existing customers in 2004 as compared to 2003, $2.5 million resulting from the cumulative impact of a favorable Japanese exchange rate in 2004, $0.9 million in fees for subscriptions from new customers and expanded agreements and $0.9 million in fees for other services in 2004. These increases were offset by reduced revenue of $5.3 million in subscription fees resulting from the conclusion of agreements and $2.4 million from certain renewals at reduced service levels. 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”).

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

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.

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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.

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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:

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:

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:

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:

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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.

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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.

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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:

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:

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.

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.

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.

         None.

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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

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.

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.

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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.

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.

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

(a)1. Financial Statements

(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

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* Indicates management compensatory plan, contract or arrangement.

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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.

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SIGNATURE

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on the 16^th day of March, 2005.

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.

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Gene Logic Inc.
Index to Consolidated Financial Statements

F-1