UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C. 20549









FORM
10-Q







(Mark
One)


x
            QUARTERLY
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934




For
the quarterly period ended September 30, 2009


or




 ̈
            TRANSITION
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934




For
the transition period from_________ to__________




Commission
file number: 000-30267







ORCHID
CELLMARK INC.


(Exact
name of registrant as specified in its charter)







Delaware
              
              22-3392819(State
      or other jurisdiction of
                incorporation
      or organization)
              
              (I.R.S.
      Employer
                Identification
      No.)4390
      US Route One
                Princeton,
      NJ
              
              08540(Address
      of principal executive offices)
              
              (Zip
      code)




Registrant’s telephone number,
including area code: (609) 750-2200





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




Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files). Yes  ̈   No
 ̈





Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer or a smaller reporting company. See
definitions of “large accelerated filer”, “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act (Check one).





Large
      accelerated filer   ̈
              Accelerated
      filer  xNon-accelerated
      filer     ̈ (Do not
      check if a smaller reporting company)
              Smaller
      reporting company   ̈





Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act)


Yes
 ̈   No
x





As of October 29, 2009, the registrant
had 29,966,562 shares of common stock outstanding.










ORCHID
CELLMARK INC.




INDEX
TO FORM 10-Q




PagePART
      I -  FINANCIAL INFORMATIONITEM
      1.
                Financial
      Statements (unaudited)
                1Consolidated
      Balance Sheets as of September 30, 2009 and December 31,
    2008
                1Consolidated
      Statements of Operations for the three and nine months ended September 30,
      2009 and 2008
                2Consolidated
      Statements of Cash Flows for the nine months ended September 30, 2009 and
      2008
                3Consolidated
      Statement of Stockholders’ Equity and Comprehensive Income/Loss for the
      nine months ended September 30, 2009
                4Notes
      to Consolidated Financial Statements
                5ITEM
      2.
                Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations
                11ITEM
      3.
                Quantitative
      and Qualitative Disclosures About Market Risk
                19ITEM
      4.
                Controls
      and Procedures
                20PART
      II -  OTHER INFORMATIONITEM
      1.
                Legal
      Proceedings
                22ITEM
      1A.
                Risk
      Factors
                23ITEM
      2.
                Unregistered
      Sales of Equity Securities and Use of Proceeds
                23ITEM
      3.
                Defaults
      Upon Senior Securities
                23ITEM
      4.
                Submission
      of Matters to a Vote of Security Holders
                24ITEM
      5.
                Other
      Information
                24ITEM 6.
                Exhibits
                24SIGNATURE
                25







PART
I – FINANCIAL INFORMATION




Item
1. FINANCIAL STATEMENTS




ORCHID
CELLMARK INC. AND SUBSIDIARIES


Consolidated
Balance Sheets


(In
thousands, except share and per share data)




September 30,
                                                          2009
                                                        
                                                        
                                                        December 31,
                                                          2008(Unaudited)AssetsCurrent
      assets:Cash
      and cash equivalents
                                                        
                                                        $
                                                        17,003
                                                        
                                                        
                                                        $
                                                        14,998Accounts
      receivable, net
                                                        
                                                        
                                                        10,632
                                                        
                                                        
                                                        
                                                        9,826Inventory
                                                        
                                                        
                                                        1,466
                                                        
                                                        
                                                        
                                                        1,262Prepaid
      and other current assets
                                                        
                                                        
                                                        1,091
                                                        
                                                        
                                                        
                                                        1,392Total
      current assets
                                                        
                                                        
                                                        30,192
                                                        
                                                        
                                                        
                                                        27,478Fixed
      assets, net
                                                        
                                                        
                                                        5,033
                                                        
                                                        
                                                        
                                                        5,859Goodwill
                                                        
                                                        
                                                        9,423
                                                        
                                                        
                                                        
                                                        9,336Other
      intangibles, net
                                                        
                                                        
                                                        6,227
                                                        
                                                        
                                                        
                                                        7,570Other
      assets
                                                        
                                                        
                                                        513
                                                        
                                                        
                                                        
                                                        406Total
      assets
                                                        
                                                        $
                                                        51,388
                                                        
                                                        
                                                        $
                                                        50,649Liabilities
      and Stockholders’ EquityCurrent
      liabilities:Accounts
      payable
                                                        
                                                        $
                                                        2,667
                                                        
                                                        
                                                        $
                                                        2,544Accrued
      expenses and other current liabilities
                                                        
                                                        
                                                        3,084
                                                        
                                                        
                                                        
                                                        2,288Current
      portion of long-term debt
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        338Deferred
      revenue
                                                        
                                                        
                                                        976
                                                        
                                                        
                                                        
                                                        842Total
      current liabilities
                                                        
                                                        
                                                        6,727
                                                        
                                                        
                                                        
                                                        6,012Other
      liabilities
                                                        
                                                        
                                                        223
                                                        
                                                        
                                                        
                                                        269Total
      liabilities
                                                        
                                                        
                                                        6,950
                                                        
                                                        
                                                        
                                                        6,281Commitments
      and contingenciesStockholders’
      equity:Preferred
      stock; $0.001 per share par value; authorized 5,000,000
    sharesSeries
      A redeemable convertible preferred stock; $0.001 per share par value;
      designated 5 shares; no shares issued or outstanding
                                                        
                                                        
                                                        —
                                                        
                                                        
                                                        
                                                        —Series
      A junior participating preferred stock; $0.001 per share par value;
      designated 1,000,000 shares; no shares issued or
    outstanding
                                                        
                                                        
                                                        —
                                                        
                                                        
                                                        
                                                        —Common
      stock; $0.001 per share par value; authorized 150,000,000 shares; issued
      30,098,269 shares at September 30, 2009 and December 31,
      2008
                                                        
                                                        
                                                        30
                                                        
                                                        
                                                        
                                                        30Additional
      paid-in capital
                                                        
                                                        
                                                        372,525
                                                        
                                                        
                                                        
                                                        371,377Accumulated
      other comprehensive income/loss
                                                        
                                                        
                                                        342
                                                        
                                                        
                                                        
                                                        (980
                                                        )Treasury
      stock at cost, 163,259 shares of common stock at September 30, 2009 and
      December 31, 2008
                                                        
                                                        
                                                        (1,587
                                                        )
                                                        
                                                        
                                                        (1,587
                                                        )Accumulated
      deficit
                                                        
                                                        
                                                        (326,872
                                                        )
                                                        
                                                        
                                                        (324,472
                                                        )Total
      stockholders’ equity
                                                        
                                                        
                                                        44,438
                                                        
                                                        
                                                        
                                                        44,368Total
      liabilities and stockholders’ equity
                                                        
                                                        $
                                                        51,388
                                                        
                                                        
                                                        $
                                                        50,649





See
accompanying notes to consolidated financial statements.


1





ORCHID
CELLMARK INC. AND SUBSIDIARIES


Consolidated
Statements of Operations


Three
and nine months ended September 30, 2009 and 2008


(In
thousands, except per share data)


(Unaudited)





Three months ended
                                                                    September 30,
                                                                  
                                                                  
                                                                  Nine months ended
                                                                    September 30,2009
                                                                  
                                                                  
                                                                  2008
                                                                  
                                                                  
                                                                  2009
                                                                  
                                                                  
                                                                  2008Revenues:Service
      revenues
                                                                  
                                                                  $
                                                                  14,660
                                                                  
                                                                  
                                                                  $
                                                                  14,845
                                                                  
                                                                  
                                                                  $
                                                                  43,190
                                                                  
                                                                  
                                                                  $
                                                                  44,404Other
      revenues
                                                                  
                                                                  
                                                                  14
                                                                  
                                                                  
                                                                  
                                                                  27
                                                                  
                                                                  
                                                                  
                                                                  135
                                                                  
                                                                  
                                                                  
                                                                  219Total
      revenues
                                                                  
                                                                  
                                                                  14,674
                                                                  
                                                                  
                                                                  
                                                                  14,872
                                                                  
                                                                  
                                                                  
                                                                  43,325
                                                                  
                                                                  
                                                                  
                                                                  44,623Operating
      expenses:Cost
      of service revenues
                                                                  
                                                                  
                                                                  9,798
                                                                  
                                                                  
                                                                  
                                                                  10,500
                                                                  
                                                                  
                                                                  
                                                                  28,535
                                                                  
                                                                  
                                                                  
                                                                  31,159Research
      and development
                                                                  
                                                                  
                                                                  228
                                                                  
                                                                  
                                                                  
                                                                  228
                                                                  
                                                                  
                                                                  
                                                                  579
                                                                  
                                                                  
                                                                  
                                                                  654Marketing
      and sales
                                                                  
                                                                  
                                                                  1,245
                                                                  
                                                                  
                                                                  
                                                                  1,536
                                                                  
                                                                  
                                                                  
                                                                  3,626
                                                                  
                                                                  
                                                                  
                                                                  4,659General
      and administrative
                                                                  
                                                                  
                                                                  3,401
                                                                  
                                                                  
                                                                  
                                                                  3,588
                                                                  
                                                                  
                                                                  
                                                                  11,146
                                                                  
                                                                  
                                                                  
                                                                  12,639Amortization
      of intangible assets
                                                                  
                                                                  
                                                                  467
                                                                  
                                                                  
                                                                  
                                                                  475
                                                                  
                                                                  
                                                                  
                                                                  1,394
                                                                  
                                                                  
                                                                  
                                                                  1,429Total
      operating expenses
                                                                  
                                                                  
                                                                  15,139
                                                                  
                                                                  
                                                                  
                                                                  16,327
                                                                  
                                                                  
                                                                  
                                                                  45,280
                                                                  
                                                                  
                                                                  
                                                                  50,540Operating
      loss
                                                                  
                                                                  
                                                                  (465
                                                                  )
                                                                  
                                                                  
                                                                  (1,455
                                                                  )
                                                                  
                                                                  
                                                                  (1,955
                                                                  )
                                                                  
                                                                  
                                                                  (5,917
                                                                  )Other
      income (expense):Interest
      income
                                                                  
                                                                  
                                                                  10
                                                                  
                                                                  
                                                                  
                                                                  79
                                                                  
                                                                  
                                                                  
                                                                  51
                                                                  
                                                                  
                                                                  
                                                                  324Interest
      expense
                                                                  
                                                                  
                                                                  -
                                                                  
                                                                  
                                                                  
                                                                  (8
                                                                  )
                                                                  
                                                                  
                                                                  (2
                                                                  )
                                                                  
                                                                  
                                                                  (31
                                                                  )Other
      income (expense)
                                                                  
                                                                  
                                                                  29
                                                                  
                                                                  
                                                                  
                                                                  57
                                                                  
                                                                  
                                                                  
                                                                  (15
                                                                  )
                                                                  
                                                                  
                                                                  553Total
      other income (expense), net
                                                                  
                                                                  
                                                                  39
                                                                  
                                                                  
                                                                  
                                                                  128
                                                                  
                                                                  
                                                                  
                                                                  34
                                                                  
                                                                  
                                                                  
                                                                  846Loss
      before income tax expense
                                                                  
                                                                  
                                                                  (426
                                                                  )
                                                                  
                                                                  
                                                                  (1,327
                                                                  )
                                                                  
                                                                  
                                                                  (1,921
                                                                  )
                                                                  
                                                                  
                                                                  (5,071
                                                                  )Income
      tax expense (benefit)
                                                                  
                                                                  
                                                                  199
                                                                  
                                                                  
                                                                  
                                                                  132
                                                                  
                                                                  
                                                                  
                                                                  479
                                                                  
                                                                  
                                                                  
                                                                  (117
                                                                  )Net
      loss
                                                                  
                                                                  $
                                                                  (625
                                                                  )
                                                                  
                                                                  $
                                                                  (1,459
                                                                  )
                                                                  
                                                                  $
                                                                  (2,400
                                                                  )
                                                                  
                                                                  $
                                                                  (4,954
                                                                  )Basic
      and diluted net loss per share
                                                                  
                                                                  $
                                                                  (0.02
                                                                  )
                                                                  
                                                                  $
                                                                  (0.05
                                                                  )
                                                                  
                                                                  $
                                                                  (0.08
                                                                  )
                                                                  
                                                                  $
                                                                  (0.17
                                                                  )Shares
      used in computing basic and diluted net loss per share
                                                                  
                                                                  
                                                                  29,935
                                                                  
                                                                  
                                                                  
                                                                  29,935
                                                                  
                                                                  
                                                                  
                                                                  29,935
                                                                  
                                                                  
                                                                  
                                                                  29,935





See
accompanying notes to consolidated financial statements.


2


ORCHID
CELLMARK INC. AND SUBSIDIARIES


Consolidated
Statements of Cash Flows


Nine
months ended September 30, 2009 and 2008


(In
thousands)


(Unaudited)





2009
                                                                  
                                                                  
                                                                  2008Cash
      flows from operating activities:Net
      loss
                                                                  
                                                                  $
                                                                  (2,400
                                                                  )
                                                                  
                                                                  $
                                                                  (4,954
                                                                  )Adjustments
      to reconcile net loss to net cash provided by (used in) operating
      activities:Stock-based
      compensation
                                                                  
                                                                  
                                                                  1,148
                                                                  
                                                                  
                                                                  
                                                                  941Loss
      on sale of assets
                                                                  
                                                                  
                                                                  -
                                                                  
                                                                  
                                                                  
                                                                  1Depreciation
      and amortization
                                                                  
                                                                  
                                                                  2,948
                                                                  
                                                                  
                                                                  
                                                                  3,450Bad
      debt expense
                                                                  
                                                                  
                                                                  253
                                                                  
                                                                  
                                                                  
                                                                  (74
                                                                  )Changes
      in assets and liabilities:Accounts
      receivable
                                                                  
                                                                  
                                                                  (811
                                                                  )
                                                                  
                                                                  
                                                                  (2,084
                                                                  )Inventory
                                                                  
                                                                  
                                                                  (204
                                                                  )
                                                                  
                                                                  
                                                                  (54
                                                                  )Prepaid
      and other assets
                                                                  
                                                                  
                                                                  228
                                                                  
                                                                  
                                                                  
                                                                  113Accounts
      payable
                                                                  
                                                                  
                                                                  123
                                                                  
                                                                  
                                                                  
                                                                  642Accrued
      expenses and other current liabilities
                                                                  
                                                                  
                                                                  452
                                                                  
                                                                  
                                                                  
                                                                  (366
                                                                  )Income
      taxes payable
                                                                  
                                                                  
                                                                  344
                                                                  
                                                                  
                                                                  
                                                                  (543
                                                                  )Deferred
      revenue
                                                                  
                                                                  
                                                                  134
                                                                  
                                                                  
                                                                  
                                                                  (112
                                                                  )Other
      liabilities
                                                                  
                                                                  
                                                                  (46
                                                                  )
                                                                  
                                                                  
                                                                  (502
                                                                  )Net
      cash provided by (used in) operating activities
                                                                  
                                                                  
                                                                  2,169
                                                                  
                                                                  
                                                                  
                                                                  (3,542
                                                                  )Cash
      flows from investing activities:Capital
      expenditures
                                                                  
                                                                  
                                                                  (492
                                                                  )
                                                                  
                                                                  
                                                                  (1,387
                                                                  )Decrease
      in restricted cash
                                                                  
                                                                  
                                                                  -
                                                                  
                                                                  
                                                                  
                                                                  958Net
      cash used in investing activities
                                                                  
                                                                  
                                                                  (492
                                                                  )
                                                                  
                                                                  
                                                                  (429
                                                                  )Cash
      flows from financing activities:Net
      proceeds from issuance of common stock
                                                                  
                                                                  
                                                                  -
                                                                  
                                                                  
                                                                  
                                                                  1Repayment
      of debt
                                                                  
                                                                  
                                                                  (338
                                                                  )
                                                                  
                                                                  
                                                                  (380
                                                                  )Net
      cash used in financing activities
                                                                  
                                                                  
                                                                  (338
                                                                  )
                                                                  
                                                                  
                                                                  (379
                                                                  )Effect
      of foreign currency translation on cash and cash
    equivalents
                                                                  
                                                                  
                                                                  666
                                                                  
                                                                  
                                                                  
                                                                  (711
                                                                  )Net
      increase (decrease) in cash and cash equivalents
                                                                  
                                                                  
                                                                  2,005
                                                                  
                                                                  
                                                                  
                                                                  (5,061
                                                                  )Cash
      and cash equivalents at beginning of period
                                                                  
                                                                  
                                                                  14,998
                                                                  
                                                                  
                                                                  
                                                                  20,918Cash
      and cash equivalents at end of period
                                                                  
                                                                  $
                                                                  17,003
                                                                  
                                                                  
                                                                  $
                                                                  15,857




See
accompanying notes to consolidated financial statements.


3





ORCHID CELLMARK INC. AND SUBSIDIARIES


Consolidated
Statement of Stockholders’ Equity and Comprehensive Income/Loss


Nine
months ended September 30, 2009


(In
thousands)


(Unaudited)





Common Stock
                      
                      
                      Additional
                      
                      
                      Accumulated
                        Other
                      
                      
                      
                      
                      
                      
                      
                      
                      TotalNumber
                        of Shares
                      
                      
                      Amount
                      
                      
                      Paid-in
                        Capital
                      
                      
                      Comprehensive
                        Income/Loss
                      
                      
                      Treasury
                        Stock
                      
                      
                      Accumulated
                        Deficit
                      
                      
                      Stockholders’
                        EquityBalance
      at January 1, 2009
                      
                      
                      30,098
                      
                      
                      $
                      30
                      
                      
                      $
                      371,377
                      
                      
                      $
                      (980
                      )
                      
                      $
                      (1,587
                      )
                      
                      $
                      (324,472
                      )
                      
                      $
                      44,368Net
      loss
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      (2,400
                      )
                      
                      
                      (2,400
                      )Foreign
      currency translation adjustment
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      1,322
                      
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      1,322Comprehensive
      loss
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      (1,070
                      )Stock-based
      compensation expense
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      1,148
                      
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      1,148Balance
      at September 30, 2009
                      
                      
                      30,098
                      
                      
                      $
                      30
                      
                      
                      $
                      372,525
                      
                      
                      $
                      342
                      
                      
                      $
                      (1,587
                      )
                      
                      $
                      (326,872
                      )
                      
                      $
                      44,438





See
accompanying notes to consolidated financial statements.


4


ORCHID
CELLMARK INC. AND SUBSIDIARIES


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


(Unaudited)




(1) Basis of Presentation




The
accompanying unaudited consolidated financial statements of Orchid Cellmark Inc.
and its subsidiaries (the Company) have been prepared in accordance with
accounting principles generally accepted in the United States of America (US)
for interim financial information and with the instructions to Form 10-Q and
Article 10 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by accounting principles generally accepted
in the US (GAAP) for complete annual financial statements. In the opinion of
management, all adjustments, consisting of normal recurring adjustments,
considered necessary for a fair presentation have been included. Interim results
are not necessarily indicative of results that may be expected for a full
year.




The
accompanying unaudited consolidated financial statements should be read in
conjunction with the audited consolidated financial statements and footnotes
thereto included in the Company’s Annual Report on Form 10-K, for the year ended
December 31, 2008, as amended (the Annual Report), as filed with the
Securities and Exchange Commission (SEC) on March 16, 2009, as amended on April
30, 2009.




There
have been no changes to the Company’s critical accounting policies as disclosed
in the Annual Report.




(2)
Net Loss per Share




Net loss
per share is computed in accordance with Statement of Financial Accounting
Standards (FAS) No. 128, Earnings Per Share, (FASB ASC
260-10), by dividing the net loss for the period by the weighted average number
of shares of common stock outstanding. During each period presented, the Company
has certain options that have not been included in the calculation of diluted
net loss per share because to do so would be anti-dilutive. As such, the
numerator and the denominator used in computing both basic and diluted net loss
per share for each period are equal.





(3)
Inventory




Inventory
is comprised of the following at September 30, 2009 and December 31, 2008
(in thousands):




September 30,
                                2009
                              
                              
                              December 31,
                                2008Raw
      materials
                              
                              $
                              962
                              
                              
                              $
                              832Work
      in progress
                              
                              
                              498
                              
                              
                              
                              426Finished
      goods
                              
                              
                              6
                              
                              
                              
                              4$
                              1,466
                              
                              
                              $
                              1,262




Raw
materials consist mainly of reagents, enzymes, chemicals and plates used in DNA
testing. Work in progress consists mainly of casework not yet completed and DNA
testing kits that are being processed. Finished goods consist mainly of DNA
testing kits that have not yet been shipped.





(4)
Goodwill and Other Intangible Assets




The
following table sets forth the activity for goodwill during the nine months
ended September 30, 2009 (in thousands):




Balance
      as of January 1, 2009
                              
                              $
                              9,336Effect
      of foreign currency translation
                              
                              
                              87Balance
      as of September 30, 2009
                              
                              $
                              9,423


5


ORCHID
CELLMARK INC. AND SUBSIDIARIES


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)


(Unaudited)





The following table sets
forth the Company’s other intangible assets at September 30, 2009 and
December 31, 2008 (in thousands):





September 30, 2009
                              
                              
                              December 31, 2008Cost (1)
                              
                              
                              Accumulated
                                Amortization
                              
                              
                              Net
                              
                              
                              Cost (1)
                              
                              
                              Accumulated
                                Amortization
                              
                              
                              NetCustomer
      list
                              
                              $
                              6,824
                              
                              
                              $
                              (4,676
                              )
                              
                              $
                              2,148
                              
                              
                              $
                              6,741
                              
                              
                              $
                              (4,178
                              )
                              
                              $
                              2,563Base
      technology
                              
                              
                              6,018
                              
                              
                              
                              (4,924
                              )
                              
                              
                              1,094
                              
                              
                              
                              5,978
                              
                              
                              
                              (4,516
                              )
                              
                              
                              1,462Patents
      and know-how
                              
                              
                              4,899
                              
                              
                              
                              (3,135
                              )
                              
                              
                              1,764
                              
                              
                              
                              4,894
                              
                              
                              
                              (2,820
                              )
                              
                              
                              2,074Trademark/tradename
                              
                              
                              4,262
                              
                              
                              
                              (3,042
                              )
                              
                              
                              1,220
                              
                              
                              
                              4,194
                              
                              
                              
                              (2,731
                              )
                              
                              
                              1,463Non-compete
      agreements
                              
                              
                              20
                              
                              
                              
                              (19
                              )
                              
                              
                              1
                              
                              
                              
                              20
                              
                              
                              
                              (12
                              )
                              
                              
                              8Totals
                              
                              $
                              22,023
                              
                              
                              $
                              (15,796
                              )
                              
                              $
                              6,227
                              
                              
                              $
                              21,827
                              
                              
                              $
                              (14,257
                              )
                              
                              $
                              7,570





(1)
            Cost
      includes the cumulative historical effect of foreign currency translation
      on intangible assets acquired in a prior business combination. This
      cumulative historical effect of foreign currency translation amounted to
      $200 thousand and $4 thousand as of September 30, 2009 and
      December 31, 2008,
respectively.





(5)
Fixed Assets




Fixed
assets are comprised of the following at September 30, 2009 and December 31,
2008 (in thousands):





September 30,
                                    2009
                                  
                                  
                                  December 31,
                                    2008Laboratory
      equipment
                                  
                                  $
                                  14,273
                                  
                                  
                                  $
                                  13,405Leasehold
      improvements
                                  
                                  
                                  6,497
                                  
                                  
                                  
                                  6,122Computers
      and software
                                  
                                  
                                  5,017
                                  
                                  
                                  
                                  5,454Furniture
      and fixtures
                                  
                                  
                                  1,698
                                  
                                  
                                  
                                  1,52927,484
                                  
                                  
                                  
                                  26,510Less
      accumulated depreciation and amortization
                                  
                                  
                                  (22,452
                                  )
                                  
                                  
                                  (20,651
                                  )$
                                  5,033
                                  
                                  
                                  $
                                  5,859




Depreciation
expense for the Company’s fixed assets for the nine months ended September 30,
2009 and 2008 was $1.6 million and $2.0 million, respectively.





(6)
Accrued Expenses and Other Current Liabilities




Accrued expenses and other current
liabilities are comprised of the following at September 30, 2009 and December
31, 2008 (in thousands):





September 30,
                                2009
                              
                              
                              December 31,
                                2008VAT
      and other taxes
                              
                              $
                              1,491
                              
                              
                              $
                              966Professional
      fees
                              
                              
                              493
                              
                              
                              
                              441Employee
      compensation
                              
                              
                              540
                              
                              
                              
                              376Facility
      related accruals
                              
                              
                              315
                              
                              
                              
                              273Restructuring
      and ReliaGene acquisition related accruals
                              
                              
                              5
                              
                              
                              
                              40Other
                              
                              
                              240
                              
                              
                              
                              192$
                              3,084
                              
                              
                              $
                              2,288


6


ORCHID
CELLMARK INC. AND SUBSIDIARIES


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)


(Unaudited)





(7)
Income Taxes




As of
September 30, 2009 and December 31, 2008, the Company has no unrecognized income
tax benefits related to uncertain tax positions.   The Company
recognizes interest and penalties related to uncertain tax positions in income
tax expense.  The tax years 2006 to 2008 remain open to examination by the
United Kingdom (UK) taxing authorities and the tax years 2006 to 2008 remain
open to examination by the US taxing authorities. With respect to the Company’s
UK subsidiary’s open tax years and based upon the filing of a UK tax return in
October 2009, the Company is finalizing certain tax items and expects to
recognize an income tax benefit in the fourth quarter of 2009 of approximately
$350 thousand to $450 thousand.  Further, the US taxing authorities may
examine the tax years from the Company’s inception in 1995 through 2005, but are
generally barred from adjusting the tax liabilities in excess of the net
operating losses generated in any of those tax years.




(8)
Recently Issued Accounting Pronouncements




In June
2009, the Financial Accounting Standards Board (FASB) issued FAS No. 168, The
FASB Accounting Standards Codification TM and the Hierarchy of Generally
Accepted Accounting Principles — a replacement of FASB Statement No. 162 or FAS
168 (FASB ASC 105-10). FAS 168 replaces all previously issued accounting
standards and establishes the FASB Accounting Standards Codification TM (FASB
ASC) as the source of authoritative accounting principles recognized by the FASB
to be applied by nongovernmental entities in the preparation of financial
statements in conformity with GAAP.  FAS 168 is effective for all
interim and annual periods ending after September 15, 2009. The FASB ASC is not
intended to change existing US GAAP. The adoption of this pronouncement will
only result in changes to the Company’s financial statement disclosure and
periodic reporting references. As such, the adoption of this pronouncement has
no effect on the Company’s consolidated financial position, results of
operations, or cash flows.




In order
to facilitate the transition to the FASB ASC, the Company has elected to show
all references to GAAP within this quarterly Report on Form 10-Q as usual along
with a parenthetical FASB ASC reference.




Effective
January 1, 2009, the Company adopted all the provisions of FAS No. 157, Fair Value Measurements(FAS
157) (FASB ASC 820-10). FAS 157 defines fair value, establishes a framework for
measuring fair value and expands disclosures about fair value measurements.FAS 157 is applicable
whenever another accounting pronouncement requires or permits assets and
liabilities to be measured at fair value. FAS 157 does not expand or require any
new fair value measures, however, the application of this statement may change
current practice. The implementation of this standard did not have a material
impact on the Company’s consolidated financial statements.




Effective
January 1, 2009, the Company adopted FAS No. 141 (revised 2007), Business Combinations (FAS
141(R)), which replaces FAS No. 141,Business Combinations (FASB
ASC 805-20).  FAS 141(R) establishes principles and requirements for
how an acquirer recognizes and measures in its financial statements the
identifiable assets acquired, the liabilities assumed, any non-controlling
interest in the acquiree and the goodwill acquired. This statement also
establishes disclosure requirements which will enable users to evaluate the
nature and financial effects of the business combination. FAS 141(R) applies
prospectively to a company’s business combinations for which the acquisition
date is on or after January 1, 2009. The implementation of this standard did not
have a material impact on the Company’s consolidated financial statements,
however, it may have an impact on future business combinations.




Effective
January 1, 2009, the Company adopted FASB Staff Position (FSP) No. 142-3, Determination of the Useful Life of
Intangible Assets(FSP 142-3) (FASB ASC 350-30). FSP 142-3 amends the
factors that should be considered in developing assumptions about renewal or
extension used in estimating the useful life of a recognized intangible asset
under FAS 142, Goodwill and
Intangible Assets(FASB ASC 350-10). FSP 142-3 is intended to improve the
consistency between the useful life of a recognized intangible asset under FAS
142 and the period of expected cash flows used to measure the fair value of the
asset under FAS 141(R) and other GAAP. The measurement provisions of this
standard apply only to intangible assets of the Company acquired on or after
January 1, 2009. The implementation of this standard did not have a material
impact on the Company’s consolidated financial statements.




Effective
January 1, 2009, the Company adopted FSP Emerging Issues Task Force (EITF) Issue
No. 03-6-1, Determining
Whether Instruments Granted in Share-Based Payment Transactions Are
Participating Securities (FSP EITF 03-6-1) (FASB ASC 260-10). FSP EITF
03-6-1 clarified that all outstanding unvested share-based payment awards that
contain rights to nonforfeitable dividends participate in undistributed earnings
with common shareholders. Awards of this nature are considered participating
securities and the two-class method of computing basic and diluted earnings per
share must be applied. The implementation of this standard did not have a
material impact on the Company’s consolidated financial statements.




Effective
January 1, 2009, the Company adopted EITF Issue No. 07-5, Determining Whether an Instrument
(or Embedded Feature) Is Indexed to an Entity’s Own Stock (EITF 07-5)
(FASB ASC 815-40). EITF 07-5 provides that an entity should use a two step
approach to evaluate whether an equity-linked financial instrument (or embedded
feature) is indexed to its own stock, including evaluating the instrument’s
contingent exercise and settlement provisions. It also clarifies the impact of
foreign currency denominated strike prices and market-based employee stock
option valuation instruments on the evaluation. The implementation of this
standard did not have a material impact on the Company’s consolidated financial
statements.


7


ORCHID
CELLMARK INC. AND SUBSIDIARIES


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)


(Unaudited)




Effective
January 1, 2009, the Company adopted FSP No. 133-1 and FIN No. 45-4, Disclosures about Credit Derivatives
and Certain Guarantees: An Amendment of FASB Statement No. 133 and FASB
Interpretation No. 45; and Clarification of the Effective Date of FASB Statement
No. 161Disclosures about Derivative Instruments and Hedging Activities - an
amendment of FASB Statement No. 133 (FSP 133-1 and FIN 45-4) (FASB ASC
815-10 and FASB ASC 460-10). FSP 133-1 and FIN 45-4 amend and enhance disclosure
requirements for sellers of credit derivatives and financial guarantees. It also
clarifies that the disclosure requirements of FAS 161 are effective for
quarterly periods beginning after November 15, 2008, and fiscal years that
include those periods. The implementation of this standard did not have a
material impact on the Company’s consolidated financial statements.




Effective
January 1, 2009, the Company adopted EITF Issue No. 08-5, Issuer’s Accounting for Liabilities
Measured at Fair Value With a Third-Party Credit Enhancement(EITF 08-5)
(FASB ASC 820-10). EITF 08-5 provides guidance for measuring liabilities issued
with an attached third-party credit enhancement (such as a guarantee). It
clarifies that the issuer of a liability with a third-party credit enhancement
(such as a guarantee) should not include the effect of the credit enhancement in
the fair value measurement of the liability. The implementation of this standard
did not have a material impact on the Company’s consolidated financial
statements.




In May
2009, the FASB issued FAS 165, Subsequent Events (FAS 165)
(FASB ASC 855-10). FAS 165 sets forth the period after the balance sheet date
during which management of a reporting entity should evaluate events or
transactions that may have occurred for potential recognition or disclosure in
the financial statements, the circumstances under which an entity should
recognize events or transactions occurring after the balance sheet date in its
financial statements and the disclosures that an entity should make about events
or transactions that occurred after the balance sheet date. The Company adopted
FAS 165 as of June 30, 2009, which was the required effective date. The
implementation of this standard did not have a material impact on the Company’s
consolidated financial statements. In accordance with FAS 165, the Company has
evaluated subsequent events through October 29, 2009, which is the date these
consolidated financial statements were issued. All subsequent events requiring
recognition as of September 30, 2009 have been incorporated into these
consolidated financial statements herein.




(9)
Comprehensive Income/Loss




Comprehensive
income/loss is comprised of net earnings and foreign currency translation
adjustments.  Total comprehensive loss for the three months ended
September 30, 2009 and 2008 was approximately $1.1 million and $3.0 million,
respectively, and total comprehensive loss for the nine months ended September
30, 2009 and 2008 was approximately $1.1 million and $6.5 million, respectively.
The difference from net loss for the three and nine months ended September 30,
2009 and 2008 consists of foreign currency translation adjustments. Accumulated
other comprehensive loss as reflected in the consolidated balance sheets
consists of cumulative foreign currency translation adjustments.




(10) Legal
Proceedings




On or about November 21,
2001, a complaint was filed in the United States District Court for the Southern
District of New York naming the Company as a defendant, along with certain of
its former officers and underwriters. An amended complaint was filed on April
19, 2002. The complaint, as amended, purportedly was filed on behalf of persons
purchasing the Company’s stock between May 4, 2000 and December 6, 2000, and
alleges violations of Sections 11, 12(a)(2) and 15 of the Securities Act of
1933, as amended, and Sections 10(b) and 20(a) of the Securities Exchange Act of
1934, as amended, and Rule 10b-5 promulgated thereunder. The amended complaint
alleges that, in connection with the Company’s May 5, 2000 initial public
offering (IPO), the defendants failed to disclose additional and excessive
commissions purportedly solicited by and paid to the underwriter defendants in
exchange for allocating shares of the Company’s stock to preferred customers and
alleged agreements among the underwriter defendants and preferred customers
tying the allocation of IPO shares to agreements to make additional aftermarket
purchases at pre-determined prices. Plaintiffs claim that the failure to
disclose these alleged arrangements made the Company’s registration statement on
Form S-1 filed with the SEC in May 2000 and the prospectus, a part of the
registration statement, materially false and misleading. On or about July 15,
2002, the Company filed a motion to dismiss all of the claims against it and its
former officers. On October 9, 2002, the Court dismissed without prejudice only
the Company’s former officers, Dale R. Pfost and Donald R. Marvin, from the
litigation in exchange for the Company entering into a tolling agreement with
plaintiffs’ executive committee. On February 19, 2003, the Company received
notice of the Court’s decision to dismiss the Section 10(b) claims against the
Company. Plaintiffs and the defendant issuers involved in related IPO securities
litigation, including the Company, have agreed in principal on a settlement
that, upon a one-time surety payment by the defendant issuers’ insurers, would
release the defendant issuers and their individual officers and directors from
claims and any future payments or out-of-pocket costs. On March 10, 2005, the
Court issued a memorandum and order (i) preliminarily approving the settlement,
contingent on the parties’ agreement on modifications of the proposed bar order
in the settlement documents, (ii) certifying the parties’ proposed settlement
classes, (iii) certifying the proposed class representatives for the purposes of
the settlement only, and (iv) setting a further hearing for the purposes of (a)
making a final determination as to the form, substance and program of notice of
proposed settlement and (b) scheduling a public fairness hearing in order to
determine whether the settlement can be finally approved by the Court. On April
24, 2006, the Court held a fairness hearing and took motion for final approval
under advisement. On October 5, 2009, the Court granted the plaintiffs’ motion
for an order of final approval of the settlement, plan of allocation and
certification of the class.  Such settlement does not require any
payment by the Company to the plaintiffs.


8


ORCHID
CELLMARK INC. AND SUBSIDIARIES


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)


(Unaudited)




In
related proceedings against the underwriters, the United States Court of Appeals
for the Second Circuit ruled on December 5, 2006 that the District Court’s
certification of class actions against the underwriters in six “focus” cases was
vacated and remanded for further proceedings.   In so doing, the
Second Circuit ruled that “the cases pending on this appeal may not be certified
as class actions.”  On April 6, 2007, the Second Circuit denied the
plaintiffs’ petition for rehearing, and no further appeals have been
taken.




As a
result of the Second Circuit’s ruling, the plaintiffs and the issuers stipulated
on June 22, 2007 that the Stipulation and Agreement of Settlement with Defendant
Issuers and Individuals, which was originally submitted to the Court on June 10,
2004, was terminated, which resolved the motion for final approval of the class
action settlement with the issuers and individual defendants.  The
Court entered the parties’ stipulation as an Order on June 25,
2007.  As a result of these developments, the plaintiffs have filed
amended complaints against the underwriters and “focus case” issuers and
individuals and are attempting to certify a class action.




In
response to the amended complaints, the underwriters and "focus case" issuers
moved to dismiss the amended complaints.  On March 26, 2008, the
motion to dismiss was granted in part and denied in part.  As a
result, the Court will proceed with the plaintiffs' amended complaints against
the underwriters and "focus case" issuers to determine whether class actions can
be certified.




The
Company is a defendant in litigation pending in the United States District Court
for the Southern District of New York entitled Enzo Biochem, Inc. et
al.  (Enzo) v. Amersham PLC, et al. (Amersham), filed in October 2002.
By their complaint, plaintiffs allege that certain defendants (i) breached their
distributorship agreements by selling certain products for commercial
development (which they allege was not authorized), (ii) infringed plaintiffs’
patents through the sale and use of certain products and (iii) are liable for
unfair competition and tortious interference with contractual relations. The
Company did not have a contractual relationship with plaintiffs, but is alleged
to have purchased the product at issue from one of the other defendants. The
Company has sold the business unit that was allegedly engaged in the unlawful
conduct. As a result, there is no relevant injunctive relief to be sought from
the Company. The complaint seeks damages in an undisclosed amount. Most of the
fact discovery in the case has been taken, and a Markman hearing to construe the
patent claims was conducted in early July 2005. On July 17, 2006, the Court
ruled in the Company’s favor on its construction of the patents asserted against
the Company, and the co-defendants, including the Company, moved for summary
judgment on all claims against it in January 2007. A hearing on the defendants’
motions for summary judgment occurred on July 17-18, 2007, and the Court
reserved ruling on the motions, taking them under advisement. Such matter has
been delayed due to the death of the judge and the assignment of a new
judge.




In other
litigation brought by Enzo against another defendant under the same patents
asserted against the Company, a Connecticut Federal Court has invalidated the
patents asserted there and asserted against the Company in the New York
case.  That decision is on appeal.   As a result of
these developments, the defendants in the Enzo v. Amersham case requested a
conference before the Court in order to determine how to
proceed.  Such conference was held on March 4, 2008 and the Court has
not yet ruled on such determination.




On June
5, 2008, the Company and Beckman Coulter, Inc. filed suit against Sequenom, Inc.
(Sequenom), in the United States District Court for the Southern District of
California alleging infringement of US patent numbers 5,888,819, 6,004,744 and
6,537,748.  This lawsuit seeks damages and injunctive
relief.  Sequenom filed an answer and counterclaims on August 15,
2008.  A reply to the counterclaims was filed on August 29,
2008.  On June 22, 2009, the parties filed a stipulation of dismissal
which dismissed the lawsuit with prejudice.




Additionally,
the Company has certain other claims against it arising from the normal course
of its business. The ultimate resolution of such matters, including those cases
disclosed above, in the opinion of management, will not have a material effect
on the Company’s financial position and liquidity, but could have a material
impact on the Company’s results of operations for any reporting
period.


9


ORCHID
CELLMARK INC. AND SUBSIDIARIES


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)


(Unaudited)




(11)
Subsequent Events




On
October 13, 2009, the Company executed a license agreement with Illumina, Inc.
(Illumina) under which the Company granted a worldwide license to Illumina for
the commercial development of the Company’s proprietary single base nucleotide
extension technology for the diagnostic and forensic fields. Under the
terms of the license transaction, the Company received an upfront fee of
$850,000. There is the potential of an additional $150,000 in contingent
milestone payments.  The Company will also collect royalties received
by Illumina through any subcontracting arrangements.  Additionally, the
licensing agreement allows the Company to purchase certain Illumina product
offerings utilizing the patents as a preferred customer. Under the agreement,
the Company reserves the rights to use the licensed patents for all fields of
use.





On
October 20, 2009, the Company announced a planned consolidation of the Company’s
East Lansing, Michigan paternity testing operations to its Dayton, Ohio
facility.  The Company expects to complete this consolidation on or
about July 1, 2010.  The Company currently expects to incur
restructuring charges and cash expenditures in connection with this action of
$775,000 to $1,000,000 in the aggregate, which includes: severance and retention
bonuses for employees in the range of $450,000 to $550,000; relocation costs for
employees relocating from the East Lansing facility in the range of $50,000 to
$75,000; recruiting and training costs in Company’s Dayton facility in
connection with the transfer of work from the East Lansing facility of
approximately $50,000; lease termination costs in the range of $150,000 to
$200,000; and equipment relocation and reinstallation costs in the range of
$75,000 to $125,000.  A substantial portion of these charges are
expected to be reported in the fourth quarter of 2009 and the first and second
quarters of 2010.  The Company currently expects to offset these
restructuring charges and expenditures through annual cost savings of
approximately $1 million from operational efficiencies, plant and equipment cost
reductions and increased scalability.





10




Item
2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS




This
Management’s Discussion and Analysis of Financial Condition and Results of
Operations as of September 30, 2009 and for the three and nine months ended
September 30, 2009 and 2008 should be read in conjunction with our unaudited
Consolidated Financial Statements and related unaudited Notes to Consolidated
Financial Statements included elsewhere in this Quarterly Report on Form
10-Q.




OVERVIEW




We are
engaged in the provision of DNA testing services that generate genetic profile
information by analyzing an organism’s unique genetic identity. We focus our
business on DNA testing primarily for human identity. We principally provide DNA
testing services for forensic, family relationship and, to a lesser extent,
security applications. Forensic DNA testing is primarily used to confirm that a
suspect committed a particular crime, to exonerate an innocent person or to
establish or maintain databases of individuals convicted of crimes or, in some
instances, arrested in connection with crimes. We are also engaged in the
provision of non-DNA forensic laboratory services. Family relationship DNA
testing is used to establish whether two or more people are genetically related.
DNA testing is used by individuals and employers in security applications to
establish or store a person’s genetic profile for identification purposes in the
event of an emergency or accident.




We have
operations in the United States, or US, and in the United Kingdom, or UK, and
the majority of our current customers are based in these two countries. Our
forensic, family relationship and security DNA testing services are conducted in
both the US and the UK. Based on our review of publicly available information
regarding contract sizes and competitor activity, supplemented by industry
publications and third-party market assessment data, we believe that the US and
UK are two of the largest existing markets for DNA testing services today. In
the US and UK, a significant amount of our current testing activity is under
established non-exclusive contracts with government agencies. These contracts
are usually awarded through a sealed bid process and, when awarded, typically
have a term from one to three years. We believe that our experience and
reputation as a reliable provider of services to government agencies is a valued
credential that can be used in securing both new contracts and renewing existing
contracts.




Our
operations in the US accounted for 46% and 52% of our total revenues for the
three months ended September 30, 2009 and 2008, respectively, and for 51% and
55% of our total revenues for the nine months ended September 30, 2009 and 2008,
respectively.  We continue to experience significant price competition
in our forensics and paternity testing businesses.  We are focused on
improving our operational execution to increase throughput in our laboratories
and lower aggregate operating costs.  In particular, in our forensics
business we have reduced our sample processing time and decreased the number of
samples that need to be retested.  Additionally, we have increased the
number of samples processed per analyst. We believe that our forensic and
paternity laboratory testing volumes, combined with the business that we
acquired as part of the acquisition of ReliaGene Technologies Inc., or
ReliaGene, have increased our operational efficiencies. In addition, on October
20, 2009, we announced a planned consolidation of our East Lansing, Michigan
paternity testing operations to our Dayton, Ohio facility.  We believe
this consolidation may lead to additional operational efficiencies, plant and
equipment cost reductions and increased scalability.




Our
operations in the UK accounted for 54% and 48% of our total revenues for the
three months ended September 30, 2009 and 2008, respectively, and for 49% and
45% of our total revenues for the nine months ended September 30, 2009 and 2008,
respectively. Prior to 2009, a significant portion of our UK revenues were
derived through our agreement with LGC Ltd., or LGC. LGC is a provider of
analytical and diagnostic services and one of our competitors in providing DNA
testing services in the UK. Our prior agreement with LGC was terminated
effective July 15, 2007 and we then entered into a series of temporary extension
agreements with LGC, which have terminated. Our focus is on providing our
services directly to UK police forces. In 2007, we were successful in winning
forensic work directly with UK police forces and, in February 2008, we were
awarded, overall, a significant portion of the service packages we bid on in the
North West/South West and Wales regional tender.  We were awarded work
from nine of the fourteen police forces that participated in this
tender.  Under the terms of the award, we are providing forensic
services, including DNA testing of database crime scene samples, forensic
casework and database testing services under the UK’s Police and Criminal
Evidence Act, or PACE, for multiple police forces that collectively tendered
their work.  This award followed a rigorous and competitive bidding
process.  We believe that the actions we have taken to date have
enabled us to successfully transition from our prior reliance on revenues
derived from LGC to directly providing these services to police forces in the
UK.  In addition, we expect the remaining police forces in the UK to
solicit initial tenders for forensic services through the UK’s National
Procurement Plan by the end of 2011.


11




Operating
Highlights




Our
revenues are predominately generated from DNA testing services provided to our
customers. Our costs and expenses include costs of service revenues, research
and development expenses, marketing and sales expenses, general and
administrative expenses, amortization expense and other income and expense.
Costs of service revenues consist primarily of salaries and related personnel
costs, laboratory supplies, fees paid for the collection of samples,
depreciation and facility expenses. Research and development expenses consist
primarily of salaries and related costs, laboratory supplies and other expenses
related to the design, development, testing and enhancement of our services.
Marketing and sales expenses consist of salaries and benefits for marketing and
sales personnel within our organization and all related costs of selling and
marketing our services. General and administrative expenses consist primarily of
salaries and related expenses for executive, finance and administrative
personnel, professional fees including legal expenses, insurance and other
corporate expenses.




Our
overall operating results improved for the three months ended September 30, 2009
as compared to the same period in 2008. For the three months ended September 30,
2009 as compared to the three months ended September 30, 2008, total revenues
decreased approximately 1%, while gross margin, as percentage of service
revenues, increased from approximately 29% to approximately 33%. For the three
months ended September 30, 2009 as compared to the same period in 2008, our UK
revenues increased by approximately 11% as a result of increased forensics
revenues due to increased volume.  In the US we experienced increased
revenues in our forensic casework testing services, due to increased volume. The
increased revenues in our US forensic casework testing services were offset by a
significant decrease in testing services involving DNA profile uploads into the
Combined DNA Index System, or CODIS, and individual state databases, as well as
decreased revenues from paternity testing services. The increase in gross
margin, as a percentage of service revenue, was the result of added sample
volumes for our forensics testing services in the UK and forensics casework
testing services in the US, as well as reductions in personnel and supply
expenses. For the three months ended September 30, 2009, our operating expenses,
other than cost of service revenues, decreased by approximately 8% as compared
to the same period in 2008, as a result of decreased general and administrative
and marketing and sales expenses, in particular decreased personnel costs and
professional fees, as well as the impact of the exchange rate movement of the
British pound as compared to the US dollar.




Our
overall operating results also improved for the nine months ended September 30,
2009 as compared to the same period in 2008.  For the nine months
ended September 30, 2009 as compared to the nine months ended September 30,
2008, total revenues decreased approximately 3%, while gross margin, as a
percentage of service revenues, increased from approximately 30% to
approximately 34%. We experienced revenue increases in our UK forensic and
immigration testing services and in our US forensic casework testing
services.  The increased revenues in some of our testing services were
offset by decreased revenues in our US paternity, CODIS, and individual state
database testing services. The increase in gross margin, as a percentage of
service revenue, was primarily a result of increased forensic testing
services.  Cost of service revenues decreased due to lower personnel
costs and lower lab supply costs as a result of process improvements as well as
the impact of the exchange rate movement of the British pound as compared to the
US dollar. For the nine months ended September 30, 2009, our operating expenses,
other than cost of service revenues, decreased by approximately 14% as compared
to the same period in 2008, due to decreased personnel costs and lower
professional fees including legal expenses related to a sizable state paternity
contract that was awarded to us and protested by a competitor in
2008.


12




RESULTS
OF OPERATIONS




The
following table sets forth a quarter-over-quarter comparison of the components
of our net loss for the three months ended September 30, 2009 and
2008:




(In thousands)2009
                        
                        
                        2008
                        
                        
                        $ Change
                        
                        
                        %
      ChangeTotal
      revenues
                        
                        $
                        14,674
                        
                        
                        $
                        14,872
                        
                        
                        $
                        (198
                        )
                        
                        
                        (1
                        )%Cost
      of service revenues
                        
                        
                        9,798
                        
                        
                        
                        10,500
                        
                        
                        
                        (702
                        )
                        
                        
                        (7
                        )Research
      and development
                        
                        
                        228
                        
                        
                        
                        228
                        
                        
                        
                        0
                        
                        
                        
                        0Marketing
      and sales
                        
                        
                        1,245
                        
                        
                        
                        1,536
                        
                        
                        
                        (291
                        )
                        
                        
                        (19
                        )General
      and administrative
                        
                        
                        3,401
                        
                        
                        
                        3,588
                        
                        
                        
                        (187
                        )
                        
                        
                        (5
                        )Amortization
      of intangible assets
                        
                        
                        467
                        
                        
                        
                        475
                        
                        
                        
                        (8
                        )
                        
                        
                        (2
                        )Total
      other income expense, net
                        
                        
                        39
                        
                        
                        
                        128
                        
                        
                        
                        (89
                        )
                        
                        
                        (69
                        )Income
      tax expense benefit
                        
                        
                        199
                        
                        
                        
                        132
                        
                        
                        
                        67
                        
                        
                        
                        51Net
      loss
                        
                        
                        (625
                        )
                        
                        
                        (1,459
                        )
                        
                        
                        834
                        
                        
                        
                        (57
                        )




Revenues




Total
revenues for the three months ended September 30, 2009 of $14.7 million
represented a decrease of $198 thousand, or approximately 1%, as compared to
revenues of $14.9 million for the comparable period in 2008.




Our US
service revenues for the three months ended September 30, 2009 of $6.7 million
decreased by approximately $1.0 million, or approximately 13%, as compared to
$7.6 million for the comparable period in 2008, primarily due to a significant
decrease in CODIS business and individual state database testing services, from
the third quarter of 2008, as well as decreased revenues from paternity testing
services. This decrease was partly offset by increases in revenues from our
forensic casework testing services due to increased volume.




Revenues
from our UK-based testing services of $8.0 million for the three months ended
September 30, 2009 increased by $793 thousand, or approximately 11%, as compared
to $7.2 million for the comparable period in 2008. For the three months ended
September 30, 2009, as compared to the comparable period in 2008, our UK
revenues were unfavorably impacted by approximately 13% as a result of the
exchange rate movement of the British pound as compared to the US dollar.
Despite the adverse effect of exchange rate movements, our UK-based revenue
increase was driven by an increase in forensics revenues, as work awarded under
the North West/South West and Wales’s regional tender and pilot work has
replaced and surpassed revenues previously generated under our expired
arrangements with LGC.




We
previously performed forensic testing services for several police forces
throughout the UK through our subcontractor agreement with LGC. Prior to 2009, a
significant portion of our UK revenues were derived through our agreement with
LGC. LGC is a provider of analytical and diagnostic services and one of our
competitors in providing DNA testing services in the UK. Our agreement with LGC
was terminated effective July 15, 2007 and we then entered into a series of
temporary extension agreements with LGC, which have terminated. Our focus is on
providing our services directly to UK police forces. In 2007, we were successful
in winning forensic work directly with UK police forces and, in February 2008,
we were awarded, overall, a significant portion of the service packages we bid
on in the North West/South West and Wales regional tender. We were awarded work
from nine of the fourteen police forces that participated in this tender. Under
the terms of the award, we are providing forensic services, including DNA
testing of database crime scene samples, forensic casework and PACE samples for
multiple police forces that collectively tendered their work. This award
followed a rigorous and competitive bidding process.  In addition, we
expect the remaining police forces in the UK to solicit initial tenders for
forensic services through the UK’s National Procurement Plan by the end of
2011.




During the three months ended September
30, 2009 and 2008, we recognized $14 thousand and $27 thousand, respectively, in
other revenues, specifically license revenues.


13


Cost
of Service Revenues




Cost of service revenues were $9.8
million, or approximately 67% of service revenues, for the three months ended
September 30, 2009, compared to $10.5 million, or approximately 70% of service
revenues, for three months ended September 30, 2008. For three months ended
September 30, 2009, as compared to the comparable period in 2008, our UK cost of
service revenues were favorably impacted by approximately 13% as a result of the
exchange rate movement of the British pound as compared to the US
dollar.  In the US, cost of service revenues for the three months
ended September 30, as compared to the comparable period in 2008, decreased due
to lower personnel costs and to lower lab supply costs as a result of process
improvements. Our gross margin percentage increased by approximately four
percentage points from 29% for the three months ended September 30, 2008 to 33%
for the three months ended September 30, 2009.  This increase is a
result of added sample volumes for our forensics testing services in the UK and
forensics casework testing services in the US, productivity enhancements in the
US and the UK, as well as reductions in personnel and supply expenses in the
US. On October 20, 2009,weannounced a planned consolidation of
our East Lansing, Michigan paternity testing operations to our Dayton, Ohio
facility.  We believe this consolidation may lead to additional
operational efficiencies, plant and equipment cost reductions and increased
scalability.





Research
and Development





Research
and development expenses for each of the three months ended September 30, 2009
and 2008 were approximately $228 thousand.




Marketing
and Sales




Marketing and sales expenses for the
three months ended September 30, 2009 and 2008 were $1.2 million and $1.5
million, respectively. The decrease in marketing and sales expenses was
primarily due to decreased personnel costs and the impact of the exchange rate
movement of the British pound as compared to the US
dollar.





General
and Administrative




General
and administrative expenses for the three months ended September 30, 2009 and
2008 were $3.4 million and $3.6 million, respectively. The decrease in general
and administrative expenses is primarily due to decreased professional fees,
including legal fees related to a sizable state paternity contract that was
awarded to us and protested by a competitor in 2008 and the impact of the
exchange rate movement of the British pound as compared to the US
dollar.




Amortization
of Intangible Assets





During
the three months ended September 30, 2009 and 2008, we recorded $467 thousand
and $475 thousand of amortization expense, respectively.




Total
Other Income (Expense), Net




Interest
income for the three months ended September 30, 2009 was $10 thousand, compared
to $79 thousand during the same period of the prior year, due to lower interest
rates and lower average cash balances in 2009.





Interest
expense for the three months ended September 30, 2009 and 2008 was zero and $8
thousand, respectively.  This interest expense was related to debt
assumed as result of the acquisition of ReliaGene in the fourth quarter of 2007,
which was paid off in April 2009.





Other
income for the three months ended September 30, 2009 was $29 thousand, primarily
consisting of finance charges received on outstanding receivables. Other income
for the three months ended September 30, 2008 was $57 thousand, primarily
consisting of non-cash gains from reductions in the fair value of certain
liabilities.





Income
Tax Expense





During
the three months ended September 30, 2009 and 2008, we recorded income tax
expense of $199 thousand and $132 thousand, respectively, primarily related to
our UK business.  No tax benefit was recorded relating to our US
business’ losses as management deemed that it was not likely that such tax
benefit would be realized.




Net
Loss




For the
three months ended September 30, 2009, we reported a net loss of $625 thousand,
which represents a decrease of 57% as compared to a net loss of $1.5 million for
the three months ended September 30, 2008.


14


The
following table sets forth a comparison of the components of our net loss for
the nine months ended September 30, 2009 and 2008:




(In
      thousands)2009
                        
                        
                        2008
                        
                        
                        $ Change
                        
                        
                        %
      ChangeTotal
      revenues
                        
                        $
                        43,325
                        
                        
                        $
                        44,623
                        
                        
                        $
                        (1,298
                        )
                        
                        
                        (3
                        )%Cost
      of service revenues
                        
                        
                        28,535
                        
                        
                        
                        31,159
                        
                        
                        
                        (2,624
                        )
                        
                        
                        (8
                        )Research
      and development
                        
                        
                        579
                        
                        
                        
                        654
                        
                        
                        
                        (75
                        )
                        
                        
                        (12
                        )Marketing
      and sales
                        
                        
                        3,626
                        
                        
                        
                        4,659
                        
                        
                        
                        (1,033
                        )
                        
                        
                        (22
                        )General
      and administrative
                        
                        
                        11,146
                        
                        
                        
                        12,639
                        
                        
                        
                        (1,493
                        )
                        
                        
                        (12
                        )Amortization
      of intangible assets
                        
                        
                        1,394
                        
                        
                        
                        1,429
                        
                        
                        
                        (35
                        )
                        
                        
                        (2
                        )Total
      other income expense, net
                        
                        
                        34
                        
                        
                        
                        846
                        
                        
                        
                        (812
                        )
                        
                        
                        (96
                        )Income
      tax expense (benefit)
                        
                        
                        479
                        
                        
                        
                        (117
                        )
                        
                        
                        596
                        
                        
                        >100Net
      loss
                        
                        
                        (2,400
                        )
                        
                        
                        (4,954
                        )
                        
                        
                        2,554
                        
                        
                        
                        (52
                        )




Revenues




Total
revenues for the nine months ended September 30, 2009 of $43.3 million
represented a decrease of $1.3 million, or approximately 3%, as compared to
revenues of $44.6 million for the comparable period in 2008.




Our US
service revenues for the nine months ended September 30, 2009 of $21.6 million
decreased by $2.5 million, or approximately 10%, as compared to $24.1 million
for the comparable period in 2008, primarily due to a significant decrease in
CODIS business and individual state database testing services from the nine
months ended September 30, 2008, as well as decreased revenues from paternity
testing services. This decrease was partly offset by increases in revenues from
our forensic casework testing services due to increased volume.




Revenues
from our UK-based testing services of $21.6 million for the nine months ended
September 30, 2009 increased by $1.3 million, or approximately 6%, as compared
to the comparable period in 2008.  For the nine months ended September
30, 2009, as compared to the comparable period in 2008, our UK revenues were
unfavorably impacted approximately 21% as a result of the exchange rate movement
of the British pound as compared to the US dollar.  Despite the
adverse effect of exchange rate movements, our UK-based revenue increase was
driven by an increase in forensics revenues, as work awarded under the North
West/South West and Wales’s regional tender and pilot work has replaced and
surpassed revenues previously generated under our expired arrangements with
LGC.




We
previously performed forensic testing services for several police forces
throughout the UK through our subcontractor agreement with LGC. Prior to 2009, a
significant portion of our UK revenues were derived through our agreement with
LGC. LGC is a provider of analytical and diagnostic services and one of our
competitors in providing DNA testing services in the UK. Our agreement with LGC
was terminated effective July 15, 2007 and we then entered into a series of
temporary extension agreements with LGC, which have terminated. Our focus is on
providing our services directly to UK police forces. In 2007, we were successful
in winning forensic work directly with UK police forces and, in February 2008,
we were awarded, overall, a significant portion of the service packages we bid
on in the North West/South West and Wales regional tender.  We were
awarded work from nine of the fourteen police forces that participated in this
tender. Under the terms of the award, we are providing forensic services,
including DNA testing of database crime scene samples, forensic casework and
PACE samples for multiple police forces that collectively tendered their work.
This award followed a rigorous and competitive bidding process.  In
addition, we expect the remaining police forces in the UK to solicit initial
tenders for forensic services through the UK’s National Procurement Plan by the
end of 2011.




During
the nine months ended September 30, 2009 and 2008, we recognized $135 thousand
and $219 thousand, respectively, in other revenues, specifically license
revenues.




15




Cost
of Service Revenues


Cost of
service revenues were $28.5 million, or approximately 66% of service revenues,
for the nine months ended September 30, 2009, compared to $31.2 million, or
approximately 70% of service revenues, for nine months ended September 30, 2008.
For nine months ended September 30, 2009, as compared to the comparable period
in 2008, our UK cost of service revenues were favorably impacted by
approximately 21% as a result of the exchange rate movement of the British pound
as compared to the US dollar.  In the US, cost of service revenues for
the nine months ended September 30, as compared to the comparable period in
2008, decreased due to lower personnel costs and to lower lab supply costs as a
result of process improvements. Our gross margin percentage increased by
approximately four percentage points from 30% for the nine months ended
September 30, 2008 to 34% for the nine months ended September 30,
2009.  This increase is a result of added sample volumes for our
forensics testing services in the UK and forensics casework testing services in
the US, productivity enhancements in the US and the UK, as well as reductions in
personnel and supply expenses in the US.




Research
and Development





Research
and development expenses for the nine months ended September 30, 2009 and 2008
were $579 thousand and $654 thousand, respectively.  The decrease in
research and development expenses was primarily due to reduced personnel costs
and laboratory supplies and the impact of the exchange rate movement of the
British pound as compared to the US dollar.




Marketing
and Sales




Marketing
and sales expenses for the nine months ended September 30, 2009 and 2008 were
$3.6 million and $4.7 million, respectively. The decrease in marketing and sales
expenses was primarily due to decreased personnel and website development costs
and the impact of the exchange rate movement of the British pound as compared to
the US dollar.




General
and Administrative




General
and administrative expenses for the nine months ended September 30, 2009 and
2008 were $11.1 million and $12.6 million, respectively. The decrease in general
and administrative expenses is primarily due to decreased professional fees,
including legal fees related to a sizable state paternity contract that was
awarded to us and protested by a competitor in 2008 and the impact of the
exchange rate movement of the British pound as compared to the US
dollar.




Amortization
of Intangible Assets





During
each of the nine months ended September 30, 2009 and 2008, we recorded $1.4
million of amortization expense.




Total
Other Income (Expense), Net




Interest
income for the nine months ended September 30, 2009 was $51 thousand, compared
to $324 thousand during the same period of the prior year, due to lower interest
rates and lower average cash balances in 2009.





Interest
expense for the nine months ended September 30, 2009 and September 30, 2008 was
$2 thousand and $31 thousand, respectively.  This interest expense was
related to debt assumed as result of the acquisition of ReliaGene in the fourth
quarter of 2007, which was paid off in April 2009.





Other
expense for the nine months ended September 30, 2009 was $15 thousand, primarily
due to exchange rate gains and losses on foreign currency transactions,
partially offset by finance charges received on outstanding receivables. Other
income for the nine months ended September 30, 2008 was $553 thousand. Other
income for the nine months ended September 30, 2008 included a gain of $185
thousand related to a change in estimate of a fair value of a lease guarantee
and a loss of $386 thousand related to a liability for royalty
payments.





Income
Tax Expense





During
the nine months ended September 30, 2009, we recorded income tax expense of $479
thousand primarily related to our UK business.  During the nine months
ended September 30, 2008, we recorded an income tax benefit of $117 thousand,
primarily as a result a write down in our unrecognized income tax benefits and
corresponding recognition of an income tax benefit of $175
thousand.   No tax benefit was recorded relating to our US
business’ losses as management deemed that it was not likely that such tax
benefit would be realized.





Net
Loss




For the
nine months ended September 30, 2009, we reported a net loss of $2.4 million,
which represents a decrease of 52% as compared to a net loss of $5.0 million for
the nine months ended September 30, 2008.


16




LIQUIDITY
AND CAPITAL RESOURCES




As of
September 30, 2009, we had $17.0 million in cash and cash equivalents, as
compared to $15.0 million as of December 31, 2008. Working capital increased to
$23.5 million at September 30, 2009 from $21.5 million at December 31,
2008.





Sources
of Liquidity




Our
primary sources of liquidity have been issuances of our securities and other
capital raising activities.




The
following table sets forth a comparison of the components of our liquidity and
capital resources for the nine months ended September 30, 2009 and
2008:





(In thousands)2009
                  
                  
                  2008
                  
                  
                  $
      Change
                  
                  
                  %
      ChangeCash
      provided by (used in):Operating
      activities
                  
                  $
                  2,169
                  
                  
                  $
                  (3,542
                  )
                  
                  $
                  5,711
                  
                  
                  >100
                  %Investing
      activities
                  
                  
                  (492
                  )
                  
                  
                  (429
                  )
                  
                  
                  (63
                  )
                  
                  
                  (15
                  )Financing
      activities
                  
                  
                  (338
                  )
                  
                  
                  (379
                  )
                  
                  
                  41
                  
                  
                  
                  11




Net cash provided by operations for the
nine months ended September 30, 2009 was $2.2 million, compared with net cash
used in operations of approximately $3.5 million for the comparable period in
the prior year. The change in operating cash flows was mainly a result of a
decreased net loss in the first nine months of 2009 as compared to
2008.  Investing activities during the nine months ended September 30,
2009 and 2008 consisted of capital expenditures, while financing activities
during the nine months ended September 30, 2009 and 2008 primarily consisted of
repayments of debt obligations.




New
Jersey NOL Program





The
Company sold certain state net operating loss, or NOL, carryforwards in
accordance with the State of New Jersey’s Corporation Business Tax Benefit
Certificate Transfer program, or the Program, and generated cash benefits of
$1.5 million, $1.1 million and $749 thousand for 2008, 2007 and 2006,
respectively. The Program allowed certain high technology and biotechnology
companies to sell unused NOL carryforwards to other New Jersey-based corporation
business taxpayers.  The carryforward period for the Company’s
pre-qualified losses under this program expired January 1, 2009.





ReliaGene
Debt





As part
of the acquisition of ReliaGene on October 31, 2007, we assumed $948 thousand in
debt comprised of a line of credit and various notes payable with outstanding
balances of $260 thousand and $688 thousand, respectively.  The line
of credit was fully paid off during 2008 with a then outstanding balance of $170
thousand.  The notes payable, which were secured by ReliaGene’s
equipment, had interest rates ranging from 4.50% to 8.50% and maturity dates
ranging from June 30, 2009 through September 5, 2011. In April 2009, we fully
paid off the ReliaGene notes payable, along with all accrued
interest.





Expected
Uses of Liquidity in 2009




Throughout
2009, we plan to continue making investments in our business. We expect the
following to be significant uses of liquidity: cost of service revenues,
salaries and related personnel costs, laboratory supplies and equipment, fees
for the collection of samples, facility expenses, marketing expenses and general
and administrative costs. Actual expenditures may vary substantially from our
estimates. In addition, we may make additional investments in future
acquisitions of businesses or technologies which would increase our capital
expenditures.




We
believe that our existing cash on hand will be sufficient to fund our operations
at least through the next twelve months. We may need to raise additional capital
to fund future growth opportunities, including future acquisitions of businesses
or technologies, or to operate our ongoing business activities if our future
results of operations fall below our current expectations. However, we may not
be able to raise additional funds or raise funds on terms that are acceptable to
us. If future financing is not available to us, or is not available on terms
acceptable to us, we may not be able to fund our future operating needs. If we
raise funds through equity or convertible securities, our stockholders may
experience dilution and our stock price may decline.


17




We cannot
provide assurance that our business or operations will not change in a manner
that would consume available resources more rapidly than currently anticipated.
We also cannot provide assurance that we will not require substantial additional
funding before we can achieve profitable operations.





Commitments
and Contingencies




There
were no material changes during the nine months ended September 30, 2009 to our
contractual obligations and commercial commitments as reported in our Annual
Report on Form 10-K, as amended, for the year ended December 31,
2008.




Off-Balance Sheet
Arrangements




None.




Critical
Accounting Policies




There
were no changes during the nine months ended September 30, 2009 to our critical
accounting policies as reported in our Annual Report on Form 10-K, as amended,
for the year ended December 31, 2008.




Recently
Issued Accounting Pronouncements




In June
2009, the Financial Accounting Standards Board (FASB) issued FAS No. 168, The
FASB Accounting Standards Codification TM and the Hierarchy of Generally
Accepted Accounting Principles — a replacement of FASB Statement No. 162 or FAS
168 (FASB ASC 105-10). FAS 168 replaces all previously issued accounting
standards and establishes the FASB Accounting Standards Codification TM (FASB
ASC) as the source of authoritative accounting principles recognized by the FASB
to be applied by nongovernmental entities in the preparation of financial
statements in conformity with GAAP. FAS 168 is effective for all interim and
annual periods ending after September 15, 2009. The FASB ASC is not intended to
change existing GAAP. The adoption of this pronouncement will only result in
changes to our financial statement disclosure and periodic reporting references.
As such, the adoption of this pronouncement has no effect on our consolidated
financial position, results of operations, or cash flows.




In order
to facilitate the transition to the FASB ASC, we have elected to show all
references to GAAP within this quarterly Report on Form 10-Q as usual along with
a parenthetical FASB ASC reference.




Effective
January 1, 2009, we adopted all the provisions of FAS No. 157, Fair Value Measurements(FAS
157) (FASB ASC 820-10). FAS 157 defines fair value, establishes a framework for
measuring fair value and expands disclosures about fair value measurements.FAS 157 is applicable
whenever another accounting pronouncement requires or permits assets and
liabilities to be measured at fair value. FAS 157 does not expand or require any
new fair value measures, however, the application of this statement may change
current practice.  The implementation of this standard did not have a
material impact on our consolidated financial statements.




Effective
January 1, 2009, we adopted FAS No. 141 (revised 2007), Business Combinations (FAS
141(R)), which replaces FAS No. 141,Business Combinations (FASB
ASC 805-20).  FAS 141(R) establishes principles and requirements for
how an acquirer recognizes and measures in its financial statements the
identifiable assets acquired, the liabilities assumed, any non-controlling
interest in the acquiree and the goodwill acquired. This statement also
establishes disclosure requirements which will enable users to evaluate the
nature and financial effects of the business combination. FAS 141(R) applies
prospectively to a company’s business combinations for which the acquisition
date is on or after January 1, 2009. The implementation of this standard did not
have a material impact on our consolidated financial statements, however it may
have an impact on future business combinations.




Effective
January 1, 2009, we adopted FASB Staff Position (FSP) No. 142-3, Determination of the Useful Life of
Intangible Assets(FSP 142-3) (FASB ASC 350-30). FSP 142-3 amends the
factors that should be considered in developing assumptions about renewal or
extension used in estimating the useful life of a recognized intangible asset
under FAS 142 Goodwill and
Intangible Assets(FASB ASC 350-10). FSP 142-3 is intended to improve the
consistency between the useful life of a recognized intangible asset under FAS
142 and the period of expected cash flows used to measure the fair value of the
asset under FAS 141(R) and other GAAP. The measurement provisions of this
standard apply only to intangible assets of the Company acquired on or after
January 1, 2009. The implementation of this standard did not have a material
impact on our consolidated financial statements.


18




Effective
January 1, 2009, we adopted FSP Emerging Issues Task Force (EITF) Issue No.
03-6-1, Determining Whether
Instruments Granted in Share-Based Payment Transactions Are Participating
Securities (FSP EITF 03-6-1) (FASB ASC 260-10). FSP EITF 03-6-1 clarified
that all outstanding unvested share-based payment awards that contain rights to
nonforfeitable dividends participate in undistributed earnings with common
shareholders. Awards of this nature are considered participating securities and
the two-class method of computing basic and diluted earnings per share must be
applied. The implementation of this standard did not have a material impact on
our consolidated financial statements.




Effective
January 1, 2009 we adopted EITF Issue No. 07-5, Determining Whether an Instrument
(or Embedded Feature) Is Indexed to an Entity’s Own Stock (EITF 07-5)
(FASB ASC 815-40). EITF 07-5 provides that an entity should use a two step
approach to evaluate whether an equity-linked financial instrument (or embedded
feature) is indexed to its own stock, including evaluating the instrument’s
contingent exercise and settlement provisions. It also clarifies the impact of
foreign currency denominated strike prices and market-based employee stock
option valuation instruments on the evaluation. The implementation of this
standard did not have a material impact on our consolidated financial
statements.




Effective
January 1, 2009, we adopted FSP No. 133-1 and FIN No. 45-4, Disclosures about Credit Derivatives
and Certain Guarantees: An Amendment of FASB Statement No. 133 and FASB
Interpretation No. 45; and Clarification of the Effective Date of FASB Statement
No. 161 Disclosures
about Derivative Instruments and Hedging Activities an amendment of FASB
Statement No. 133 (FSP 133-1 and FIN 45-4) (FASB ASC 815-10 and FASB ASC
460-10).  FSP 133-1 and FIN 45-4 amend and enhance disclosure
requirements for sellers of credit derivatives and financial guarantees. It also
clarifies that the disclosure requirements of FAS 161 are effective for
quarterly periods beginning after November 15, 2008, and fiscal years that
include those periods. The implementation of this standard did not have a
material impact on our consolidated financial statements.




Effective
January 1, 2009, we adopted EITF Issue No. 08-5, Issuer’s Accounting for Liabilities
Measured at Fair Value With a Third-Party Credit Enhancement(EITF 08-5)
(FASB ASC 820-10). EITF 08-5 provides guidance for measuring liabilities issued
with an attached third-party credit enhancement (such as a guarantee). It
clarifies that the issuer of a liability with a third-party credit enhancement
(such as a guarantee) should not include the effect of the credit enhancement in
the fair value measurement of the liability. The implementation of this standard
did not have a material impact on our consolidated financial
statements.




In May
2009, the FASB issued FAS 165, Subsequent Events (FAS 165)
(FASB ASC 855-10). FAS 165 sets forth the period after the balance sheet date
during which management of a reporting entity should evaluate events or
transactions that may have occurred for potential recognition or disclosure in
the financial statements, the circumstances under which an entity should
recognize events or transactions occurring after the balance sheet date in its
financial statements and the disclosures that an entity should make about events
or transactions that occurred after the balance sheet date. We adopted FAS 165
as of June 30, 2009, which was the required effective date. The implementation
of this standard did not have a material impact on our consolidated financial
statements. In accordance with FAS 165, we evaluated subsequent events through
October 29, 2009 which is the date these consolidated financial statements were
issued. All subsequent events requiring recognition as of September 30, 2009
have been incorporated into these consolidated financial statements
herein.




Item
3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK




Interest
Rate Sensitivity




Our
exposure to market risk is principally confined to our cash equivalents, which
are conservative in nature, with a focus on preservation of capital. Due to the
short-term nature of our investments and the investment policies and procedures,
we have determined that the risks associated with interest rate fluctuations
related to these financial instruments are not material to our business. There
has not been any significant change to the interest rate sensitivity analysis we
performed as of December 31, 2008.




Foreign
Currency Risk




Our
business derives a substantial portion of its revenues from international
operations. We record the majority of our foreign operational transactions,
including all cash inflows and outflows, in the local currency, British pound.
We record all of our US operational transactions, including cash inflows and
outflows, in US dollars. We expect that international sales will continue to
represent a significant portion of our revenues. The significant percentage of
our revenues derived from our UK operations makes us vulnerable to future
fluctuations in the exchange rate, and while there is currently no material
adverse impact to our financial results, future material adverse exchange rate
movements would have an unfavorable translation impact on our consolidated
financial results. We are prepared to hedge against any fluctuations in foreign
currencies should such fluctuations have a material economic impact on us,
although we have not engaged in hedging activities to date. There has not been
any significant change to the foreign currency sensitivity analysis we performed
as of December 31, 2008.


19




Item
4. CONTROLS AND PROCEDURES





(a) Disclosure
Controls and Procedures. As of September 30, 2009, we conducted an
evaluation under the supervision and with the participation of our management,
including our President and Chief Executive Officer and Vice President and Chief
Financial Officer, of the effectiveness of the design and operation of our
disclosure controls and procedures. The term “disclosure controls and
procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Securities
Exchange Act of 1934, as amended, or the Exchange Act, means controls and other
procedures of a company that are designed to ensure that information required to
be disclosed by the company in the reports it files or submits under the
Exchange Act is recorded, processed, summarized and reported, within the time
periods specified in the Security and Exchange Commission’s rules and forms.
Disclosure controls and procedures include, without limitation, controls and
procedures designed to ensure that information required to be disclosed by a
company in the reports that it files or submits under the Exchange Act is
accumulated and communicated to the company’s management, including its
principal executive and principal financial officers, or persons performing
similar functions, as appropriate, to allow timely decisions regarding required
disclosure. Based on this evaluation, our President and Chief Executive Officer
and Vice President and Chief Financial Officer concluded as of September 30,
2009 that our disclosure controls and procedures were adequate and
effective.




(b) Changes in
Internal Control over Financial Reporting.  There were no
changes in our internal control over financial reporting during the quarter
ended September 30, 2009 that have materially affected, or are reasonably likely
to materially affect, our internal control over financial
reporting.




(c) Limitations
on the Effectiveness of Controls.  Our disclosure controls and
procedures are designed to provide reasonable assurance of achieving their
objectives and our President and Chief Executive Officer and Vice President and
Chief Financial Officer have concluded that our disclosure controls and
procedures are adequate and effective at that reasonable assurance level.
However, our management, including our President and Chief Executive Officer and
Vice President and Chief Financial Officer, does not expect that our disclosure
controls and procedures or our internal control over financial reporting will
prevent all error and all fraud. A control system, no matter how well conceived
and operated, can provide only reasonable, not absolute, assurance that the
objectives of the control system are met. Further, 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. Because of the
inherent limitations in all control systems, no evaluation of controls can
provide absolute assurance that all control issues and instances of fraud, if
any, within an organization 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.




Additionally,
controls can be circumvented by the individual acts of some persons, by
collusion of two or more people, or by management override of the control. The
design of any system of controls also is based in part upon certain assumptions
about the likelihood of future events, and there can be no assurance that any
design will succeed in achieving our stated goals under all potential future
conditions. Over time, controls may become inadequate because of changes in
conditions, or the degree of compliance with the policies or procedures may
deteriorate. Because of the inherent limitations in a cost-effective control
system, misstatements due to error or fraud may occur and not be
detected.




FORWARD-LOOKING
STATEMENTS




This
Quarterly Report on Form 10-Q contains forward-looking statements. Such
statements are based on management’s current expectations and are subject to a
number of factors and uncertainties that could cause actual results or outcomes
to differ materially from those described in such forward-looking statements.
These statements address or may address the following subjects:


20




•
              our
      expectation of the amount and timing of future revenues, expenses and
      other items affecting the results of our
  operations;





•
            our
      expectation that we will recognize an income tax benefit in the fourth
      quarter of 2009 of approximately $350 thousand to $450
      thousand;





•
            our
      belief that our forensic and paternity laboratory testing volumes,
      combined with those of ReliaGene, have increased our operational
      efficiencies;





•
            our
      belief that our experience and reputation as a reliable provider of
      services to government agencies is a valued credential that can be used in
      securing both new contracts and renewing existing
      contracts;







•
            our
      belief that the actions we have taken to date have enabled us to
      successfully transition from our prior reliance on revenues derived from
      LGC to directly providing DNA testing services to police forces in the
      UK;





•
            our
      expectation that the remaining police forces in the UK will solicit
      initial tenders for forensic services through the UK’s National
      Procurement Plan by the end of
2011;






•
            our
      belief that our existing cash on hand will be sufficient to fund our
      operations at least through the next twelve
  months;




•
            our
      belief that litigation claims arising against us from the normal course of
      business will not have a material effect on our financial position and
      liquidity, but could have a material impact on our results of operations
      for any reporting period;





•
            our
      plan to continue to make investments in our
  business;




•
            our
      expectation about our significant uses of
  liquidity;





•
            our
      expectation that international sales will continue to represent a
      significant portion of our
revenues;





•
            our
      expectation that the consolidation of our East Lansing facility into our
      Dayton facility may lead to additional operational efficiencies, plant and
      equipment reductions and increased
  scalability;





•
            our
      expectation that we will complete the East Lansing consolidation on or
      about July 1, 2010;





•
            our
      expectation that we will incur restructuring charges and cash expenditures
      in connection with therestructuring
      of $775,000 to $1,000,000 in the
  aggregate;





•
            our
      expectation that a substantial portion of these restructuring charges will
      be reported in the fourth quarter of 2009 and the first and second
      quarters of 2010;





•
            our
      expectation that we will offset these restructuring charges and
      expenditures through annual cost savings of approximately $1 million from
      operational efficiencies, plant and equipment cost reductions and
      increased scalability;





•
            our
      belief that the US and UK are two of the largest existing markets for DNA
      testing services today; and





•
              our
      expectation that our disclosure controls and procedures or our internal
      control over financial reporting will not  prevent all error and
      all fraud.




21





While management makes its
best efforts to be accurate in making forward-looking statements, such
statements are subject to risks and uncertainties that could cause actual
results to vary materially, including the risks and uncertainties discussed
throughout this Quarterly Report on Form 10-Q and the cautionary information set
forth under the heading “Risk Factors” appearing in Item 1A of our Annual Report
on Form 10-K, as amended, for the year ended December 31, 2008. Except as
required by law, we undertake no obligation to publicly update or revise
forward-looking statements to reflect events or circumstances after the date of
this Quarterly Report on Form 10-Q or to reflect the occurrence of unanticipated
events.




PART
II – OTHER INFORMATION




Item
1. LEGAL PROCEEDINGS




On or
about November 21, 2001, a complaint was filed in the United States District
Court for the Southern District of New York naming us as a defendant, along with
certain of our former officers and underwriters. An amended complaint was filed
on April 19, 2002. The complaint, as amended, purportedly was filed on behalf of
persons purchasing our stock between May 4, 2000 and December 6, 2000, and
alleges violations of Sections 11, 12(a)(2) and 15 of the Securities Act of
1933, as amended, and Sections 10(b) and 20(a) of the Securities Exchange Act of
1934, as amended, and Rule 10b-5 promulgated thereunder. The amended complaint
alleges that, in connection with our May 5, 2000 initial public offering, or
IPO, the defendants failed to disclose additional and excessive commissions
purportedly solicited by and paid to the underwriter defendants in exchange for
allocating shares of our stock to preferred customers and alleged agreements
among the underwriter defendants and preferred customers tying the allocation of
IPO shares to agreements to make additional aftermarket purchases at
pre-determined prices. Plaintiffs claim that the failure to disclose these
alleged arrangements made our registration statement on Form S-1 filed with the
SEC in May 2000 and the prospectus, a part of the registration statement,
materially false and misleading. On or about July 15, 2002, we filed a motion to
dismiss all of the claims against us and our former officers. On October 9,
2002, the Court dismissed without prejudice only our former officers, Dale R.
Pfost and Donald R. Marvin, from the litigation in exchange for us entering into
a tolling agreement with plaintiffs’ executive committee. On February 19, 2003,
we received notice of the Court’s decision to dismiss the Section 10(b) claims
against us. Plaintiffs and the defendant issuers involved in related IPO
securities litigation, including us, have agreed in principal on a settlement
that, upon a one-time surety payment by the defendant issuers’ insurers, would
release the defendant issuers and the individual officers and directors from
claims and any future payments or out-of-pocket costs. On March 10, 2005, the
Court issued a memorandum and order (i) preliminarily approving the settlement,
contingent on the parties’ agreement on modifications of the proposed bar order
in the settlement documents, (ii) certifying the parties’ proposed settlement
classes, (iii) certifying the proposed class representatives for the purposes of
the settlement only and (iv) setting a further hearing for the purposes of (a)
making a final determination as to the form, substance and program of notice of
proposed settlement and (b) scheduling a public fairness hearing in order to
determine whether the settlement can be finally approved by the Court. On April
24, 2006, the Court held a fairness hearing and took the motion for final
approval under advisement. On October 5, 2009, the Court granted the plaintiffs’
motion for an order of final approval of the settlement, plan of allocation and
certification of the class.  Such settlement does not require any
payment by us to the plaintiffs.




In
related proceedings against the underwriters, the United States Court of Appeals
for the Second Circuit ruled on December 5, 2006 that the District Court’s
certification of class actions against the underwriters in six “focus” cases was
vacated and remanded for further proceedings.   In so doing, the
Second Circuit ruled that “the cases pending on this appeal may not be certified
as class actions.”  On April 6, 2007, the Second Circuit denied the
plaintiffs’ petition for rehearing, and no further appeals have been
taken.


22




As a
result of the Second Circuit’s ruling, the plaintiffs and the issuers stipulated
on June 22, 2007 that the Stipulation and Agreement of Settlement with Defendant
Issuers and Individuals, which was originally submitted to the Court on June 10,
2004, was terminated, which resolved the motion for final approval of the class
action settlement with the issuers and individual defendants.  The
Court entered the parties’ stipulation as an Order on June 25,
2007.  As a result of these developments, the plaintiffs have filed
amended complaints against the underwriters and “focus case” issuers and
individuals and are attempting to certify a class action.




In
response to the amended complaints, the underwriters and "focus case" issuers
moved to dismiss the amended complaints.  On March 26, 2008, the
motion to dismiss was granted in part and denied in part.  As a
result, the Court will proceed with the plaintiffs' amended complaints against
the underwriters and "focus case" issuers to determine whether class actions can
be certified.




We are a
defendant in litigation pending in the United States District Court for the
Southern District of New York entitled Enzo Biochem, Inc. et al. (Enzo) v.
Amersham PLC, et al. (Amersham), filed in October 2002. By their complaint,
plaintiffs allege that certain defendants (i) breached their distributorship
agreements by selling certain products for commercial development (which they
allege was not authorized), (ii) infringed plaintiffs’ patents through the sale
and use of certain products, and (iii) are liable for unfair competition and
tortious interference with contractual relations. We did not have a contractual
relationship with plaintiffs, but we are alleged to have purchased the product
at issue from one of the other defendants. We have sold the business unit that
was allegedly engaged in the unlawful conduct. As a result, there is no relevant
injunctive relief to be sought from us. The complaint seeks damages in an
undisclosed amount. Most of the fact discovery in the case has been taken, and a
Markman hearing to construe the patent claims was conducted in early July 2005.
On July 17, 2006, the Court ruled in our favor on its construction of the
patents asserted against us, and the co-defendants, including us, moved for
summary judgment on all claims against us in January 2007. A hearing on the
defendants’ motions for summary judgment occurred on July 17-18, 2007, and the
Court reserved ruling on the motions, taking them under advisement. Such matter
has been delayed due to the death of the judge and the assignment of a new
judge.




In other
litigation brought by Enzo against another defendant under the same patents
asserted against us, a Connecticut Federal Court has invalidated
the patents asserted there and asserted against us in the New York
case.  That decision is on appeal.   As a result of these
developments, the defendants in the Enzo v. Amersham case requested a conference
before the Court in order to determine how to proceed.  Such
conference was held on March 4, 2008 and the Court has not yet ruled on such
determination.




On June
5, 2008, we and Beckman Coulter, Inc. filed suit against Sequenom, Inc.
(Sequenom) in the United States District Court for the Southern District of
California alleging infringement of U.S. patent numbers 5,888,819, 6,004,744 and
6,537,748.  This lawsuit seeks damages and injunctive
relief.  Sequenom filed an answer and counterclaims on August 15,
2008.  A reply to the counterclaims was filed on August 29,
2008.  On June 22, 2009, the parties filed a stipulation of dismissal
which dismissed the lawsuit with prejudice.





Additionally,
we have certain other claims against us arising from the normal course of our
business. The ultimate resolution of such matters, including those cases
disclosed above, in the opinion of management, will not have a material effect
on our financial position and liquidity, but could have a material impact on our
results of operations for any reporting period.





Item
1A.  RISK FACTORS





There
have not been any material changes to the risk factors disclosed under the
heading “Risk Factors” appearing in Item 1A of our Annual Report on Form 10-K,
as amended, for the year ended December 31, 2008.




Item
2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS





Not
applicable.




Item
3. DEFAULTS UPON SENIOR SECURITIES




Not
applicable.


23





Item
4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS





At our
Annual Meeting of Stockholders on October 7, 2009, our stockholders:
(i) elected Nicole Williams as a Class III Director to serve a three-year
term expiring in 2012; and (ii) ratified the appointment of Grant Thornton
LLP as our independent registered public accounting firm for the fiscal year
ending December 31, 2009.





The
following table sets forth information regarding the number of votes cast for,
against or withheld, and abstentions, with respect to each matter presented at
the meeting.




Proposals:
                      
                      For
                      
                      
                      Against
      or
                        Withheld
                      
                      
                      Abstentions(i)
                      Election
      of directorsNicole
      Williams
                      
                      
                      22,025,369
                      
                      
                      
                      302,137
                      
                      
                      
                      334,829(ii)
                      Proposal
      to a ratify the appointment of Grant Thornton LLP as the Company’s
      independent register public accounting firm for the fiscal year ended
      December 31, 2009
                      
                      
                      22,245,171
                      
                      
                      
                      186,477
                      
                      
                      
                      230,707





Nicole
Williams will serve as a Class III director until 2012. In addition to Ms.
Williams, the following directors continue to serve on the board of directors:
James Beery, Thomas A. Bologna, Sidney M. Hecht and Kenneth D.
Noonan.





Item
5. OTHER INFORMATION




Not
applicable.





Item
6. EXHIBITS





The
following is a list of exhibits filed as part of this Quarterly Report on Form
10-Q.




Exhibit
                        Number
                      
                      Description31.1
                      
                      Certification
      of Principal Executive Officer pursuant to Section 302 of the
      Sarbanes-Oxley Act of 200231.2
                      
                      Certification
      of Principal Financial and Accounting Officer pursuant to Section 302 of
      the Sarbanes-Oxley Act of 200232
                      
                      Certifications
      of Principal Executive Officer and Principal Financial and Accounting
      Officer pursuant to Section 906 of the Sarbanes-Oxley Act of
      2002




24




SIGNATURE




Pursuant
to the requirements 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.




ORCHID
      CELLMARK INC.Date:
      October 30, 2009
                By:
                /s/
      James F. SmithJames
      F. Smith
                  Vice
      President and Chief Financial Officer
                  (Principal
      Financial and Accounting
Officer)




25


Exhibits




Exhibit
                      Number
                    
                    Description31.1
                    
                    Certification
      of Principal Executive Officer pursuant to Section 302 of the
      Sarbanes-Oxley Act of 200231.2
                    
                    Certification
      of Principal Financial and Accounting Officer pursuant to Section 302 of
      the Sarbanes-Oxley Act of 200232
                    
                    Certifications
      of Principal Executive Officer and Principal Financial and Accounting
      Officer pursuant to Section 906 of the Sarbanes-Oxley Act of
      2002




26