##### Table of Contents

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



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FORM 10-Q



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(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, 2004



| ̈ | 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



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ORCHID BIOSCIENCES, INC.

(Exact name of registrant as specified in its charter)



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|                                                               |  |                                     
|-------------------------------------------------------------- |  | ------------------------------------
|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



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



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



As of November 8,
2004, the registrant had 22,383,421 shares of common stock outstanding.



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##### Table of Contents

ORCHID BIOSCIENCES, INC. AND SUBSIDIARIES



INDEX TO FORM 10-Q



|        |  |                                                                                                                                         |  |     
|------- |  | --------------------------------------------------------------------------------------------------------------------------------------- |  | ----
|        |  |                                                                                                                                         |  | Page
|        |  | PART I. FINANCIAL INFORMATION                                                                                                           |  |     
|ITEM 1. |  | Financial Statements                                                                                                                    |  | 3   
|        |  | Consolidated Balance Sheets as of September 30, 2004 and December 31, 2003 (unaudited)                                                  |  | 3   
|        |  | Consolidated Statement of Operations for the three and nine months ended September 30, 2004 and 2003 (unaudited)                        |  | 4   
|        |  | Consolidated Statement of Cash Flows for the nine months ended September 30, 2004 and 2003 (unaudited)                                  |  | 5   
|        |  | Consolidated Statement of Stockholders Equity and Comprehensive Income (Loss) for the nine months ended September 30, 2004 (unaudited) |  | 6   
|        |  | Notes to Consolidated Financial Statements (unaudited)                                                                                  |  | 7   
|ITEM 2. |  | Managements Discussion and Analysis of Financial Condition and Results of Operations                                                   |  | 20  
|ITEM 3. |  | Quantitative and Qualitative Disclosures about Market Risk                                                                              |  | 32  
|ITEM 4. |  | Controls and Procedures                                                                                                                 |  | 32  
|        |  | PART II OTHER INFORMATION                                                                                                               |  |     
|ITEM 1. |  | Legal Proceedings                                                                                                                       |  | 34  
|ITEM 2. |  | Unregistered Sales of Equity Securities and Use of Proceeds                                                                             |  | 34  
|ITEM 3. |  | Defaults Upon Senior Securities                                                                                                         |  | 34  
|ITEM 4. |  | Submission of Matters to a Vote of Security Holders                                                                                     |  | 34  
|ITEM 5. |  | Other Information                                                                                                                       |  | 35  
|ITEM 6. |  | Exhibits                                                                                                                                |  | 35  



2



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##### Table of Contents

PART I  FINANCIAL INFORMATION



Item 1. FINANCIAL STATEMENTS



ORCHID BIOSCIENCES, INC. AND SUBSIDIARIES

Consolidated Balance Sheets

(unaudited)

(In thousands, except
share and per share data)



|                                                                                                                                                                                                                                                                                                  |  |                   |          |   |                  |   |          |  
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ----------------- | -------- | - | ---------------- | - | -------- | -
|                                                                                                                                                                                                                                                                                                  |  | September 30,2004 |          |   | December 31,2003 |  
|Assets                                                                                                                                                                                                                                                                                            |  |                   |          |   |                  |   |          |  
|Current assets:                                                                                                                                                                                                                                                                                   |  |                   |          |   |                  |   |          |  
|Cash and cash equivalents                                                                                                                                                                                                                                                                         |  | $                 | 24,560   |   |                  | $ | 9,938    |  
|Short-term investments                                                                                                                                                                                                                                                                            |  |                   | 5,999    |   |                  |   |         |  
|Restricted cash                                                                                                                                                                                                                                                                                   |  |                   | 218      |   |                  |   | 953      |  
|Accounts receivable, net                                                                                                                                                                                                                                                                          |  |                   | 10,953   |   |                  |   | 9,976    |  
|Inventory                                                                                                                                                                                                                                                                                         |  |                   | 1,522    |   |                  |   | 1,172    |  
|Prepaids and other current assets                                                                                                                                                                                                                                                                 |  |                   | 1,733    |   |                  |   | 2,583    |  
|Assets of a business component held for sale                                                                                                                                                                                                                                                      |  |                   |         |   |                  |   | 4,595    |  
|                                                                                                                                                                                                                                                                                                  |  |                   |          |   |                  |   |          |  
|Total current assets                                                                                                                                                                                                                                                                              |  |                   | 44,985   |   |                  |   | 29,217   |  
|Fixed assets, net                                                                                                                                                                                                                                                                                 |  |                   | 10,405   |   |                  |   | 11,071   |  
|Goodwill, net                                                                                                                                                                                                                                                                                     |  |                   | 2,700    |   |                  |   | 2,686    |  
|Other intangibles, net                                                                                                                                                                                                                                                                            |  |                   | 13,615   |   |                  |   | 14,942   |  
|Restricted cash                                                                                                                                                                                                                                                                                   |  |                   | 1,769    |   |                  |   | 1,113    |  
|Other assets                                                                                                                                                                                                                                                                                      |  |                   | 122      |   |                  |   | 400      |  
|                                                                                                                                                                                                                                                                                                  |  |                   |          |   |                  |   |          |  
|Total assets                                                                                                                                                                                                                                                                                      |  | $                 | 73,596   |   |                  | $ | 59,429   |  
|                                                                                                                                                                                                                                                                                                  |  |                   |          |   |                  |   |          |  
|Liabilities and Stockholders Equity                                                                                                                                                                                                                                                              |  |                   |          |   |                  |   |          |  
|Current liabilities:                                                                                                                                                                                                                                                                              |  |                   |          |   |                  |   |          |  
|Accounts payable                                                                                                                                                                                                                                                                                  |  | $                 | 2,932    |   |                  | $ | 4,768    |  
|Income taxes payable                                                                                                                                                                                                                                                                              |  |                   | 3,840    |   |                  |   | 2,451    |  
|Accrued expenses                                                                                                                                                                                                                                                                                  |  |                   | 8,675    |   |                  |   | 7,520    |  
|Current portion of long-term debt                                                                                                                                                                                                                                                                 |  |                   | 655      |   |                  |   | 1,889    |  
|Deferred revenue                                                                                                                                                                                                                                                                                  |  |                   | 1,569    |   |                  |   | 1,812    |  
|Liabilities of a business component held for sale                                                                                                                                                                                                                                                 |  |                   |         |   |                  |   | 3,156    |  
|                                                                                                                                                                                                                                                                                                  |  |                   |          |   |                  |   |          |  
|Total current liabilities                                                                                                                                                                                                                                                                         |  |                   | 17,671   |   |                  |   | 21,596   |  
|Long-term debt, less current portion                                                                                                                                                                                                                                                              |  |                   |         |   |                  |   | 415      |  
|Accrued restructuring, less current portion                                                                                                                                                                                                                                                       |  |                   | 1,170    |   |                  |   | 782      |  
|Other liabilities                                                                                                                                                                                                                                                                                 |  |                   | 1,900    |   |                  |   | 1,592    |  
|                                                                                                                                                                                                                                                                                                  |  |                   |          |   |                  |   |          |  
|Total liabilities                                                                                                                                                                                                                                                                                 |  |                   | 20,741   |   |                  |   | 24,385   |  
|Redeemable Convertible Series A preferred stock;                                                                                                                                                                                                                                                  |  |                   |          |   |                  |   |          |  
|Designated 1,680 shares: $.001 per share par value; 0 and 1,675 shares issued as of September 30, 2004 and December 31, 2003, respectively; 0
and 503 shares outstanding as of September 30, 2004 and December 31, 2003, respectively; stated, minimum redemption and liquidation value of $5,025 |  |                   |         |   |                  |   | 3,897    |  
|Commitments and contingencies                                                                                                                                                                                                                                                                     |  |                   |          |   |                  |   |          |  
|Stockholders equity:                                                                                                                                                                                                                                                                             |  |                   |          |   |                  |   |          |  
|Preferred stock, $.001 par value. Authorized 5,000,000 shares designated; 1,680 shares of redeemable convertible Series A preferred stock and
0 and 1,675 shares issued as of September 30, 2004 and December 31, 2003, respectively and 503 shares outstanding as of December 31, 2003           |  |                   |         |   |                  |   |         |  
|Series A junior participating preferred stock, $.001 par value. Designated 1,000,000 shares; no shares issued or outstanding                                                                                                                                                                      |  |                   |          |   |                  |   |          |  
|Common stock, $0.001 par value. Authorized 150,000,000 shares; 22,383,311 and 16,717,498 shares issued and outstanding at September 30, 2004
and December 31, 2003, respectively                                                                                                                  |  |                   | 22       |   |                  |   | 16       |  
|Common stock, $0.001 par value. 20,115 shares to be issued as of December 31, 2003                                                                                                                                                                                                                |  |                   |         |   |                  |   | 149      |  
|Additional paid-in capital                                                                                                                                                                                                                                                                        |  |                   | 347,813  |   |                  |   | 317,055  |  
|Deferred compensation                                                                                                                                                                                                                                                                             |  |                   |         |   |                  |   | (212     | )
|Accumulated other comprehensive income                                                                                                                                                                                                                                                            |  |                   | 2,002    |   |                  |   | 1,641    |  
|Accumulated deficit                                                                                                                                                                                                                                                                               |  |                   | (296,982 | ) |                  |   | (287,502 | )
|                                                                                                                                                                                                                                                                                                  |  |                   |          |   |                  |   |          |  
|Total stockholders equity                                                                                                                                                                                                                                                                        |  |                   | 52,855   |   |                  |   | 31,147   |  
|                                                                                                                                                                                                                                                                                                  |  |                   |          |   |                  |   |          |  
|Total liabilities and stockholders equity                                                                                                                                                                                                                                                        |  | $                 | 73,596   |   |                  | $ | 59,429   |  
|                                                                                                                                                                                                                                                                                                  |  |                   |          |   |                  |   |          |  



See accompanying notes
to consolidated financial statements.



3



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##### Table of Contents

ORCHID BIOSCIENCES, INC. AND SUBSIDIARIES

Consolidated Statements of Operations

Three and nine months ended September 30, 2004 and 2003

(In thousands, except per share data)

(unaudited)



|                                                                                               |  |                                 |        |   |                           |   |        |      |  |   |         |   |  |   |         |  
|---------------------------------------------------------------------------------------------- |  | ------------------------------- | ------ | - | ------------------------- | - | ------ | ---- |  | - | ------- | - |  | - | ------- | -
|                                                                                               |  | Three months endedSeptember 30, |        |   | Nine months endedSept 30, |  
|                                                                                               |  | 2004                            |        |   | 2003                      |   |        | 2004 |  |   | 2003    |  
|Revenues:                                                                                      |  |                                 |        |   |                           |   |        |      |  |   |         |   |  |   |         |  
|Service revenues                                                                               |  | $                               | 16,354 |   |                           | $ | 11,756 |      |  | $ | 44,481  |   |  | $ | 36,541  |  
|Other revenues                                                                                 |  |                                 | 93     |   |                           |   | 77     |      |  |   | 391     |   |  |   | 394     |  
|                                                                                               |  |                                 |        |   |                           |   |        |      |  |   |         |   |  |   |         |  
|Total revenues                                                                                 |  |                                 | 16,447 |   |                           |   | 11,833 |      |  |   | 44,872  |   |  |   | 36,935  |  
|                                                                                               |  |                                 |        |   |                           |   |        |      |  |   |         |   |  |   |         |  
|Operating expenses:                                                                            |  |                                 |        |   |                           |   |        |      |  |   |         |   |  |   |         |  
|Cost of service revenues                                                                       |  |                                 | 9,266  |   |                           |   | 7,713  |      |  |   | 25,815  |   |  |   | 21,363  |  
|Research and development                                                                       |  |                                 | 426    |   |                           |   | 642    |      |  |   | 1,297   |   |  |   | 3,006   |  
|Marketing and sales                                                                            |  |                                 | 1,634  |   |                           |   | 1,123  |      |  |   | 5,379   |   |  |   | 4,692   |  
|General and administrative                                                                     |  |                                 | 4,497  |   |                           |   | 5,632  |      |  |   | 17,260  |   |  |   | 18,048  |  
|Impairment of assets                                                                           |  |                                 |       |   |                           |   |       |      |  |   |        |   |  |   | 837     |  
|Restructuring                                                                                  |  |                                 |       |   |                           |   | (72    | )    |  |   | 1,130   |   |  |   | (155    | )
|Amortization of intangible assets                                                              |  |                                 | 448    |   |                           |   | 452    |      |  |   | 1,352   |   |  |   | 1,360   |  
|                                                                                               |  |                                 |        |   |                           |   |        |      |  |   |         |   |  |   |         |  
|Total operating expenses                                                                       |  |                                 | 16,271 |   |                           |   | 15,490 |      |  |   | 52,233  |   |  |   | 49,151  |  
|                                                                                               |  |                                 |        |   |                           |   |        |      |  |   |         |   |  |   |         |  
|Operating income (loss)                                                                        |  |                                 | 176    |   |                           |   | (3,657 | )    |  |   | (7,361  | ) |  |   | (12,216 | )
|Other income (expense):                                                                        |  |                                 |        |   |                           |   |        |      |  |   |         |   |  |   |         |  
|Interest income                                                                                |  |                                 | 85     |   |                           |   | 16     |      |  |   | 140     |   |  |   | 78      |  
|Interest expense                                                                               |  |                                 | (28    | ) |                           |   | (114   | )    |  |   | (125    | ) |  |   | (414    | )
|Other income/(expense)                                                                         |  |                                 | 150    |   |                           |   | 1,491  |      |  |   | 50      |   |  |   | 1,782   |  
|                                                                                               |  |                                 |        |   |                           |   |        |      |  |   |         |   |  |   |         |  
|Total other income/(expense), net                                                              |  |                                 | 207    |   |                           |   | 1,393  |      |  |   | 65      |   |  |   | 1,446   |  
|                                                                                               |  |                                 |        |   |                           |   |        |      |  |   |         |   |  |   |         |  
|Income (loss) from continuing operations before income taxes                                   |  |                                 | 383    |   |                           |   | (2,264 | )    |  |   | (7,296  | ) |  |   | (10,770 | )
|Income tax expense                                                                             |  |                                 | (1,022 | ) |                           |   | (549   | )    |  |   | (1,578  | ) |  |   | (1,609  | )
|                                                                                               |  |                                 |        |   |                           |   |        |      |  |   |         |   |  |   |         |  
|Loss from continuing operations                                                                |  |                                 | (639   | ) |                           |   | (2,813 | )    |  |   | (8,874  | ) |  |   | (12,379 | )
|Discontinued operations:                                                                       |  |                                 |        |   |                           |   |        |      |  |   |         |   |  |   |         |  
|Income (loss) from operations of a business held for sale                                      |  |                                 | 244    |   |                           |   | (1,028 | )    |  |   | (606    | ) |  |   | (5,210  | )
|                                                                                               |  |                                 |        |   |                           |   |        |      |  |   |         |   |  |   |         |  
|Net loss                                                                                       |  |                                 | (395   | ) |                           |   | (3,841 | )    |  |   | (9,480  | ) |  |   | (17,589 | )
|Dividends to Series A preferred shareholders                                                   |  |                                 |       |   |                           |   | (196   | )    |  |   | (14     | ) |  |   | (440    | )
|Accretion of Series A preferred stock discount                                                 |  |                                 |       |   |                           |   | (957   | )    |  |   | (1,129  | ) |  |   | (1,428  | )
|Beneficial conversion feature of redeemable Series A preferred stock                           |  |                                 |       |   |                           |   |       |      |  |   |        |   |  |   | (744    | )
|                                                                                               |  |                                 |        |   |                           |   |        |      |  |   |         |   |  |   |         |  
|Net loss allocable to common stockholders                                                      |  | $                               | (395   | ) |                           | $ | (4,994 | )    |  | $ | (10,623 | ) |  | $ | (20,201 | )
|                                                                                               |  |                                 |        |   |                           |   |        |      |  |   |         |   |  |   |         |  
|Basic and diluted loss from continuing operations per share allocable to common stockholders   |  | $                               | (0.03  | ) |                           | $ | (0.31  | )    |  | $ | (0.47   | ) |  | $ | (1.27   | )
|Basic and diluted income (loss) from discontinued operations per share                         |  | $                               | 0.01   |   |                           | $ | (0.08  | )    |  | $ | (0.03   | ) |  | $ | (0.44   | )
|Basic and diluted net loss per share allocable to common stockholders                          |  | $                               | (0.02  | ) |                           | $ | (0.38  | )    |  | $ | (0.50   | ) |  | $ | (1.71   | )
|Shares used in computing basic and diluted net loss per share allocable to common stockholders |  |                                 | 22,359 |   |                           |   | 12,996 |      |  |   | 21,423  |   |  |   | 11,846  |  



See accompanying notes
to consolidated financial statements.



4



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##### Table of Contents

ORCHID BIOSCIENCES, INC. AND SUBSIDIARIES

Consolidated Statements of Cash Flows

Nine months ended September 30, 2004 and 2003

(In thousands)

(unaudited)



|                                                                                                  |  |      |        |   |      |   |         |  
|------------------------------------------------------------------------------------------------- |  | ---- | ------ | - | ---- | - | ------- | -
|                                                                                                  |  | 2004 |        |   | 2003 |  
|Cash flows from operating activities:                                                             |  |      |        |   |      |   |         |  
|Loss from continuing operations                                                                   |  | $    | (8,874 | ) |      | $ | (12,379 | )
|Loss from discontinued operations                                                                 |  |      | (606   | ) |      |   | (5,210  | )
|Adjustments to reconcile net loss to net cash used in operating activities:                       |  |      |        |   |      |   |         |  
|Cash used in discontinued operations                                                              |  |      |       |   |      |   | (854    | )
|Noncash compensation expense                                                                      |  |      | 212    |   |      |   | 1,281   |  
|Depreciation and amortization                                                                     |  |      | 4,204  |   |      |   | 4,566   |  
|Favorable settlements of obligations                                                              |  |      |       |   |      |   | (1,746  | )
|Non cash expense for warrants issued as a financing fee and modification of stock options         |  |      |       |   |      |   | 166     |  
|Impairment of discontinued assets                                                                 |  |      |       |   |      |   | 4,704   |  
|Impairment of assets                                                                              |  |      |       |   |      |   | 837     |  
|Bad debt expense                                                                                  |  |      | 72     |   |      |   |        |  
|Loss on sale of investment                                                                        |  |      | 125    |   |      |   |        |  
|Changes in assets and liabilities:                                                                |  |      |        |   |      |   |         |  
|Accounts receivable                                                                               |  |      | (1,049 | ) |      |   | 1,883   |  
|Inventory                                                                                         |  |      | (350   | ) |      |   | (120    | )
|Prepaids and other current assets                                                                 |  |      | (287   | ) |      |   | (111    | )
|Other assets                                                                                      |  |      | (121   | ) |      |   | 134     |  
|Accounts payable                                                                                  |  |      | (1,837 | ) |      |   | 678     |  
|Income taxes payable                                                                              |  |      | 1,389  |   |      |   | 2,423   |  
|Accrued expenses, including restructuring                                                         |  |      | 5,419  |   |      |   | (2,917  | )
|Deferred revenue                                                                                  |  |      | (243   | ) |      |   | 923     |  
|Other liabilities                                                                                 |  |      | 308    |   |      |   |        |  
|                                                                                                  |  |      |        |   |      |   |         |  
|Net cash used in operating activities                                                             |  |      | (1,638 | ) |      |   | (5,742  | )
|                                                                                                  |  |      |        |   |      |   |         |  
|Cash flows from investing activities:                                                             |  |      |        |   |      |   |         |  
|Capital expenditures                                                                              |  |      | (2,183 | ) |      |   | (1,906  | )
|Purchases of Short-term Investments                                                               |  |      | (5,980 | ) |      |   |        |  
|Proceeds from the sale of investments                                                             |  |      | 196    |   |      |   |        |  
|Increase in restricted cash                                                                       |  |      | 79     |   |      |   |        |  
|                                                                                                  |  |      |        |   |      |   |         |  
|Net cash used in investing activities                                                             |  |      | (7,888 | ) |      |   | (1,906  | )
|                                                                                                  |  |      |        |   |      |   |         |  
|Cash flows from financing activities:                                                             |  |      |        |   |      |   |         |  
|Net proceeds from issuance of common stock                                                        |  |      | 26,717 |   |      |   | 598     |  
|Net proceeds from issuance of redeemable convertible preferred stock                              |  |      |       |   |      |   | 16,000  |  
|Repayment of debt from line of credit                                                             |  |      | (1,649 | ) |      |   | (7,888  | )
|Payments of patent obligations                                                                    |  |      | (1,300 | ) |      |   | (375    | )
|                                                                                                  |  |      |        |   |      |   |         |  
|Net cash provided by financing activities                                                         |  |      | 23,768 |   |      |   | 8,335   |  
|                                                                                                  |  |      |        |   |      |   |         |  
|Effect of foreign currency translation on cash and cash equivalents                               |  |      | 380    |   |      |   | 107     |  
|                                                                                                  |  |      |        |   |      |   |         |  
|Net increase in cash and cash equivalents                                                         |  |      | 14,622 |   |      |   | 794     |  
|Cash and cash equivalents at beginning of period                                                  |  |      | 9,938  |   |      |   | 9,985   |  
|                                                                                                  |  |      |        |   |      |   |         |  
|Cash and cash equivalents at end of period                                                        |  | $    | 24,560 |   |      | $ | 10,779  |  
|                                                                                                  |  |      |        |   |      |   |         |  
|Supplemental disclosure of noncash financing and investing activities:                            |  |      |        |   |      |   |         |  
|Changes in deferred compensation for grant, forfeiture and remeasurement of common stock options  |  | $    |       |   |      | $ | 512     |  
|Issuance of common stock warrants to investors of the redeemable preferred stock                  |  |      |       |   |      |   | 2,903   |  
|Issuance of common stock for conversion of the redeemable preferred stock                         |  |      | 3,897  |   |      |   |        |  
|Issuance of units of redeemable preferred stock to placement agent as a financing fee             |  |      |       |   |      |   | 750     |  
|Issuance of common stock warrants to placement agent of the redeemable preferred stock            |  |      |       |   |      |   | 120     |  
|Beneficial settlements of purchase accounting obligations                                         |  |      |       |   |      |   | 524     |  
|Beneficial conversion feature of redeemable preferred stock                                       |  |      |       |   |      |   | 744     |  
|Unrealized gain on Short-term investments                                                         |  |      | 19     |   |      |   |        |  
|Dividends to Series A preferred shareholders issued or issuable in common stock                   |  |      | 14     |   |      |   | 440     |  
|Accretion of Series A preferred stock discount resulting from conversions and probable redemption |  |      | 1,129  |   |      |   | 1,428   |  
|Supplemental disclosure of cash flow information:                                                 |  |      |        |   |      |   |         |  
|Cash paid during the period for interest                                                          |  | $    | 126    |   |      | $ | 296     |  



See accompanying notes
to consolidated financial statements.



5



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##### Table of Contents

ORCHID BIOSCIENCES, INC. AND SUBSIDIARIES

Consolidated Statement of Stockholders Equity and
Comprehensive Income (Loss)

Nine months ended September 30, 2004

(In thousands, except shares)

(unaudited)



|                                                                                       |  |                 |  |                         |    |  |                          |      |                       |  |   |                                     |  |                    |      |   |                          |   |       |  |   |          |   |  |   |        |  
|-------------------------------------------------------------------------------------- |  | --------------- |  | ----------------------- | -- |  | ------------------------ | ---- | --------------------- |  | - | ----------------------------------- |  | ------------------ | ---- | - | ------------------------ | - | ----- |  | - | -------- | - |  | - | ------ | -
|                                                                                       |  | Common Stock    |  | CommonStock tobe issued |    |  | AdditionalPaid-inCapital |      | DeferrredCompensation |  |   | AccumulatedOtherComprehensiveIncome |  | AccumulatedDeficit |      |   | TotalStockholdersEquity |  
|                                                                                       |  | Number ofShares |  | Amount                  |    |  |                          |      |                       | 
|Balance, December 31, 2003:                                                            |  | 16,717,498      |  | $                       | 16 |  | $                        | 149  |                       |  | $ | 317,055                             |  | $                  | (212 | ) |                          | $ | 1,641 |  | $ | (287,502 | ) |  | $ | 31,147 |  
|Comprehensive loss:                                                                    |  |                 |  |                         |    |  |                          |      |                       |  |   |                                     |  |                    |      |   |                          |   |       |  |   |          |   |  |   |        |  
|Net loss                                                                               |  |                |  |                         |   |  |                          |     |                       |  |   |                                    |  |                    |     |   |                          |   |      |  |   | (9,480   | ) |  |   | (9,480 | )
|Foreign currency translation adjustment                                                |  |                |  |                         |   |  |                          |     |                       |  |   |                                    |  |                    |     |   |                          |   | 342   |  |   |         |   |  |   | 342    |  
|Unrealized gain on available-for-sale securities                                       |  |                |  |                         |   |  |                          |     |                       |  |   |                                    |  |                    |     |   |                          |   | 19    |  |   |         |   |  |   | 19     |  
|                                                                                       |  |                 |  |                         |    |  |                          |      |                       |  |   |                                     |  |                    |      |   |                          |   |       |  |   |          |   |  |   |        |  
|Comprehensive loss                                                                     |  |                |  |                         |   |  |                          |     |                       |  |   |                                    |  |                    |     |   |                          |   | 361   |  |   | (9,480   | ) |  |   | (9,119 | )
|Issuance of common stock for conversion of Series A preferred stock                    |  | 2,233,778       |  |                         | 2  |  |                          |     |                       |  |   | 3,895                               |  |                    |     |   |                          |   |      |  |   |         |   |  |   | 3,897  |  
|Issuance of common stock in private placement                                          |  | 3,157,800       |  |                         | 3  |  |                          |     |                       |  |   | 26,105                              |  |                    |     |   |                          |   |      |  |   |         |   |  |   | 26,108 |  
|Issuance of common stock from cashless exercise of warrants                            |  | 68,808          |  |                         | 1  |  |                          |     |                       |  |   |                                    |  |                    |     |   |                          |   |      |  |   |         |   |  |   | 1      |  
|Issuance of common stock from exercise of warrants                                     |  | 40,000          |  |                         |   |  |                          |     |                       |  |   | 90                                  |  |                    |     |   |                          |   |      |  |   |         |   |  |   | 90     |  
|Issuance of common stock from exercise of stock options                                |  | 143,741         |  |                         |   |  |                          |     |                       |  |   | 519                                 |  |                    |     |   |                          |   |      |  |   |         |   |  |   | 519    |  
|Issuance of common stock as dividends to Series A preferred shareholders who converted |  | 1,571           |  |                         |   |  |                          |     |                       |  |   | 0                                   |  |                    |     |   |                          |   |      |  |   |         |   |  |   | 0      |  
|Dividends paid and payable in common stock to Series A preferred shareholders          |  | 20,115          |  |                         |   |  |                          | (149 | )                     |  |   | 149                                 |  |                    |     |   |                          |   |      |  |   |         |   |  |   | 0      |  
|Amortization of deferred compensation                                                  |  |                |  |                         |   |  |                          |     |                       |  |   |                                    |  |                    | 212  |   |                          |   |      |  |   |         |   |  |   | 212    |  
|                                                                                       |  |                 |  |                         |    |  |                          |      |                       |  |   |                                     |  |                    |      |   |                          |   |       |  |   |          |   |  |   |        |  
|Balance at September 30, 2004                                                          |  | 22,383,311      |  | $                       | 22 |  | $                        |     |                       |  | $ | 347,813                             |  | $                  |     |   |                          | $ | 2,002 |  | $ | (296,982 | ) |  | $ | 52,855 |  
|                                                                                       |  |                 |  |                         |    |  |                          |      |                       |  |   |                                     |  |                    |      |   |                          |   |       |  |   |          |   |  |   |        |  



See accompanying notes
to consolidated financial statements.



6



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##### Table of Contents

ORCHID BIOSCIENCES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2004 and 2003

(unaudited)



(in thousands, except per share
data)



(1) Summary of Significant Accounting Policies



(a) Basis of Presentation



The accompanying unaudited consolidated financial statements of Orchid
BioSciences, 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 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, 2003, as filed with the Securities and Exchange Commission (SEC).



On March 25, 2004, the Company announced that the Board of
Directors had approved a reverse stock split ratio of 1-for-5. The Company began trading on a reverse split basis on March 30, 2004. All amounts presented in this quarterly report have been adjusted to reflect the reverse stock split on a
retroactive basis.



(b) Organization and Business
Activities



Orchid BioSciences, Inc. (previously known
as Orchid Biocomputer, Inc.) and subsidiaries (the Company), was organized under the laws of the State of Delaware on March 8, 1995 and, since 1998, has primarily focused on products and services. The Company was a wholly owned subsidiary of Sarnoff
Corporation (Sarnoff) at inception and was reduced to a majority-owned subsidiary of Sarnoff in 1995. As a result of the December 1997 financing, Sarnoffs ownership in the Company was reduced to less than a majority.



During 2001, the Company consummated two acquisitions. On February 12, 2001,
the Company acquired Cellmark Diagnostics (Cellmark), a division of AstraZeneca, and a provider of genetic testing services in the UK, which sold kits and conducts testing for genetic diseases, including cystic fibrosis. On December 5, 2001, the
Company acquired Lifecodes Corporation (Lifecodes), a provider of genetic testing for forensics and paternity in the US, as well as donor transplantation matching.



In the third quarter of 2004, the Company reported $0.2 million of operating income. Prior to the third quarter of 2004, the
Company had not reported operating income, and prior to the second quarter of 2004 the Company had not reported positive cash flow from operations. There is no assurance that operating income can be sustained, or that positive cash flows can be
achieved for any other periods or, if achieved, could be sustained on a continuing basis. The Companys accumulated deficit aggregated $297.0 million at September 30, 2004. The Company expects that its existing cash on hand will be sufficient
to fund the Companys operations at least through the next twelve months. On February 27, 2004, the Company consummated a common stock private equity financing with gross proceeds of $30.3 million (net amount of $26.1 million, after fees paid
to investment bankers and other expenses of the financing).



The Company currently does not anticipate the need to raise funds through the equity markets in the near future. However, if the Company does raise funds through equity or convertible securities, the Companys stockholders may
experience dilution and the Companys stock price may decline. The Company may be unable to raise additional funds or raise funds on terms that are acceptable to the Company. If future financing is not available to the Company, or is not
available on terms acceptable to the Company, it may not be able to fund its future needs.



On January 8, 2004, the Company sent formal notice to holders of its Series A convertible preferred stock calling for the redemption of all outstanding Series A redeemable convertible preferred stock no later than
February 6, 2004. All holders of Series A convertible preferred stock converted their shares to common stock prior to the redemption date.



In January 2004, the Company completed the sale of its Diagnostics business to Tepnel Life Sciences, PLC for approximately $3.5 million in cash, of which
$0.5 million was held in escrow, subject to certain post-closing adjustments. The Company and Tepnel selected a neutral third party auditor to determine the final sale amount based on the provisions of the sale agreement, and the neutral auditor
completed its assessment during the second quarter



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##### Table of Contents

ORCHID BIOSCIENCES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

September 30,
2004 and 2003

(unaudited)



(in thousands, except per share data)



2004. The Company accrued for the amount attributable to the final sale amount based on the neutral auditor assessment and included those charges in the loss from
discontinued operations for the six months ended June 30, 2004. During the third quarter of 2004, the Company and Tepnel reached a final settlement. The settlement included the release of the existing escrow to Tepnel, and an additional cash payment
by the Company to Tepnel in the amount of approximately $0.4 million. The total cash settlement was less than the neutral auditor assessment, and as a result, the Company recorded income from discontinued operations for the three months ended
September 30, 2004. As of September 30, 2004, there are no further obligations related to this settlement, and the Company has included all amounts in the income (loss) from discontinued operations for the three and nine months ended September 30,
2004.



(c) Consolidated Financial Statements



The accompanying consolidated financial statements
include the results of operations of the Company and its subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation.



(d) Cash and Cash Equivalents



The Company considers all highly liquid investments with an original maturity of three months or less when purchased to be cash equivalents. All cash and
cash equivalents are held in US financial institutions and money market funds. To date, the Company has not experienced any losses on its cash and cash equivalents. The carrying amount of cash and cash equivalents approximates its fair value due to
its short-term and liquid nature. The Company also maintains $2.0 million of restricted cash as of September 30, 2004 pursuant to the requirements of its long-term debt and certain operating leases and contracts (Note 7).



(e) Short-Term Investments



Short-term investments consist of commercial paper and certificates of
deposit with original maturities greater than three months. In accordance with Statement of Financial Accounting Standards (SFAS) No. 115, Accounting for Certain Investments in Debt and Equity Securities, the Company classifies its short-term
investments as available-for-sale. Available-for-sale securities are recorded at fair value of the investments based on quoted market prices at September 30, 2004. Cost is determined on a specific identification basis. The Company considered all of
these investments to be available-for-sale.



(f)
Inventory



Inventory is stated at the lower of cost or
market. Cost is determined by the first-in, first-out method.



(g) Fixed Assets



Fixed assets, which
consist of lab equipment, furniture and fixtures, computers and software are carried at cost, less accumulated depreciation, which is computed on the straight-line basis over the estimated useful lives of the related assets, which range from two to
eight years. Leasehold improvements, which are also included in fixed assets, are recorded at cost, less accumulated depreciation, which is computed on the straight-line basis over the shorter of their estimated useful lives or the remaining lease
term. Expenditures for maintenance and repairs are charged to expense as incurred.



(h) Business Combinations, Goodwill and Intangible Assets



On July 1, 2001 the Company adopted the provisions of SFAS No. 141, Business Combinations(SFAS 141), and on January 1, 2002 fully adopted the
provisions of SFAS No. 142, Goodwill and Other Intangible Assets (SFAS 142). SFAS 141 requires that the purchase method of accounting be used for all business combinations initiated after June 30, 2001 as well as all purchase method business
combinations completed after June 30, 2001. SFAS 141 also specifies criteria intangible assets acquired in a purchase method business combination must meet to be recognized and reported apart from goodwill, noting that any purchase price allocable
to an assembled workforce may not be accounted for separately. In accordance with SFAS 142, goodwill and intangible assets with indefinite useful lives are no longer amortized, but instead tested for impairment at least annually.



Goodwill represents the excess purchase price over fair value of net assets
acquired in a business combination. Intangible assets acquired as a result of a business combination are recorded at their fair value at the acquisition date. Intangible assets acquired individually are recorded at their acquisition cost. Prior to
the full adoption of SFAS 142, goodwill was amortized like other intangible assets. Other intangible assets are amortized on a straight-line basis over their estimated useful lives.



8



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##### Table of Contents

ORCHID BIOSCIENCES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

September 30,
2004 and 2003

(unaudited)



(in thousands, except per share data)



(i) Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed Of



On January 1, 2002 the Company adopted SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets (SFAS
144), which supersedes both SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of (SFAS 121), and the accounting and reporting provisions of APB Opinion No. 30, Reporting the Results of
OperationsReporting Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions, for the disposal of a business segment (as previously defined in that Opinion). In accordance
with SFAS 144, the Company reviews long-lived assets and certain identifiable intangibles for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be
held and used is measured by a comparison of the carrying amount of an asset to the undiscounted future net cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured
by the amount by which the carrying amount of the assets exceeds the fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to dispose.



(j) Income Taxes



The Company accounts for income taxes in accordance with the asset and
liability method prescribed by SFAS No. 109,Accounting for Income Taxes. Under this method, deferred tax liabilities and assets are determined based on the difference between the financial statement and tax basis of assets and liabilities
using tax rates in effect for the years in which the differences are expected to reverse. The measurement of deferred tax assets is reduced, if necessary, by a valuation allowance for any tax benefits, which are not expected to be realized. The
effect on deferred tax assets and liabilities of a change in tax rates is recognized in the period that such tax rate changes are enacted. In certain situations, a taxing authority may challenge positions that the Company has adopted in the income
tax filings. Accordingly, the Company may apply different tax treatment for these selected transactions in filing its tax return than for income tax financial reporting purposes. The Company regularly assesses its position for such transactions and
includes reserves for those differences in position. The reserves are utilized or reversed once the statute of limitations has expired or the matter is otherwise resolved.



During the three months ended September 30, 2004 and 2003, the Company has recorded $1.0 million and $0.5 million,
respectively, in foreign income tax expense associated with the Companys operations in Europe, which is currently generating income. During the nine months ended September 30, 2004 and 2003, the Company has recorded $1.6 million and $1.6
million, respectively, in foreign income tax expense.



(k) Revenue Recognition



The Company is
engaged in the development and delivery of genetic testing, or genotyping, services that generate information related to genetic susceptibility, uniqueness, or the genetic variability that distinguishes one organism from another. The Company
recognizes DNA laboratory services revenues at the time test results are completed and reported. Deferred revenues represent the unearned portion of payments received in advance of tests being completed and reported. Unbilled receivables represent
revenue, which has been earned on completed and reported tests, but has not been billed to the customer. Revenues from license arrangements, including license fees creditable against future royalty obligations of the licensee, are recognized when an
arrangement is entered into if the Company has no significant continuing involvement under the terms of the arrangement. If the Company has significant continuing involvement under such an arrangement, license fees are deferred and recognized over
the estimated performance period. Management has made estimates and assumptions relating to the performance period, which are subject to change. Changes in these estimates and assumptions could affect the amount of revenues from licenses reported in
any given period. Revenues from research and development agreements are recognized when related research expenses are incurred and when the Company has satisfied specific obligations under the terms of the respective agreements.



9



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##### Table of Contents

ORCHID BIOSCIENCES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

September 30,
2004 and 2003

(unaudited)



(in thousands, except per share data)



(l) Research and Development



Costs incurred for research and product development, including salaries and related personnel costs, fees paid to consultants and outside service
providers, are expensed as incurred. In addition, the Company recognizes research and development expenses in the period incurred and in accordance with the specific contractual performance terms of such research agreements. Costs incurred in
obtaining technology licenses and development of software are charged to research and development expense if the technology licensed or the software has not reached technological feasibility.



(m) Stock-Based Compensation



The Company accounts for its stock-based compensation to employees and
members of the board of directors in accordance with the provisions of APB Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations. As such, compensation is recorded on the date of issuance or grant as the excess
of the current market price (estimated fair value prior to the initial public offering in May 2000 (IPO)) of the underlying stock over the purchase or exercise price. Any deferred compensation is amortized over the respective vesting periods of the
equity instruments, if any. The Company has adopted the disclosure provisions of SFAS No. 123, Accounting for Stock-Based Compensation, as amended(SFAS 123) which permits entities to provide pro forma net loss and net loss per share
disclosures for stock-based compensation as if the fair value method defined in SFAS 123 had been applied. Pro forma net loss and net loss per share disclosures for stock-based compensation have been prepared as if the fair value method had been
applied in periods subsequent to the Companys IPO and as if the minimum value method had been applied prior to the Companys IPO, as the Company was not a public registrant during those years. As required by SFAS 123, transactions with
non-employees, in which goods or services are the consideration received for the issuance of equity instruments, are accounted for under the fair value basis in accordance with SFAS 123 and related interpretations.



In December 2002, the Financial Accounting Standards Board (FASB) issued SFAS
No. 148, Accounting for Stock Based Compensation Transition and Disclosure,an amendment of SFAS 123 (SFAS 148). SFAS 148 amends SFAS 123 to provide alternative methods of transition for a voluntary change to the fair value method of
accounting for stock based employee compensation. In addition, SFAS 148 amends the disclosure requirements of SFAS 123 to require prominent disclosures in both annual and interim financial statements. Certain of the disclosure modifications are
required for fiscal years ending after December 15, 2002 and are included below.



Had the Company determined compensation cost for options based on the fair value method for 2004 and 2003 for its stock options under SFAS 123, the Companys net loss allocable to common stockholders and net loss
per share allocable to common stockholders would have been increased to the pro forma amounts indicated below (in thousands, except per share data):



|                                                                                                              |  |                                |       |   |                               |   |        |      |  |   |         |   |  |   |         |  
|------------------------------------------------------------------------------------------------------------- |  | ------------------------------ | ----- | - | ----------------------------- | - | ------ | ---- |  | - | ------- | - |  | - | ------- | -
|                                                                                                              |  | Three months endedSeptember 30 |       |   | Nine months endedSeptember 30 |  
|                                                                                                              |  | 2004                           |       |   | 2003                          |   |        | 2004 |  |   | 2003    |  
|Net loss allocable to common stockholders:                                                                    |  |                                |       |   |                               |   |        |      |  |   |         |   |  |   |         |  
|As reported                                                                                                   |  | $                              | (395  | ) |                               | $ | (4,994 | )    |  | $ | (10,623 | ) |  | $ | (20,201 | )
|Add: Stock-based employee compensation expense included in reported net loss allocable to common stockholders |  |                                |      |   |                               |   | 300    |      |  |   | 212     |   |  |   | 1,281   |  
|Deduct: Total stock-based employee compensation expense determined under the fair value method for all awards |  |                                | (225  | ) |                               |   | (455   | )    |  |   | (689    | ) |  |   | (2,145  | )
|Pro forma under SFAS 123                                                                                      |  | $                              | (620  | ) |                               | $ | (5,149 | )    |  | $ | (11,100 | ) |  | $ | (21,065 | )
|Basic and diluted net loss per share allocable to common stockholders:                                        |  |                                |       |   |                               |   |        |      |  |   |         |   |  |   |         |  
|As reported                                                                                                   |  | $                              | (0.02 | ) |                               | $ | (0.38  | )    |  | $ | (0.50   | ) |  | $ | (1.71   | )
|Pro forma under SFAS 123                                                                                      |  |                                | (0.03 | ) |                               |   | (0.40  | )    |  |   | (0.52   | ) |  |   | (1.78   | )



In determining the
fair value for grants of common stock options, the Company used the following assumptions:



|                        |  |                                         |   |  |           |  
|----------------------- |  | --------------------------------------- | - |  | --------- | -
|                        |  | Three and nine months endedSeptember 30 |  
|                        |  | 2004                                    |   |  | 2003      |  
|Risk-free interest rate |  | 4.75                                    | % |  | 4.85      | %
|Volatility              |  | 90                                      | % |  | 90        | %
|Expected option life    |  | 5.0 years                               |   |  | 5.5 years |  
|Expected dividend yield |  | 0                                       | % |  | 0         | %



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##### Table of Contents

ORCHID BIOSCIENCES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

September 30,
2004 and 2003

(unaudited)



(in thousands, except per share data)



(n) Use of Estimates



The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the US requires the Company to make
estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ from those estimates.



(o) Financial Instruments



The carrying amounts of cash and cash equivalents, accounts receivable, accounts payable, and accrued expenses approximate
their fair values because of the short maturity of these instruments. The interest rates on long-term debt and capital leases approximates rates for similar types of borrowing arrangements at September 30, 2004 and December 31, 2003, therefore, the
fair value of the long-term debt and capital leases approximate the carrying value at September 30, 2004 and December 31, 2003.



(p) Net Loss Per Share



Net loss per share is computed in accordance with SFAS 128, Earnings Per Share, by dividing the net loss allocable to common stockholders by the
weighted average number of shares of common stock outstanding. During each year presented, the Company has certain options, warrants, and mandatorily redeemable convertible preferred stock, which have not been used in the calculation of diluted net
loss per share allocable to common stockholders 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 allocable to common stockholders for each year are equal.
For the nine months ended September 30, 2004, the Company has reflected $1.1 million relating to dividends and the accretion of Series A preferred stock discount and for the nine months ended September 30, 2003, the Company recorded $1.9 million
relating to the dividends and accretion of Series A preferred stock discount, in addition to $0.7 million as a beneficial conversion feature in the net loss allocable to common stockholders as result of the Series A Convertible Preferred Stock sold
in March 2003.



(q) Recent Accounting Pronouncements



In December 2002, the FASB issued SFAS No. 148,
Accounting for Stock-Based Compensation  Transition and Disclosure(SFAS 148). SFAS 148 provides alternative methods of transition for a voluntary change to the fair value method of accounting for stock-based employee compensation as
originally provided by SFAS 123. Additionally, SFAS 148 amends the disclosure requirements of SFAS 123 to require prominent disclosure in both the annual and interim financial statements about the method of accounting for stock-based compensation
and the effect of the method used on reported results. The transitional requirements of SFAS 148 are effective for all financial statements for fiscal years ending after December 15, 2002. The Company adopted the disclosure portion of this statement
beginning in the fiscal quarter ended March 31, 2003. The application of the disclosure portion of this standard had no impact on the Companys consolidated financial position or results of operations. On April 22, 2003, the FASB determined
that stock-based compensation should be recognized as a cost in the financial statements and that such cost be measured according to the fair value of stock options. The FASB issued an exposure draft, Share-Based Payment, an Amendment of FASB
Statements No. 123 and 95 on June 30, 2004. The eventual adoption of this proposed statement, if issued in final form by the FASB will have a material effect on the Companys consolidated financial statements.



(r) Reclassifications



Certain prior period amounts have been reclassified to conform to the
current year presentation.



(2) Inventory



Inventory is comprised of the following at September 30, 2004 and December
31, 2003 (in thousands):



|                 |  |                   |       |                  |   |      
|---------------- |  | ----------------- | ----- | ---------------- | - | -----
|                 |  | September 30,2004 |       | December 31,2003
|Raw materials    |  | $                 | 1,222 |                  | $ | 941  
|Work in progress |  |                   | 300   |                  |   | 231  
|Finished goods   |  |                   |      |                  |   |     
|                 |  |                   |       |                  |   |      
|                 |  | $                 | 1,522 |                  | $ | 1,172
|                 |  |                   |       |                  |   |      



11



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##### Table of Contents

ORCHID BIOSCIENCES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

September 30,
2004 and 2003

(unaudited)



(in thousands, except per share data)



Raw materials consist mainly of reagents, enzymes, chemicals and plates used in genotyping and to manufacture consumables. Work in progress consists
mainly of casework not yet completed and kits that are in the production process.



(3) Goodwill and Other Intangible Assets



The
following table sets forth the Companys other intangible assets at September 30, 2004 and December 31, 2003 (in thousands):



|                     |  |                    |        |                         |   |        |     |  |      |        |                         |   |        |     |   |        |   |  |   |       
|-------------------- |  | ------------------ | ------ | ----------------------- | - | ------ | --- |  | ---- | ------ | ----------------------- | - | ------ | --- | - | ------ | - |  | - | ------
|                     |  | September 30, 2004 |        | December 31, 2003      
|                     |  | Cost               |        | AccumulatedAmortization |   |        | Net |  | Cost |        | AccumulatedAmortization |   |        | Net
|Base technology      |  | $                  | 5,980  |                         | $ | (2,368 | )   |  | $    | 3,612  |                         | $ | 5,980  |     | $ | (1,999 | ) |  | $ | 3,981 
|Customer lists       |  |                    | 5,040  |                         |   | (2,070 | )   |  |      | 2,970  |                         |   | 5,040  |     |   | (1,732 | ) |  |   | 3,308 
|Trademark/tradename  |  |                    | 3,946  |                         |   | (1,226 | )   |  |      | 2,720  |                         |   | 3,946  |     |   | (969   | ) |  |   | 2,977 
|Patents and know-how |  |                    | 4,895  |                         |   | (833   | )   |  |      | 4,062  |                         |   | 4,895  |     |   | (549   | ) |  |   | 4,346 
|Other                |  |                    | 743    |                         |   | (492   | )   |  |      | 251    |                         |   | 743    |     |   | (413   | ) |  |   | 330   
|                     |  |                    |        |                         |   |        |     |  |      |        |                         |   |        |     |   |        |   |  |   |       
|Totals               |  | $                  | 20,604 |                         | $ | (6,989 | )   |  |      | 13,615 |                         | $ | 20,604 |     | $ | (5,662 | ) |  | $ | 14,942
|                     |  |                    |        |                         |   |        |     |  |      |        |                         |   |        |     |   |        |   |  |   |       



The Company has
estimated the useful lives of the above intangible assets as follows:



|                         |  |            
|------------------------ |  | -----------
|                         |  | Useful Life
|Customer lists           |  | 11         
|Base technology          |  | 10-12      
|Trademarks and tradename |  | 10-15      
|Patents and know-how     |  | 10-15      
|Other                    |  | 4          



The weighted average
useful life for these intangible assets is approximately 9.43 years.



The Companys expected future amortization expense related to intangible assets over the next five years is as follows:



|                                     |  |      
|------------------------------------ |  | -----
|Three months ended December 31, 2004 |  | 447  
|2005                                 |  | 1,699
|2006                                 |  | 1,699
|2007                                 |  | 1,699
|2008                                 |  | 1,699



The following table
sets forth the activity during the nine months ended September 30, 2004 as it relates to goodwill (in thousands):



|                                                          |  |       |       |                         |   |      |     |  |   |      
|--------------------------------------------------------- |  | ----- | ----- | ----------------------- | - | ---- | --- |  | - | -----
|                                                          |  | Gross |       | Accumulatedamortization |   |      | Net
|Balance as of December 31, 2003                           |  |       | 3,146 |                         |   | (460 | )   |  |   | 2,686
|Other (due to the effect of foreign currency translation) |  |       | 14    |                         |   |     |     |  |   | 14   
|                                                          |  |       |       |                         |   |      |     |  |   |      
|Balance as of September 30, 2004                          |  | $     | 3,160 |                         | $ | (460 | )   |  | $ | 2,700
|                                                          |  |       |       |                         |   |      |     |  |   |      



Upon full adoption of
SFAS 142 in 2002, the Company was required to perform an assessment as of January 1, 2002 of whether goodwill was impaired at the date of adoption. The Company performed this assessment and determined that goodwill was not impaired. The Company also
performed an annual assessment of goodwill as required under the provisions of SFAS 142 in 2002 and 2003 and concluded that goodwill was not impaired.



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ORCHID BIOSCIENCES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

September 30,
2004 and 2003

(unaudited)



(in thousands, except per share data)



(4) Accrued Expenses



Accrued expenses are comprised of the following at September 30, 2004 and December 31, 2003 (in thousands):



|                                                |  |                   |       |                  |      
|----------------------------------------------- |  | ----------------- | ----- | ---------------- | -----
|                                                |  | September 30,2004 |       | December 31,2003
|Employee compensation                           |  | $                 | 2,349 |                  | 247  
|Current portion of patent obligations           |  |                   | 150   |                  | 694  
|Royalties on licensed technology                |  |                   | 480   |                  | 1,003
|Restructuring, current portion                  |  |                   | 862   |                  | 1,251
|Professional fees                               |  |                   | 2,231 |                  | 1,435
|Acquisition and divestiture related liabilities |  |                   |      |                  | 1,000
|Corporate and other taxes                       |  |                   | 1,961 |                  | 1,380
|Other                                           |  |                   | 642   |                  | 510  
|                                                |  |                   |       |                  |      
|                                                |  | $                 | 8,675 |                  | 7,520
|                                                |  |                   |       |                  |      



(5) Restructuring



During the nine months ended September 30, 2004, the Company recognized
an additional $1.1 million in restructuring charges related to one of the Companys former operating facilities in Princeton, NJ. The additional charge was a result of a change in managements estimate as to when this facility is expected
to be subleased and the estimated discount associated with such a sublease arrangement.



As of September 30, 2004 and December 31, 2003, the Company had approximately $2.0 million and $2.0 million, respectively, in restructuring accruals outstanding of which approximately $1.2 million and approximately
$0.8 million, respectively, is classified as a long-term liability. The most significant remaining liability relates to facility obligations.



The following is a roll forward of the restructuring reserve (in thousands):



|                                                                        |  |                    |      |   |                |   |       |       |  |   |        |  
|----------------------------------------------------------------------- |  | ------------------ | ---- | - | -------------- | - | ----- | ----- |  | - | ------ | -
|                                                                        |  | WorkforceReduction |      |   | Facility Costs |   |       | Total | 
|Restructuring liability as of December 31, 2003                         |  | $                  | 469  |   |                | $ | 1,566 |       |  | $ | 2,035  |  
|Additional reserve recorded in the nine months ended September 30, 2004 |  |                    |     |   |                |   | 1,184 |       |  |   | 1,184  |  
|Non-cash adjustments                                                    |  |                    | (54  | ) |                |   |      |       |  |   | (54    | )
|Cash payments in the nine months ended September 30, 2004               |  |                    | (404 | ) |                |   | (729  | )     |  |   | (1,133 | )
|                                                                        |  |                    |      |   |                |   |       |       |  |   |        |  
|Restructuring liability as of September 30, 2004                        |  | $                  | 11   |   |                | $ | 2,021 |       |  | $ | 2,032  |  
|                                                                        |  |                    |      |   |                |   |       |       |  |   |        |  



(6) Discontinued Operations



On January 21, 2004, pursuant to the terms of an Asset
Purchase Agreement dated as of October 30, 2003 among the Company, Lifecodes Corporation, a wholly-owned subsidiary of the Company, Tepnel Life Sciences plc (Tepnel), Tepnel North America Corporation, a wholly-owned subsidiary of Tepnel, and Tepnel
Lifecodes Corporation, a wholly-owned subsidiary of Tepnel North America Corporation, as amended (the US Purchase Agreement), a Business Purchase Agreement dated as of October 30, 2003 among the Company, Orchid BioSciences Europe Limited, a
wholly-owned subsidiary of the Company, Tepnel and Tepnel Diagnostics Limited, a wholly-owned subsidiary of Tepnel, as amended (the UK Purchase Agreement), and a Share Purchase Agreement dated as of October 30, 2003 among the Company, Lifecodes
Corporation, Tepnel and Tepnel Diagnostics Limited, as amended (the Belgian Purchase Agreement), Tepnel completed its acquisition of certain assets and liabilities of the Companys Diagnostics business unit. The aggregate purchase price was
$3.5 million in cash, of which $0.5 million was held in escrow, subject to certain post-closing adjustments. The Company and Tepnel selected a neutral third party auditor to determine the final sale amount based on the provisions of the sale
agreement, and the neutral auditor completed its assessment during the second quarter of 2004. The Company accrued for the amount attributable to the final sale amount based on the neutral auditor assessment and included those charges in the loss
from discontinued operations for the six months ended June 30, 2004. During the third quarter of 2004, the Company and Tepnel reached a final settlement. The settlement included the release of the existing escrow to Tepnel, and an additional cash
payment by the Company to Tepnel in the amount of approximately $0.4 million. The total cash settlement was less



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ORCHID BIOSCIENCES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

September 30,
2004 and 2003

(unaudited)



(in thousands, except per share data)



than the neutral auditor assessment, and as a result, the Company recorded income from discontinued operations for the three months ended September 30, 2004. As of
September 30, 2004, there are no further obligations related to this settlement, and the Company has included all amounts in the income (loss) from discontinued operations for the three and nine months ended September 30, 2004.



The Company reflected the net realizable value of its Diagnostic business
units assets and liabilities in its consolidated balance sheet as of December 31, 2003. The net realizable value has been calculated at the expected proceeds from the sale less the estimated costs to sell. In connection with the sale of these
assets and liabilities to Tepnel, the Company was required to sign an unconditional guarantee related to the lease for the Stamford, Connecticut based laboratory, which lease was assigned to Tepnel. The Company also reflected the fair value of the
guarantee of $1.6 million as a reduction to the net realizable value of these assets and liabilities, which is included in other long term liabilities in the accompanying consolidated balance sheet as of September 30, 2004 and December 31, 2003
accordingly. See note 10 for further discussion of this matter.



In accordance with the provisions of SFAS 144, the Company has not included the results of operations of the Diagnostics business unit held for sale in the results from continuing operations. The results of operations for this business unit
held for sale has been reflected in discontinued operations. The income (loss) from discontinued operations for the three and nine months ended September 30, 2004 and 2003, respectively, consists of the following (in thousands):



|                                        |  |                                         |     |      |                                        |        |      |  |   |      |   |  |   |        |  
|--------------------------------------- |  | --------------------------------------- | --- | ---- | -------------------------------------- | ------ | ---- |  | - | ---- | - |  | - | ------ | -
|                                        |  | For the three months endedSeptember 30, |     |      | For the nine months endedSeptember 30, |       
|                                        |  | 2004                                    |     | 2003 |                                        |        | 2004 |  |   | 2003 |  
|Revenues                                |  | $                                       |    |      | $                                      | 2,457  |      |  | $ | 508  |   |  | $ | 8,088  |  
|Costs of products and services revenues |  |                                         |    |      |                                        | 1,760  |      |  |   | 616  |   |  |   | 5,428  |  
|                                        |  |                                         |     |      |                                        |        |      |  |   |      |   |  |   |        |  
|Gross margin                            |  |                                         |    |      |                                        | 697    |      |  |   | (108 | ) |  |   | 2,660  |  
|Research and development                |  |                                         |    |      |                                        | 398    |      |  |   | 122  |   |  |   | 1,137  |  
|Selling and marketing                   |  |                                         |    |      |                                        | 533    |      |  |   | 126  |   |  |   | 1,612  |  
|General and administrative              |  |                                         |    |      |                                        | 180    |      |  |   | 151  |   |  |   | 605    |  
|Amortization of Intangibles             |  |                                         |    |      |                                        |       |      |  |   |     |   |  |   |       |  
|Impairment of assets                    |  |                                         |    |      |                                        | 799    |      |  |   |     |   |  |   | 4,704  |  
|                                        |  |                                         |     |      |                                        |        |      |  |   |      |   |  |   |        |  
|Operating income (loss)                 |  |                                         |    |      |                                        | (1,213 | )    |  |   | (507 | ) |  |   | (5,398 | )
|Other income (loss)                     |  |                                         | 244 |      |                                        | 185    |      |  |   | (99  | ) |  |   | 188    |  
|                                        |  |                                         |     |      |                                        |        |      |  |   |      |   |  |   |        |  
|Net income (loss)                       |  | $                                       | 244 |      | $                                      | (1,028 | )    |  | $ | (606 | ) |  | $ | (5,210 | )
|                                        |  |                                         |     |      |                                        |        |      |  |   |      |   |  |   |        |  



The Company sold the
assets and liabilities of the business unit held for sale in January 2004; therefore all of the assets and liabilities as of December 31, 2003 have been reflected as current. The components of these assets and liabilities at December 31, 2003 are as
follows (in thousands):



|                                      |  |                  |      
|------------------------------------- |  | ---------------- | -----
|                                      |  | December 31,2003
|Accounts receivable                   |  | $                | 1,795
|Inventory                             |  |                  | 2,621
|Other current assets                  |  |                  | 179  
|                                      |  |                  |      
|Current assets                        |  |                  | 4,595
|Fixed assets                          |  |                  |     
|Intangible assets                     |  |                  |     
|                                      |  |                  |      
|Total assets                          |  |                  | 4,595
|Accounts payable and accrued expenses |  |                  | 3,156
|Other liabilities                     |  |                  |     
|                                      |  |                  |      
|Net assets                            |  | $                | 1,439
|                                      |  |                  |      



(7) Debt



On December 23, 2002, the Company consummated a line of credit with a
commercial bank for a maximum of $10.0 million. This line of credit was terminated in December of 2003. In 2002, pursuant to the terms of the line of credit, the Company also issued 43,000 warrants to purchase common stock of the Company at an
exercise price of $3.20 per share. The warrants were immediately exercisable and had a five-year term. The Company calculated the fair value of the warrants using the Black Scholes option-pricing model. This value was recorded as debt issuance costs
and is being amortized over the term of the debt. These warrants were exercised and common stock was issued in January of 2004.



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ORCHID BIOSCIENCES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

September 30,
2004 and 2003

(unaudited)



(in thousands, except per share data)



In December 1998, the Company entered into a $6.0 million equipment loan line, which is secured by the purchased equipment whose availability expired in
1999. In December 2000, the Company amended the loan line and established a new borrowing base of $8.0 million. As of September 30, 2004 and December 31, 2003, the Company does not have the ability to draw down on the loan line due to the expiration
of the loan line in December 2001. At September 30, 2004 and December 31, 2003, the Company had approximately $0.7 million and approximately $2.3 million outstanding under this arrangement. If the Company did not maintain minimum unrestricted cash,
as defined in the agreement, equal to the greater of $35.0 million or twelve months cash needs (calculated by taking the trailing three months net cash used in operations multiplied by four), the Company was required to provide a cash security
deposit or letter of credit equal to an amount defined in the agreement, not to exceed 50% of outstanding amounts on draws made in or subsequent to December 2000. The Company was also required to provide a cash security deposit or obtain a letter of
credit equal to approximately $2.2 million plus 50% of any future draw amount no later than June 30, 2001, unless the Company completed a follow-on equity offering of at least $50.0 million in net unrestricted proceeds. During 2001, the Company did
complete a follow-on offering. However, the net unrestricted proceeds from this offering of $33.2 million were less than the minimum amount required under the loan line. The Company has received written notice from the lender stating that the lender
waived the requirement of a pledge of cash security deposit or letter of credit under this agreement. In addition, subsequent to June 30, 2002, the Company did not maintain the minimum unrestricted cash as defined in the Agreement. The Company has
also received written notice from the lender stating that the lender waived the financial covenant violation as a result of not maintaining a pledge of cash security deposit or letter of credit under this agreement for the period of non-compliance
through June 19, 2002. On June 19, 2002, the Company obtained a letter of credit in the amount of approximately $2.7 million as required by the amended line of credit, which was supported by a cash restriction on certain securities held by the
Company.



During 2003, the Companys required letter of
credit or cash deposit became less than the original $2.7 million letter of credit established because the Company continued to pay down its monthly obligation in accordance with the original terms of the loan line. The restricted cash amount
related to this agreement has been reduced accordingly as of September 30, 2004 to approximately $0.2 million. This cash restriction, in addition to cash restricted under two of the Companys operating leases, and one government contract is
reflected as restricted cash in the consolidated balance sheet as of September 30, 2004 and December 31, 2003 of $2.0 million and $2.1 million, respectively, of which approximately $1.8 million is classified as a long term asset. In May 2004, the
Company obtained a letter of credit in the amount of approximately $0.8 million as required by a line of credit it entered into as required by the terms of a new government contract.



All borrowings under the equipment loan line are to be repaid in monthly principal installments plus interest over 48 months
from the date of funding, with the final 15% of the original principal amount due in a balloon payment at the end of loan term. At December 31, 2003, annual interest rates on the seven draws range from 9.16% to 11.66%. During 1999, in connection
with this arrangement, 4,178 warrants to purchase common stock were granted at the time of the borrowings with exercise prices, which ranged from $22.50 to $61.25 per share. The fair value of these warrants of approximately $0.1 million, as
determined using a Black-Scholes option pricing model, was recorded as debt issuance costs and is being amortized over the term of the debt.



Long-term debt is comprised of the following at September 30, 2004 and December 31, 2003 (in thousands):



|                                                                 |  |                   |     |                  |   |      
|---------------------------------------------------------------- |  | ----------------- | --- | ---------------- | - | -----
|                                                                 |  | September 30,2004 |     | December 31,2003
|Equipment loan line secured by purchased equipment               |  | $                 | 639 |                  | $ | 2,238
|Capital lease obligations (see Note 10) and other long-term debt |  |                   | 16  |                  |   | 66   
|                                                                 |  |                   |     |                  |   |      
|                                                                 |  |                   | 655 |                  |   | 2,304
|Less current portion                                             |  |                   | 655 |                  |   | 1,889
|                                                                 |  |                   |     |                  |   |      
|Long-term debt, less current portion*                            |  | $                 |    |                  | $ | 415  
|                                                                 |  |                   |     |                  |   |      

---

|* | Amount due in 2005
|- | ------------------



(8) Segment Information



From its inception in 1995, the Company has engaged in several different technologies and businesses, a number of which the Company has since elected to exit. On December 19, 2002, the Company sold its Life Sciences instrumentation business
and related assets to Beckman Coulter, Inc. (BCI), and during the year ended December 31, 2002, the Company made the decision to sell the



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##### Table of Contents

ORCHID BIOSCIENCES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

September 30,
2004 and 2003

(unaudited)



(in thousands, except per share data)



Diagnostics business unit. In January 2004, the Company completed the sale of certain assets related to its Diagnostics business units products and services to
Tepnel. After the Company exited these businesses, the Company determined that it operated its business under one segment, the development and delivery of genetic testing, or genotyping, services that generate information related to genetic
susceptibility, uniqueness, or the genetic variability that distinguishes one organism from another. During the quarters ended March 31, June 30 and September 30 of 2003, the Company reported Orchid public health as a separate segment; however, upon
further analysis, the Company concluded public health should be included with our Identity Genomics business unit and the Company now operates under one reporting segment.



Prior to 2003, the Company had historically operated in two segments, Identity Genomics and Life Sciences, each of which
represented activities of strategic businesses that were historically managed separately because each business provided distinct products and services. The Life Sciences segment marketed and sold equipment and consumables for SNP scoring and other
genetic analyses, whereas the Identity Genomics segment included genotyping services and DNA laboratory analysis for paternity, forensic and transplantation testing and SNP scoring services. During 2002, the Company continued to market and sell
these products and provide these services to its customers; however, in early 2002, the Company completed an internal process of realigning its business into four business units.



The Company committed to sell its Diagnostic business unit during 2002. As a result of this decision, the segment
information in 2003 for the Diagnostics business unit has been excluded below. Note 6 depicts the operations of that business which is reflected as discontinued operations and the assets and liabilities of that business unit were considered as
held for sale during 2003. The chief operating decision maker of the Company measures segment profit/ (loss) using operating income/ (loss), which excludes other income (expense) and allocation of corporate expenditures. These corporate
costs, which include treasury, human resources, finance, restructuring costs and certain other corporate functions, are included in Corporate and all other. All other also reflects the operations of Orchid GeneShield, which during the
three months ended September 30, 2004 and 2003 was considered to be insignificant from a segment reporting perspective. Goodwill has been allocated to each reportable segment as shown below. In accordance with FAS 131, Disclosures about Segments
of an Enterprise and Related Information,the Company determined it was impracticable to restate previously reported segment information. As the Company exited from its Life Sciences business in 2002, neither the old nor the new basis of
segmentation result in revenues, expenses or assets attributable to the Life Sciences business in 2004.



|                                                        |  |                  |        |              |   |                       |  |   |         |   |  |   |         |  
|------------------------------------------------------- |  | ---------------- | ------ | ------------ | - | --------------------- |  | - | ------- | - |  | - | ------- | -
|                                                        |  | IdentityGenomics |        | LifeSciences |   | Corporateand allother |  |   | Total   |  
|                                                        |  | (in thousands)   |       
|For the three months ended September 30, 2004:          |  |                  |        |              |   |                       |  |   |         |   |  |   |         |  
|Revenues from external customers                        |  | $                | 16,354 |              | $ |                      |  | $ | 93      |   |  | $ | 16,447  |  
|Segment operating income (loss)                         |  |                  | 2,354  |              |   |                      |  |   | (2,178  | ) |  |   | 176     |  
|As of and for the nine months ended September 30, 2004: |  |                  |        |              |   |                       |  |   |         |   |  |   |         |  
|Revenues from external customers                        |  | $                | 44,481 |              | $ |                      |  | $ | 391     |   |  | $ | 44,872  |  
|Segment operating income (loss)                         |  |                  | 3,626  |              |   |                      |  |   | (10,987 | ) |  |   | (7,361  | )
|Depreciation and amortization expense                   |  |                  | 3,458  |              |   |                      |  |   | 746     |   |  |   | 4,204   |  
|Noncash stock based compensation                        |  |                  |       |              |   |                      |  |   | 212     |   |  |   | 212     |  
|Capital expenditures                                    |  |                  | 2,169  |              |   |                      |  |   | 14      |   |  |   | 2,183   |  
|Total assets from continuing operations                 |  |                  | 39,084 |              |   |                      |  |   | 34,512  |   |  | $ | 73,596  |  
|Total assets from discontinued operations               |  |                  |        |              |   |                       |  |   |         |   |  |   |        |  
|Total assets                                            |  |                  |        |              |   |                       |  |   |         |   |  | $ | 73,596  |  
|For the three months ended September 30, 2003:          |  |                  |        |              |   |                       |  |   |         |   |  |   |         |  
|Revenues from external customers                        |  | $                | 10,156 |              | $ | 1,622                 |  | $ | 55      |   |  | $ | 11,833  |  
|Segment operating income (loss)                         |  |                  | 680    |              |   | 587                   |  |   | (4,924  | ) |  |   | (3,657  | )
|As of and for the nine months ended September 30, 2003: |  |                  |        |              |   |                       |  |   |         |   |  |   |         |  
|Revenues from external customers                        |  | $                | 31,054 |              | $ | 5,383                 |  | $ | 498     |   |  | $ | 36,935  |  
|Segment operating income (loss)                         |  |                  | 3,878  |              |   | 2,492                 |  |   | (18,586 | ) |  |   | (12,216 | )
|Goodwill                                                |  |                  | 2,598  |              |   |                      |  |   |        |   |  |   | 2,598   |  
|Total assets from continuing operations                 |  |                  | 33,321 |              |   | 2,785                 |  |   | 19,277  |   |  | $ | 55,383  |  
|Total assets from discontinued operations               |  |                  |       |              |   |                      |  |   |        |   |  |   | 6,520   |  
|Total assets                                            |  |                  |       |              |   |                      |  |   |        |   |  | $ | 61,903  |  



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##### Table of Contents

ORCHID BIOSCIENCES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

September 30,
2004 and 2003

(unaudited)



(in thousands, except per share data)



For the three months ended September 30, 2004, the Company generated approximately $5.9 million or 36% of its total revenues through agreements with two
contractors. These contractors generated approximately $3.6 million or 30% of its total revenues during the three months ended September 30, 2003. For the nine months ended September 30, 2004, the Company generated approximately $13.9 million or 31%
of its total revenues through agreements with two contractors. These contractors generated approximately $11.2 million or 30% of its total revenues during the nine months ended September 30, 2003.



As a result of the Companys acquisition of Cellmark in February 2001,
the Company has significant international operations, primarily in the UK. During the three months ended September 30, 2004 and 2003, the Company recorded revenues from international customers, of approximately $7.5 million, or approximately 46% and
$4.7 million or 40%, respectively, of total revenues. Contracts with two customers, the Department of Environment, Food and Rural Affairs (DEFRA) and Forensic Alliance Ltd. (FAL), account for approximately 78% and 76% of total international revenues
for the three months ended September 30, 2004 and 2003, respectively. During the nine months ended September 30, 2004 and 2003, the Company recorded revenues from international customers, of approximately $18.7 million, or 42% and $14.2 million or
38%, respectively, of total revenues. Contracts with two customers, DEFRA and FAL, account for approximately 74% and 79% of total international revenues for the nine months ended September 30, 2004 and 2003, respectively.



(9) Redeemable Convertible Preferred Stock and Common Stock



Common Stock Offering



On February 26, 2004, the Company entered into definitive agreements with new and existing institutional investors to raise
approximately $30.3 million in gross proceeds ($26.1 million after direct transaction costs) in a common stock private equity financing. Pursuant to the agreements, the Company sold approximately 3.2 million shares of common stock at $9.60 per share
and granted the investors four-year warrants to purchase approximately an additional 0.6 million shares of the Companys common stock at an exercise price of $13.20 per share. The transaction closed on February 27, 2004. The securities issued
in this transaction were registered for sale on Form S-3, which was declared effective on May 28, 2004 covering the resale of the shares of common stock sold, as well as the shares of common stock issuable upon the exercise of the warrants.



Redeemable Convertible Preferred Stock



On March 31, 2003, the Company completed a private placement of 1,600 units,
with each unit consisting of one share of Series A redeemable convertible preferred stock and a warrant to purchase shares of the Companys common stock, which resulted in net proceeds of $16.0 million. The warrants are exercisable at any time
after the first anniversary of the issuance date through the fifth anniversary of the issuance date at an exercise price equal to $2.25 per share, and may be exercised via a cashless exercise from the second anniversary of the issuance date through
the fifth anniversary of the issuance date.



Due to the
redemption characteristics of the Series A Preferred Stock, the Company classified the carrying value of the Series A Preferred Stock of approximately $3.9 million outside of stockholders equity in the accompanying consolidated balance sheet
as of December 31, 2003. During the three months ended June 30, 2003, the Company also recorded a beneficial conversion feature of $0.7 million in the net loss allocable to common stockholders based on the difference between the Companys per
share value as of the commitment date and the per share value of the Series A Preferred Stock transaction after giving effect to the value associated with the warrants.



During the first quarter of 2004, the Company issued a notice of redemption to the then outstanding shareholders of the
Series A Preferred Stock. As a result of this redemption notice, all 503 shares of Series A Preferred Stock outstanding at December 31, 2003 were converted into approximately 2.2 million shares of common stock as of February 6, 2004. The unamortized
discount from issuance of the Series A Preferred Stock of $1.1 million was recorded in the first quarter of 2004 and included in net loss allocable to common stockholders for the first quarter of 2004.



The Series A Preferred Stock bore cumulative dividends, payable quarterly, at
an initial annual rate of 6% for the first nine quarters, payable at the Companys option, in cash or shares of common stock. The Company issued 1,571 shares of common stock as dividends to the Series A Preferred Shareholders who converted
during the three months ended March 31, 2004. The dividends have been included in net loss allocable to common stockholders.



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##### Table of Contents

ORCHID BIOSCIENCES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

September 30,
2004 and 2003

(unaudited)



(in thousands, except per share data)



(10) Commitments and Contingencies



The Company leases office and laboratory facilities under noncancelable operating lease arrangements. Future minimum rental commitments required by such
leases as of September 30, 2004 are as follows (in thousands):



|                                      |  |   |       
|------------------------------------- |  | - | ------
|Three months ending December 31, 2004 |  | $ | 666   
|2005                                  |  |   | 2,669 
|2006                                  |  |   | 1,986 
|2007                                  |  |   | 1,610 
|2008                                  |  |   | 1,256 
|Thereafter                            |  |   | 5,280 
|                                      |  |   |       
|                                      |  | $ | 13,467
|                                      |  |   |       



The Company has
capital leases for certain machinery and equipment. Minimum lease payments, including interest, under capital leases amounts is less than $0.1 million and is all due in 2004.



In connection with the Companys acquisition of certain patents in 2002 and 2001, the Company assumed obligations to
pay future amounts over the next four years. The obligations have been recorded in the accompanying consolidated balance sheet as of September 30, 2004, at the net present value of the future obligations. The payments, which are to be made to the
original patent holders are as follows (in thousands):



|                                                          |  |   |    
|--------------------------------------------------------- |  | - | ---
|2004                                                      |  | $ |   
|2005                                                      |  |   | 150
|2006                                                      |  |   | 150
|2007                                                      |  |   | 150
|                                                          |  |   |    
|Total                                                     |  |   | 450
|Less current portion                                      |  |   | 150
|                                                          |  |   |    
|Present value of future obligations, less current portion |  | $ | 300
|                                                          |  |   |    



Under the amended
terms of a supply agreement with BCI, the Company is committed to purchase from BCI a minimum amount of materials and supplies in the amount of $0.6 million during 2003, $0.7 million during 2004 and $1.3 million during 2005. If BCI fails to provide
the Company with such materials and supplies meeting the specifications under the supply agreement on three consecutive purchase orders or five purchase orders in any 12-month period, the Company has the right to terminate the supply agreement
without further payments. In accordance with the agreement, on May 18, 2004, the Company informed BCI it had terminated the agreement, as BCI has been unable to supply the Company with materials and supplies that meet the required specifications.
BCI believes that they are not in breach of the agreement, and that the Company remains committed to its minimum purchase obligations. The Company believes it has no existing liabilities owed to BCI relating to any minimum purchase arrangements.



In connection with the sale of assets and liabilities to
Tepnel, the Company was required to sign an unconditional guarantee related to the lease for the Stamford, Connecticut based laboratory, which was assigned to Tepnel. The Company also reflected the fair value of the guarantee of $1.6 million as a
reduction to the net realizable value of these assets and liabilities, which is included in other long term liabilities in the accompanying consolidated balance sheet as of September 30, 2004 and December 31, 2003 accordingly. The Company valued the
guarantee based on the existing terms and conditions of the lease, an estimated vacancy of the space for one year prior to subleasing the space, and discounted the expected rents for a potential sublease of the space. The lease terminates in April
of 2010. Minimum rents under the assigned lease total approximately $4.2 million.



(11) 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 Orchid as defendant, along with certain of its officers and underwriters. An amended complaint was filed on April 19, 2002.



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##### Table of Contents

ORCHID BIOSCIENCES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

September 30,
2004 and 2003

(unaudited)



(in thousands, except per share data)



The complaint, as amended, purportedly was filed on behalf of persons purchasing Orchid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 there under. The amended complaint alleges that, in connection with
Orchids May 5, 2000 initial public offering, the defendants failed to disclose additional and excessive commissions purportedly solicited by and paid to the underwriter defendants in exchange for allocating shares of Orchid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 Orchids registration statement on Form S-1 filed with the Commission in May 2000 and the prospectus, a part of the registration statement, materially false and misleading. Plaintiffs seek unspecified
damages. Orchid believes that the allegations are without merit and has vigorously defended, and intends to continue to vigorously defend, against Plaintiffs claims. In this regard, on or about July 15, 2002, Orchid filed a motion to dismiss
all of the claims against it and its officers. On October 9, 2002, the court dismissed without prejudice only Orchids individual officers, Dale R. Pfost and Donald R. Marvin, from the litigation in exchange for Orchid entering into a tolling
agreement with Plaintiffs executive committee. On February 19, 2003, Orchid received notice of the courts decision to dismiss the Section 10(b) claims against Orchid. Plaintiffs and the defendant issuers 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. The Company is
awaiting the courts approval of the settlement documents.



Prior to Orchids acquisition of Lifecodes Corporation in December 2001, Lifecodes Corporation sold Medical Molecular Diagnostics GmbH, (MMD), a wholly owned subsidiary of Lifecodes Corporation based in Dresden, Germany to Deutsche
Knochenmarkspenderdatei gemeinnutzige Gesellschaft mbH (DKMS), pursuant to a Stock Purchase Agreement dated November 15, 2002 (the SPA). Upon the acquisition of Lifecodes Corporation, Orchid assumed Lifecodes Corporations obligations to DKMS
under the SPA. On September 19, 2003, Orchid received a complaint filed in the 9th Chamber for Trade Affairs in Cologne, Germany on behalf of DKMS through a Request for Service Abroad of Judicial Documents. The complaint sought damages under the SPA
for $5.2 million, or DKMSs cost to acquire MMD. DKMS claims there are defects in the equipment of the MMD laboratory. Orchid had not reserved any amount related to this case and believed that the allegations were without merit. In addition, in
December 2002, Orchid filed a claim in the 29th Chamber for Trade Affairs in Tubingen, Germany against DKMS for $2.2 million of unpaid accounts receivables that accrued during the year ended December 31, 2002. As of September 30, 2004 and December
31, 2003, the Company had fully reserved for this receivable. The accounts receivables were for HLA typing services conducted by the Diagnostics business unit upon DKMS request, which Orchid sold to Tepnel Life Sciences plc in January 2004. On
September 16, 2004 the parties agreed to a settlement wherein the complaints in both matters would be withdrawn, leaving no further obligation by or between the parties, and Orchid would receive $100,000 from the escrow that was established in
November 2002 pursuant to the SPA which will be applied towards Orchids costs incurred in connection with these proceedings.



Orchid is a defendant in litigation pending in the Southern District of New York entitled Enzo Biochem, Inc. et al. v. Amersham PLC, et al. The case was
filed in October, 2002 and is currently in the discovery phase. 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 fraud, unfair competition and tortious interference with contractual relations. Orchid did not have a contractual
relationship with Plaintiffs, but is alleged to have purchased the product at issue from one of the other defendants. Orchid has sold the business unit which is allegedly engaged in the unlawful conduct. As a result, there is no relevant injunctive
relief to be sought from Orchid. The complaint seeks damages in an undisclosed amount.



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##### Table of Contents

Item 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION



This Managements Discussion and Analysis of Financial Condition as of September 30, 2004 and Results of Operations for the three and nine months ended September 30,
2004 and 2003 should be read in conjunction with our Consolidated Financial Statements and related Notes to Consolidated Financial Statements and Selected Financial Data included elsewhere in this Quarterly Report on Form 10-Q, in addition to
sections of our audited condensed consolidated financial statements and notes thereto as well as our Managements Discussion and Analysis of Financial Condition and Results of Operations that are included in our Annual Report on
Form 10-K for the year ended December 31, 2003.



OVERVIEW



We are engaged in the provision of services for profiling genetic
uniqueness. We incorporated as a Delaware corporation and began operations in 1995. In the first three years of business we were primarily focused on developing our microfluidics technologies for applications in high throughput production of small
molecules under collaborative research programs with SmithKline Beecham and Sarnoff Corporation. Starting in 1998, we focused our business on the application of our technology to determine genetic variability and differences. From 1998 through 2002,
our business focused on SNP scoring products and services that used our proprietary primer extension technology, and on our identity genomics services in paternity and forensics. In December 2002, we disposed of our SNP genotyping instrumentation
and related consumables assets of our Orchid Life Sciences business unit and in January 2004 we completed the divestiture of our Diagnostics business unit. In May 2003, we strategically realigned our Orchid GeneShield business unit which focused on
pharmacogenetics and personalized medicine, and currently have no operational activities occurring in this unit.



From early 2003 to date, we have focused our efforts and reported our operating results around our Identity Genomics Segment serving customers in the
United States and United Kingdom. Identity Genomics includes services that measure and analyze information related to genetic uniqueness, or the genetic variability that distinguishes one organism from another. These services are provided in the
markets for the establishment of paternity, and other familial relationships forensic identification and food safety and animal testing applications. We intend to continue to focus our operations on providing services related to genetic uniqueness.



Our operating results improved for the three and nine months
ended September 30, 2004 as compared to 2003. Overall, for the three months ended September 30, 2004, as compared to 2003, we increased total revenues 39 percent, improved service revenue gross margin to 44 percent for the three months ended
September 30, 2004, as compared to service revenue gross margin of 34 percent in the comparable period in 2003. In addition, for the first time in our history reported income from continuing operations before income taxes in the amount of
approximately $0.4 million, as compared to a loss from continuing operations before income taxes of $2.3 million for the three months ended September 30, 2003. For the nine months ended September 30, 2004, as compared to 2003, we increased total
revenues 21 percent, reduced loss from continuing operations before income taxes by $3.5 million, and maintained service revenue gross margins of approximately 42 percent. We did experience a slight decline in service revenue gross margin for the
three months ended September 30, 2004 as compared to the three months ended June 30, 2004, related to start-up costs for our newly-implemented enhanced automation capabilities in our CODIS testing business, in preparation for our anticipated ramp-up
in CODIS testing in 2005 and beyond.



Our revenues for forensic
testing services in the US are dependent in part on the timing of federal funding for forensics DNA testing through the National Institute of Justice (NIJ). Over the last few quarters, we have witnessed an increase in the amount of funding made
available by the NIJ to various governmental and law enforcement establishments around the US, and consequently we have successfully entered into or renewed several NIJ-funded state contracts in 2004. We expect that our continued ability to secure
new contracts and retain our existing customers will strengthen our revenues and our ability to meet our financial objectives for 2004 and beyond. In addition, we expect that the recent Congressional enactment of the Presidents DNA Initiative
should provide increased funding over the next several years to private forensic laboratories, similar to ours, to process DNA backlogs in criminal investigations.



Our operations in the UK include all of our public health testing services, in addition to providing a portion of our
paternity and forensic DNA testing services, and accounted for 46 and 42 percent of our total revenues for the three and nine months ended September 30, 2004, respectively. For the three and nine months ended September 30, 2004, 78% and 74%,
respectively, of our UK revenues were derived through agreements with two contractors, the Department of Environment, Food and Rural Affairs (DEFRA) and Forensic Alliance Ltd. (FAL). In May of 2004 we renewed the DEFRA contract for two more years.
The contract with FAL was executed on July 15, 2002 and will expire in July 2007, subject to early termination by either party by providing the other party with not less than twelve months written notice on or after July 15, 2006. We continued
to see strong volumes in our scrapie susceptibility testing businesses for the three months ended September 30, 2004. We continue to expect our UK business to be a significant part of our business. We expect to experience continued growth in our UK
business in the public health testing area through expected increases in the amount of testing we perform for DEFRA and other customers for scrapie susceptibility in sheep, and through the introduction of our meat traceability business with new
customers, which includes the Maple Leaf Foods agreement announced in the first quarter of 2004. We saw increased testing volumes from the Maple Leaf Agreement in the third quarter and we expect to continue to see increased testing volumes under
this agreement in the fourth quarter of 2004.



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##### Table of Contents

We were favorably impacted during 2003, and 2004 by exchange rate movements of the British Lb sterling as
compared to the US Dollar. For the nine months ended September 30, 2004 as compared to the same period in 2003, our revenues were favorably impacted by five basis points as a result of the exchange rate movement. Excluding the favorable impact of
the exchange rate movement, the growth rate in revenues for the nine months ended September 30, 2004 was 16%. The significant percentage of our revenue derived from our UK operations makes us vulnerable to future fluctuations in the exchange rate,
and there can be no assurance that the recent favorable trend in this exchange rate will not be reversed, which would have an unfavorable impact on our consolidated financial results.



Our operating results are driven by our ability to generate sales and improve operating efficiency. As a result of the
implementation of our restructuring plan throughout 2002 and 2003, we reported operating income for the three months ended September 30, 2004, and expect to continue to report improvements in operating results and operating cash flow. We also expect
to continue to focus on improving operating efficiencies during 2004. We expect that these operating efficiency improvements, together with our expected annual growth in revenue during 2004 of 20%, will result in improved gross margins during 2004.
If we achieve our targeted 2004 revenue growth, we would generate approximately $60.0 million in total revenues for the year ended December 31, 2004, fueled by growth in our forensics, animal and food testing, and private paternity businesses. We
expect to realize a gross margin of approximately 45 percent for the year ended December 31, 2004 as a result of higher sales volume and improved services mix. We continue to believe that our current level of overhead expenses is sufficient to
support our planned revenue growth in 2004, and we anticipate that these expenses will be lower than 2003 levels, as a result of the restructuring activities undertaken in 2003 and 2002. Our outlook for 2004 is based in part on some key assumptions
which have occurred in 2004, including the award to us of a significant portion of NIJ-funded state contracts, the continued benefit of our 2004 sales and marketing investments which have resulted in solid growth in our private paternity DNA testing
business, and increased testing volumes in our animal testing and food safety DNA testing business, and our renewed two-year contract with the UK government as their major provider of scrapie genotyping services.



Since inception, we have incurred losses and as of September 30, 2004 we had
stockholders equity of approximately $52.9 million, including an accumulated deficit of approximately $297.0 million. We had previously indicated that we expected to attain profitability in the second half of 2003; however, due to market
circumstances, particularly the rate at which funding of forensics testing was released from the NIJ, we were unable to achieve our objective. For the nine months ended September 30, 2004, the loss from continuing operations before income taxes was
$7.3 million, which included $1.1 million recorded as an additional reserve for one of Orchids former operating facilities in Princeton, New Jersey, $1.9 million in general and administration expenses related to the companys various
financing transactions, and $1.4 million of charges for the amortization of intangibles. For the three months ended September 30, 2004, we reported income from continuing operations before income taxes of $0.4 million, a significant improvement from
the $1.4 million loss from continuing operations before income taxes for the three months ended June 30, 2004, and $6.3 million loss from continuing operations before income taxes for the three months ended March 31, 2004. We expect to continue to
generate income from continuing operations in the fourth quarter of 2004.



During the first quarter of 2004, we closed a common stock private equity financing in the amount of $26.1 million, net of closing costs. In addition, as of February 6, 2004, 100% of our redeemable convertible
preferred stockholders had converted their shares of Series A Preferred Stock to common stock. In connection with the common stock private equity financing, on March 26, 2004, we filed a registration statement with the Securities and Exchange
Commission (SEC) covering the resale of the shares of common stock sold, as well as the shares of common stock issuable upon the exercise of the warrants issued in the financing, which was declared effective on May 28, 2004. As a result of these
measures, we expect to have adequate capital to fund operations for at least the next twelve months.



On January 13, 2004 we filed a shelf registration statement on Form S-3 with the SEC, to provide us with further opportunities to raise capital. This
shelf registration will permit us, from time to time, to offer and sell up to $30 million of our common stock. We do not anticipate the need to raise additional capital in 2004 to fund current operations; however, if we determine that this need
exists, or if we intend to fund future growth opportunities, we may use this shelf registration to provide financing. This registration statement was declared effective on May 28, 2004.



RESULTS OF OPERATIONS



Our Diagnostic business unit was considered to be a non-core asset, and was reflected as a discontinued operation. Accordingly, we have not included the
results of operations of our Diagnostics business unit, in the results of continuing operations in any period presented. The results of operations for this business unit have been reflected in discontinued operations for all periods presented. The
assets and liabilities of our Diagnostics business unit, which was held for sale, have been reflected as such in the consolidated balance sheets as of December 31, 2003. We completed the sale of certain assets and liabilities related to our
Diagnostics business unit in January 2004.



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The following table sets forth a quarter-over-quarter comparison of the components of our Net Loss for the three
months ended September 30, 2004 and 2003:



|                                                          |  |                |        |   |         |   |        |         |  |   |        |   |  |      |   
|--------------------------------------------------------- |  | -------------- | ------ | - | ------- | - | ------ | ------- |  | - | ------ | - |  | ---- | --
|                                                          |  | (In thousands) |        |   | $Change |   |        | %Change | 
|                                                          |  | 2004           |        |   | 2003    |   |        |        
|Total revenues                                            |  | $              | 16,447 |   |         | $ | 11,833 |         |  | $ | 4,614  |   |  | 39   | % 
|Costs of revenues                                         |  |                | 9,266  |   |         |   | 7,713  |         |  |   | 1,553  |   |  | 20   | % 
|Research and development expenses                         |  |                | 426    |   |         |   | 642    |         |  |   | (216   | ) |  | (34  | )%
|Marketing and sales expenses                              |  |                | 1,634  |   |         |   | 1,123  |         |  |   | 511    |   |  | 46   | % 
|General and administrative expenses                       |  |                | 4,497  |   |         |   | 5,632  |         |  |   | (1,135 | ) |  | (20  | )%
|Restructuring and related charges                         |  |                |       |   |         |   | (72    | )       |  |   | 72     |   |  | 100  | % 
|Impairment of assets                                      |  |                |       |   |         |   |       |         |  |   |       |   |  |     | % 
|Amortization of intangible assets                         |  |                | 448    |   |         |   | 452    |         |  |   | (4     | ) |  | (1   | )%
|Other income/(expense)                                    |  |                | 207    |   |         |   | 1,393  |         |  |   | (1,186 | ) |  | (85  | )%
|Income tax expense                                        |  |                | 1,022  |   |         |   | 549    |         |  |   | 473    |   |  | 86   | % 
|Income (loss) from operations of a business held for sale |  |                | 244    |   |         |   | (1,028 | )       |  |   | 1,272  |   |  | >100 | % 
|Net loss                                                  |  |                | (395   | ) |         |   | (3,841 | )       |  |   | (3,446 | ) |  | (90  | )%
|Net loss allocable to common shareholders                 |  |                | (395   | ) |         |   | (4,994 | )       |  |   | (4,599 | ) |  | (92  | )%



Three months ended September 30,
2004 and 2003



Revenues



Revenues for the three months ended September 30, 2004 of approximately
$16.5 million represented an increase of approximately $4.7 million as compared to revenues of approximately $11.8 million for the comparable period of 2003. Total revenues during the three months ended September 30, 2004 versus 2003 increased as a
result of increased service revenues. Total service revenues, which include revenues from our service businesses of paternity, forensics and public health testing for the three months ended September 30, 2004 were approximately $16.4 million, an
increase of approximately $4.6 million, or 39%, from approximately $11.8 million during the comparable period in 2003. The increase in revenues from our service businesses was primarily attributable to an increase in testing volumes experienced
during the three months ended September 30, 2004. We expect to experience increased testing volumes for the foreseeable future, despite an anticipated slight decline in testing volumes for the fourth quarter of 2004 as compared to the third quarter
of 2004. This slight decline represents the impact of the inherent seasonality in our animal testing business during the winter months.



As a result of the acquisition of Cellmark in February 2001, the acquisition of Lifecodes in December 2001, and a limited number of agreements with
foreign companies, our business has become increasingly global, with international revenue representing 46% and 40% of total revenue during the three months ended September 30, 2004 and 2003. Fluctuations in foreign currency exchange rates during
2004 and 2003 had a favorable impact of four basis points on our consolidated revenues and profits. We are prepared to hedge against fluctuations in foreign currencies if our transaction exposure becomes material, although we have not engaged in
hedging activities to date.



In August of 2001 we entered into
a three-year agreement with DEFRA of the UK to provide genotypes on sheep in order to test the animals for their susceptibility or resistance to scrapie. In June of 2004, we renewed this contract for two more years. We also signed an agreement in
July of 2002 with FAL, an agency through which we perform forensic testing services for multiple police forces throughout the UK. It is by virtue of our relationship with FAL that we have been able to increase our revenues based on this forensic
testing. The contract with FAL has early termination provisions which, if exercised could have a material adverse effect on the financial condition of our business. Revenue for the three months ended September 30, 2004 and 2003 under these two
agreements, was approximately 36% and 30%, respectively, of our total revenues.



Cost of Service Revenues



Cost of
service revenues consist primarily of salaries and related personnel costs, laboratory supplies, fees paid for the collection of samples, and facility expenses. Cost of service revenues was approximately $9.3 million, or 57% of services revenues,
for the three months ended September 30, 2004 compared to approximately $7.7 million, or 66% of service revenues for the comparable period of the prior year. The increase in cost of service revenues reflects growth in revenues from our businesses of
forensics, paternity and public health testing services. Cost of services as a percentage of revenues declined as compared to the prior year as a result of resource investments implemented during the three months ended September 30, 2003, largely in
our UK operations in preparation for the addition of the certain contracts and to support our growing public health genotyping business. Additionally, resource investments were made in our US based forensics operations during 2003 in anticipation of
the release of additional NIJ awards.



The resource
investments, primarily through additional hires, which we made in both our UK operations and our US-based forensics operations late in 2003 and in the first quarter of 2004, provided us with sufficient resources for the DEFRA agreement, the FAL
agreement and our other recently secured contracts and we expect a continued decrease in costs of services as a percentage of service revenues once testing volumes increase.



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Research and Development Expenses



Research and development expenses consist primarily of salaries and related personnel costs, fees paid to consultants and
outside service providers for development, laboratory supplies, and other expenses related to the design, development, testing, and enhancement of our products and services. Research and development expenses for the three months ended September 30,
2004 were approximately $0.4 million, a decrease of approximately $0.2 million, as compared to approximately $0.6 million for the comparable period of the prior year. The decrease in research and development expenses for the three months ended
September 30, 2004 as compared to the comparable period of the previous year was primarily attributable to a reduction in the research and development efforts undertaken by our GeneShield business unit. During the three months ended September 30,
2004, we incurred no costs related to our GeneShield business unit as compared to approximately $0.3 million for the three months ended September 30, 2003. For the three months ended September 30, 2004, the research and development charges related
primarily to our assay development for our animal and food traceability testing business. For the remainder of 2004, we expect to continue to incur research and development charges to support our entry into the meat traceability market, although
this is not expected to be material, as we will largely rely on the technology already used in our existing businesses.



Marketing and Sales Expenses



Marketing and sales expenses consist of salaries and benefits for our salespeople and all related costs of selling and marketing our products and
services. These costs include travel, advertising, market research costs, and certain professional fees. Marketing and sales expenses for the three months ended September 30, 2004 were approximately $1.6 million as compared to approximately $1.1
million during the comparable period of the prior year. The increase in these costs of approximately $0.5 million was substantially related to investing in advertising and marketing initiatives to accelerate or perpetuate our long term growth,
particularly in our private paternity testing business. As a result of the expansion of select marketing and sales initiatives, our marketing and sales expenses may continue to increase slightly in future periods, although the actual
quarter-to-quarter trend in these expenses may vary.



General and
Administrative Expenses



General and administrative
expenses consist primarily of salaries and related expenses for executive, finance and administrative personnel, professional fees, general legal and intellectual property and other corporate expenses. General and administrative expenses for the
three months ended September 30, 2004 were approximately $4.5 million, a decrease of approximately $1.1 million, as compared to approximately $5.6 million for the comparable period of the prior year. The decrease was primarily attributable to
approximately $0.7 million of professional fees related to strategic corporate activities in the three months ended September 30, 2003. We expect that general and administrative expense will decrease slightly in future periods, although the actual
quarter to quarter trend in these expenses may vary.



Restructuring



There were no restructuring costs for the three
months ended September 30, 2004, as compared to a credit of approximately $0.1 million for the three months ended September 30, 2003.



Amortization of Intangible Assets



During the three months ended September 30, 2004 and 2003, we recorded approximately $0.5 million of amortization of intangible assets.



Interest Income



Interest income for the three months ended September 30, 2004 were approximately $0.1 million as compared to less than $0.1
million in 2003. Interest income for both periods primarily relates to interest earned on investments in money market funds.



Interest Expense



Interest expense for the three months ended September 30, 2004 and 2003 was less than $0.1 million. Interest expense results from our long-term debt.



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Other income



Other income for the three months ended September 30, 2004 was approximately $0.2 million compared to approximately $1.5 million during the comparable
period of the prior year. On July 16, 2003, we had amended our agreement related to obligations associated with our 2001 acquisition of US Patent No. 5,856,092 and its foreign counterparts from Affymetrix. Pursuant to the amended agreement, we were
obligated to pay approximately $0.4 million at the signing of the agreement and $0.6 million over the next four years in ratable installments of $0.15 million per year to the original patent holders. Prior to the execution of the amended agreement,
we reflected an obligation pursuant to the original agreement in an amount of $2.4 million, net of the amount related to interest. Based on the amended agreement, we paid approximately $0.4 million upon execution and recorded a benefit to other
income of $1.4 million to our statement of operations associated with the amended agreement during the three months ended September 30, 2003.



Income Tax Expense



During the three months ended September 30, 2004 and 2003, we recorded income tax expense of approximately $1.0 million and $0.5 million, respectively,
primarily related to our UK business, which is generating taxable income.



Discontinued Operations



During 2004
and 2003, we considered our Diagnostic business unit to be a non-core asset and therefore it has been reflected in discontinued operations for all periods presented. We recorded approximately $0.2 million of income and approximately $1.0 million of
loss from the discontinuance of the Diagnostic business unit during the three months ended September 30, 2004 and 2003, respectively. We sold our Diagnostics business unit to Tepnel in January 2004. Subsequent to the closing date, we and Tepnel
selected a neutral third party auditor to determine the final sale amount based on the provisions of the sale agreement, and the neutral auditor completed its assessment during the second quarter of 2004. We accrued for the amount attributable to
the final sale amount based on the neutral auditor assessment and included those charges in the loss from discontinued operations for the six months ended June 30, 2004. During the third quarter of 2004, we and Tepnel reached a final settlement. The
settlement included the release of the existing escrow to Tepnel, and an additional cash payment by us to Tepnel in the amount of approximately $0.4 million. The total cash settlement was less than the neutral auditor assessment, and as a result, we
recorded income from discontinued operations for the three months ended September 30, 2004. As of September 30, 2004, there are no further obligations related to this settlement, and we included all amounts in the income (loss) from discontinued
operations for the three and nine months ended September 30, 2004.



Net
Loss and Net Loss Allocable to Common Stockholders



Due to the factors described above, as well as the level of testing volumes, which have not yet reached the necessary levels to generate positive net income during the three months ended September 30, 2004, we reported a net loss of
approximately $0.4 million compared to a net loss of approximately $3.8 million for the comparable period a year ago. We also recorded dividends and accretion of Series A redeemable convertible preferred stock of approximately $1.2 million, which
was included in our net loss allocable to common stockholders of approximately $5.0 million for the three months ended September 30, 2003. As of February 6, 2004, all outstanding shares of Series A preferred stock converted into shares of common
stock.



The following table sets forth a quarter-over-quarter comparison
of the components of our Net Loss for the nine months ended September 30, 2004 and 2003:



|                                                 |  |                |         |   |         |   |         |         |  |   |        |   |  |       |   
|------------------------------------------------ |  | -------------- | ------- | - | ------- | - | ------- | ------- |  | - | ------ | - |  | ----- | --
|                                                 |  | (In thousands) |         |   | $Change |   |         | %Change | 
|                                                 |  | 2004           |         |   | 2003    |   |         |        
|Total revenues                                   |  | $              | 44,872  |   |         | $ | 36,935  |         |  | $ | 7,937  |   |  | 21    | % 
|Costs of revenues                                |  |                | 25,815  |   |         |   | 21,363  |         |  |   | 4,452  |   |  | 21    | % 
|Research and development expenses                |  |                | 1,297   |   |         |   | 3,006   |         |  |   | (1,709 | ) |  | (57   | )%
|Marketing and sales expenses                     |  |                | 5,379   |   |         |   | 4,692   |         |  |   | 687    |   |  | 15    | % 
|General and administrative expenses              |  |                | 17,260  |   |         |   | 18,048  |         |  |   | (788   | ) |  | (4    | )%
|Impairment of assets                             |  |                |        |   |         |   | 837     |         |  |   | (837   | ) |  | (100  | )%
|Restructuring and related charges                |  |                | 1,130   |   |         |   | (155    | )       |  |   | 1,285  |   |  | >(100 | )%
|Amortization of intangible assets                |  |                | 1,352   |   |         |   | 1,360   |         |  |   | (8     | ) |  | (1    | )%
|Other income/(expense)                           |  |                | 65      |   |         |   | 1,446   |         |  |   | (1,381 | ) |  | (96   | )%
|                                                 |  |                |         |  
|Income tax expense                               |  |                | 1,578   |   |         |   | 1,609   |         |  |   | (31    | ) |  | (2    | )%
|Loss from operations of a business held for sale |  |                | (606    | ) |         |   | (5,210  | )       |  |   | 4,604  |   |  | 88    | % 
|Net loss                                         |  |                | (9,480  | ) |         |   | (17,589 | )       |  |   | 8,109  |   |  | (46   | )%
|Net loss allocable to common shareholders        |  |                | (10,623 | ) |         |   | (20,201 | )       |  |   | 9,578  |   |  | 47    | % 



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Nine months ended September 30, 2004 and 2003



Revenues



Revenues for the nine months ended September 30, 2004 of approximately $44.9 million represented an increase of
approximately $8.0 million as compared to revenues of approximately $36.9 million for the comparable period of 2003. Total revenues during the nine months ended September 30, 2004 versus 2003 increased as a result of increased service revenues.
Total service revenues, which include revenues from our service businesses of paternity, forensics and public health testing for the nine months ended September 30, 2004 were approximately $44.5 million, an increase of approximately $8.0 million, or
22%, from approximately $36.5 million during the comparable period in 2003. The increase in revenues from our service businesses was primarily attributable to an increase in testing volumes experienced during the first nine months ended September
30, 2004. We have recently witnessed an increase in the amount of funding made available by the NIJ to various governmental and law enforcement establishments throughout the US, which contributed to us successfully entering into or renewing several
NIJ funded state contracts in 2004. We expect to experience increased testing volumes for the foreseeable future, despite an anticipated slight decline in testing volumes for the fourth quarter of 2004 as compared to the third quarter of 2004. This
slight decline represents the impact of the inherent seasonality in our animal testing business during the winter months.



As a result of the acquisition of Cellmark, in February 2001, the acquisition of Lifecodes in December 2001, and a limited number of agreements with
foreign companies, our business has become increasingly global, with international revenue representing 42% and 38% of total revenue during the nine months ended September 30, 2004 and 2003, respectively. Fluctuations in foreign currency exchange
rates during 2004 and 2003 had a favorable impact of five basis points on our consolidated revenues and profits. We are prepared to hedge against fluctuations in foreign currencies if our exposure becomes material, although we have not engaged in
hedging activities to date.



In August of 2001 we entered into
a three-year agreement with DEFRA of the UK to provide genotypes on sheep in order to test the animals for their susceptibility or resistance to scrapie. In June of 2004, we renewed this contract for two more years. We also signed a five-year
agreement in July of 2002 with FAL, an agency through which we perform forensic testing services for multiple police forces throughout the UK. It is by virtue of our relationship with FAL that we have been able to increase our revenues based on this
forensic testing. The contract with FAL has early termination provisions which, if exercised could have a material adverse effect on the financial condition of our business. Revenue for the nine months ended September 30, 2004 and 2003 under these
two agreements was approximately 31% and 30% of our total revenues for the nine months ended September 30, 2004 and 2003.



Cost of Service Revenues



Cost of service revenues consist primarily of salaries and related personnel costs, laboratory supplies, fees paid for the collection of samples, and
facility expenses. Cost of service revenues was approximately $25.8 million, or 58% of services revenues, for the nine months ended September 30, 2004 compared to approximately $21.4 million, or 58% of service revenues for the comparable period of
the prior year. Cost of services as a percentage of revenues for the nine months ended September 30, 2004 was consistent with the comparable period of the prior year. The resource investments, primarily through additional hires, which we made in
both our UK operations and our US-based forensics operations late in 2003, and in the first quarter of 2004, provided us with sufficient resources for the DEFRA agreement, the FAL agreement and our other recently secured contracts.



Research and Development Expenses



Research and development expenses consist primarily of salaries and related
personnel costs, fees paid to consultants and outside service providers for development, laboratory supplies, and other expenses related to the design, development, testing, and enhancement of our products and services. Research and development
expenses for the nine months ended September 30, 2004 were approximately $1.3 million, a decrease of approximately $1.7 million, as compared to approximately $3.0 million for the comparable period of the prior year. The decrease in research and
development expenses for the nine months ended September 30, 2004 as compared to the comparable period of the previous year was primarily attributable to a reduction in the research and development efforts undertaken by our GeneShield business unit.
During the nine months ended September 30, 2004, we incurred no costs related to our GeneShield business unit as compared to approximately $1.7 million for the nine months ended September 30, 2003. For the nine months ended September 30, 2004, the
research and development charges related primarily to our assay development for our animal and food traceability testing business.



Marketing and Sales Expenses



Marketing and sales expenses consist of salaries and benefits for salespeople within our company and all related costs of selling and marketing our
products and services. These costs include travel, advertising, market research costs, and certain professional fees. Marketing and sales expenses for the nine months ended September 30, 2004 were approximately $5.4 million as compared to
approximately $4.7 million during the comparable period of the prior year. The increase in these costs of approximately $0.7 million



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was substantially related to increased investments in our marketing and sales efforts in our private paternity testing
business, and our operations in the UK, which were slightly offset by a reduction in expenditures for our GeneShield business unit as a result of our decision to realign this business unit, and our efforts to reduce discretionary spending as it
related to marketing our services. As a result of the ongoing expansion of select marketing and sales initiatives, our marketing and sales expenses may continue to increase slightly in future periods, although actual expenses may vary due to changes
in the condition of our business.



General and Administrative Expenses



General and administrative expenses consist primarily
of salaries and related expenses for executive, finance and administrative personnel, professional fees, general legal and intellectual property and other corporate expenses. General and administrative expenses for the nine months ended September
30, 2004 were approximately $17.3 million, a decrease of approximately $0.7 million, as compared to approximately $18.0 million for the comparable period of the prior year. The decrease was primarily attributable to approximately $2.4 million in
expenses incurred for the nine months ended September 30, 2003 for strategic corporate activities, including approximately $1.4 million associated with a third party banker, approximately $0.5 million in legal costs and approximately $0.5 million in
consulting costs in connection with other strategic corporate activities. These costs were substantially offset by the $1.9 million of charges related to our various financing activities during the first three months of 2004.



Impairment



There were no impairment costs for the nine months ended September 30, 2004, as compared to $0.8 million for the nine months
ended September 30, 2003. The additional reserve of $0.8 million that was recorded in the nine months ended September 30, 2003 was principally a result of our decision to realign our GeneShield business unit. In connection with this decision, we
terminated most of our GeneShield employees, most of whom were located in our Arlington, Virginia facility. As a result of this decision, we impaired some of the fixed assets, including office and computer equipment, furniture and fixtures and
software related to the GeneShield business unit.



Restructuring



Restructuring expense for the nine months ended
September 30, 2004 was approximately $1.1 million, as compared to a credit of approximately $0.2 million in the comparable period of 2003. The additional reserve of $1.1 million recorded in the nine months ended September 30, 2004 was principally a
result of a change in managements estimate as to when we expect to sublease one of our former operating facilities in Princeton, NJ and the estimated discount associated with such a sublease arrangement. We are attempting to sublease this
facility, which is currently not in use.



During the nine
months ended September 30, 2003, we settled two restructuring obligations on favorable terms. The first favorable settlement related to our leasehold obligation for one of our Princeton based facilities. During the second quarter of 2003, we
recorded a benefit to the restructuring expense of approximately $0.3 million due to us settling this matter for an amount less than our original estimate. During the third quarter of 2003, we reflected another benefit to the restructuring expense
of approximately $0.4 million related to a favorable settlement of an obligation to our former chief executive officer. In connection with this settlement, we issued 106,570 shares of common stock and cash valued at approximately $0.2 million.
During the nine months ended September 30, 2003, we recognized approximately $0.5 million of additional restructuring expense that offset the benefits mentioned above. As a result of the realignment of our GeneShield business unit, we recorded
approximately $0.4 million of severance, legal and facility related charges in the restructuring. We also recognized approximately $0.2 million as a restructuring expense associated with our former chief financial officer, a portion of which is
related to the modification of the terms of previously issued options to purchase common stock.



Amortization of Intangible Assets



During the nine months ended September 30, 2004, we recorded approximately $1.4 million of amortization of intangible assets as compared to $1.4 million in 2003.



Interest Income



Interest income for the nine months ended September 30, 2004 and 2003 was approximately $0.1 million and less than $0.1
million, respectively. Interest income for both periods primarily relates to interest earned on investments in money market funds.



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Interest Expense



Interest expense for the nine months ended September 30, 2004 was approximately $0.1 million compared to approximately $0.4 million during the
comparable period of the prior year. Interest expense during the nine months ended September 30, 2004 decreased as a result of reduced levels of long-term debt.



Other income (expense)



Total other income (expense) for the nine months ended September 30, 2004 was less than $0.1 million compared to approximately $1.5 million of other
income during the comparable period of the prior year. During the nine months ended September 30, 2003, other income (expense) resulted primarily from a gain on the sale of equipment. On July 16, 2003, we had amended our agreement related to
obligations associated with our 2001 acquisition of US Patent No. 5,856,092 and its foreign counterparts from Affymetrix. Pursuant to the amended agreement, we were obligated to pay approximately $0.4 million at the signing of the agreement and $0.6
million over the next four years in ratable installments of $0.15 million per year to the original patent holders. Prior to the execution of the amended agreement, we reflected an obligation pursuant to the original agreement in an amount of $2.4
million, net of the amount related to interest. Based on the amended agreement, we paid approximately $0.4 million upon execution and recorded other income of $1.4 million in our statement of operations associated with the amended agreement during
the three months ended September 30, 2003.



Income Tax Expense



During the nine months ended September 30, 2004 and
2003, we recorded income tax expense of approximately $1.6 million and $1.6 million, respectively, primarily related to our UK business, which is generating taxable income.



Discontinued Operations



During 2004 and 2003, we considered our Diagnostic business unit to be a non-core asset and therefore it has been reflected in discontinued operations for
all periods presented. We recorded a loss of approximately $0.6 million and approximately $5.2 million of loss from the discontinuance of the Diagnostic business unit during the nine months ended September 30, 2004 and 2003, respectively. We sold
our Diagnostics business unit to Tepnel in January 2004. Subsequent to the closing date, we and Tepnel selected a neutral third party auditor to determine the final sale amount based on the provisions of the sale agreement, and the neutral auditor
completed its assessment during the second quarter of 2004. We accrued for the amount attributable to the final sale amount based on the neutral auditor assessment and included those charges in the loss from discontinued operations for the six
months ended June 30, 2004. During the third quarter of 2004, we and Tepnel reached a final settlement. The settlement included the release of the existing escrow to Tepnel, and an additional cash payment by us to Tepnel in the amount of
approximately $0.4 million. The total cash settlement was less than the neutral auditor assessment, and as a result, we recorded income from discontinued operations for the three months ended September 30, 2004. As of September 30, 2004, there are
no further obligations related to this settlement, and we included all amounts in the income (loss) from discontinued operations for the three and nine months ended September 30, 2004.



Net Loss and Net Loss Allocable to Common Stockholders



Due to the factors described above, which includes restructuring charges and costs related to our capital restructuring
efforts, and costs of services in anticipation of receipt of testing samples, as well as the level of testing volumes have not yet reached the necessary levels to generate net income during the nine months ended September 30, 2004, we reported a net
loss of approximately $9.5 million compared to a net loss of approximately $17.6 million for the comparable period a year ago. We also recorded dividends and accretion of Series A redeemable convertible preferred stock of approximately $1.1 million,
which was included in our net loss allocable to common stockholders of approximately $10.6 million for the nine months ended September 30, 2004.



For the nine months ended September 30, 2003, we also recorded a beneficial conversion feature, dividends and accretion of approximately $2.6 million,
which was included in our net loss allocable to common stockholders of approximately $20.2 million. The beneficial conversion feature of $0.7 million related to our March 2003 financing was calculated as the difference between the per share value as
of the commitment date and the per share value of the transaction after giving effect to the value associated with the investors warrants to purchase common stock. The approximate $0.4 million in dividends relate to the 6% dividend payable to the
holders of our Series A convertible preferred stock. In addition, we accreted approximately $1.4 million for the conversion of shares of our Series A convertible preferred stock into shares of our common stock during the nine months ended September
30, 2003. (See Liquidity and Capital Resources below for a further discussion of the financing). As of February 6, 2004, all of our shares of Series A preferred stock had converted into shares of common stock.



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LIQUIDITY AND CAPITAL RESOURCES



As of September 30, 2004, we had approximately $24.6 million in cash and cash equivalents as compared to approximately $9.9
million as of December 31, 2003. In addition, as of September 30, 2004, we had approximately $6.0 million of short-term investments, which consisted of certificates of deposit and commercial paper purchased during the three months ended September
30, 2004. Working capital increased to approximately $27.3 million at September 30, 2004 from approximately $7.6 million at December 31, 2003. This increase in working capital was primarily a result of net proceeds from our common stock private
equity financing in the amount of $26.1 million, net of closing costs, which closed on February 27, 2004.



Sources of Liquidity



Our primary sources of liquidity have been capital raising activities, including issuances of our securities and borrowings under our credit facility. The line of credit facility we had obtained from a commercial bank in December 2002 was
terminated in December 2003.



During the second quarter of 2004
we attained positive cash flow from operations for the first time, and continued to have positive cash from operations during the third quarter of 2004. Our operations provided $0.4 million in cash for the three months ended September 30, 2004 and
$1.1 million for the three months ended June 30, 2004, as compared to cash used in operations of $3.1 million for the first three months of 2004. We generated positive cash flow from our operations for the three months ended September 30, 2004
primarily as a result of higher testing volumes. For the three months ended September 30, 2004, the income from continuing operations before income taxes was $0.4 million, a significant improvement from a loss of $1.4 million for the three months
ended June 30, 2004 and a loss of $6.3 million for the three months ended March 31, 2004. For the nine months ended September 30, 2004, we used approximately $1.6 million of cash in operating activities. Our loss from continuing operations of $8.9
million included $1.1 million recorded as an additional reserve for one of our former operating facilities in Princeton, New Jersey, and $1.9 million in general and administration expenses related to our various financing transactions, which were
incurred in the first quarter of 2004. We expect the loss from continuing operations to continue to improve for the remainder of 2004.



The following table sets forth a year-over-year comparison of the components of our liquidity and capital resources for the nine months ended
September 30, 2004 and 2003:



|                                            |  |                |        |   |      |   |        |  
|------------------------------------------- |  | -------------- | ------ | - | ---- | - | ------ | -
|                                            |  | (In thousands) |       
|                                            |  | 2004           |        |   | 2003 |  
|Overall change in cash and cash equivalents |  | $              | 14,622 |   |      | $ | 794    |  
|Cash (used in) provided by:                 |  |                |        |   |      |   |        |  
|Operating activities                        |  |                | (1,638 | ) |      |   | (5,742 | )
|Investing activities                        |  |                | (7,888 | ) |      |   | (1,906 | )
|Financing activities                        |  |                | 23,768 |   |      |   | 8,335  |  



Net cash used in
operations for the nine months ended September 30, 2004 was approximately $1.6 million compared with net cash used in operations of $5.7 million for the same period of the prior year. This improvement of net cash used in operations resulted
primarily from the improved efficiencies in the business, including increased testing volumes, and the disposal of our discontinued operations in January of 2004. Net cash used in investing activities was approximately $7.9 million for the nine
months ended September 30, 2004. Investing activities during the nine months ended September 30, 2004 included the purchase of approximately $6.0 million of short-term investments and $2.2 million of capital expenditures primarily related to our UK
operations. Financing activities during the nine months ended September 30, 2004 included approximately $26.1 million of net proceeds, which resulted from our common stock private equity financing, which closed on February 27, 2004, which was in
part offset by payments on debt and patent obligations.



We
expect our restructuring efforts taken in 2002 and 2003 and the first half of 2004 will continue to reduce cash expenditures in the future. We believe that the result of these efforts coupled with the divestitures of certain non-core assets,
expected increases in both revenues and gross margins in our remaining business units and our financings in 2003 and early 2004 will enable us to sustain operating profitability and positive cash-flows.



February 2004 Private Placement



On February 26, 2004, we entered into definitive agreements with accredited
new and existing institutional investors to raise approximately $30.3 million in gross proceeds in a common stock private equity financing. Pursuant to the agreements, we sold approximately 3.2 million shares of common stock at $9.60 per share and
granted the investors four-year warrants to purchase approximately an additional 0.6 million shares of our common stock at an exercise price of $13.20. The transaction closed on February 27, 2004. On March 26, 2004, we filed a registration statement
covering the resale of the shares of common stock sold in the financing, as well as the shares of common stock issuable upon the exercise of the warrants granted in the financing, which was declared effective by the SEC on May 28, 2004.



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Shelf Registration Statement



Separate from and prior to the common stock private equity financing of February 27, 2004, we filed a registration statement
on Form S-3 with the Securities and Exchange Commission on January 13, 2004. This shelf registration statement will permit us, from time to time, to offer and sell up to $30 million of our common stock. This registration statement was declared
effective by the SEC on May 28, 2004.



March 2003 Private Placement



On June 30, 2003, we completed a private placement of
1,600 Units each, consisting of one share of Series A redeemable convertible preferred stock and a warrant to purchase shares of our common stock, which resulted in net proceeds to us of $16.0 million. We registered the shares underlying the Series
A redeemable convertible preferred stock and the warrants on a registration statement on Form S-3 filed with the Securities and Exchange Commission on May 30, 2003. As of February 6, 2004, all shares of Series A redeemable convertible preferred
stock were converted into common stock.



Uses of Liquidity in 2004



Throughout the remainder of 2004, we plan to continue
making investments in our business. In that regard, we expect the following to be significant uses of liquidity: cost of service revenues including personnel costs; salaries and related personnel costs, laboratory supplies; fees paid for the
collection of samples, and facility expenses as well as general and administrative costs which consist primarily of salaries and related expenses for executive, finance and administrative personnel, professional fees, general legal and intellectual
property and other corporate expenses. To date we have purchased approximately $2.2 million in capital expenditures, however we do not anticipate that we will incur significant capital expenditures for the remainder of 2004, although these
expenditures may exceed levels in 2003 or prior years if opportunities arise to grow our business more aggressively. In addition, we may make investments in future acquisitions of complementary businesses or technologies.



The amounts and timing of our actual expenditures will depend upon numerous
factors, including our sales and marketing activities, our investments in technology to extend our service portfolio or increase levels of automation in our laboratories, the amount of cash generated by our operations and the amount and extent of
our acquisitions, if any. Actual expenditures may vary substantially from our estimates.



We believe that our existing cash on hand will be sufficient to fund our operations at least through the next twelve months. For the second quarter of 2004, we attained positive cash flow from operations for the first
time, and continued to have positive cash from operations during the third quarter of 2004. Our operations provided $0.4 million in cash for the three months ended September 30, 2004 and $1.1 million for the three months ended June 30, 2004, as
compared to cash used in operations of $3.1 million for the first three months of 2004. We do not anticipate the need to raise additional capital in 2004. However, we may need to access the capital markets for additional financing to fund future
growth opportunities or to operate our ongoing business activities after a period of time if our future results of operations fall below our expectations. If so, 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 needs. If we raise funds through equity or convertible securities, our stockholders may experience
dilution and our stock price may decline.



We cannot assure you
that our business or operations will not change in a manner that would consume available resources more rapidly than anticipated. We also cannot assure you that we will not require substantial additional funding before we can achieve profitable
operations. Our capital requirements depend on numerous factors, including the following:



| |  | our ability to enter into strategic alliances or make acquisitions;
| | - | -------------------------------------------------------------------



| |  | regulatory changes and competing technological and market developments;
| | - | -----------------------------------------------------------------------



| |  | the cost of filing, prosecuting, defending and enforcing patent claims and other intellectual property rights;
| | - | --------------------------------------------------------------------------------------------------------------



| |  | the application of new technologies to our businesses in paternity, forensics and public health testing;
| | - | --------------------------------------------------------------------------------------------------------



| |  | the success rate of establishing new contracts, and renewal rate of existing contracts, for identity genomics services in the areas of paternity, forensics, and public health DNA
testing; and
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | the availability of additional funding at favorable terms, if necessary.
| | - | ------------------------------------------------------------------------



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As of December 31, 2003, our net operating loss carry forwards were approximately $213.0 million and
approximately $186.0 million for Federal and state income tax purposes, respectively. If not utilized, our Federal and state tax loss carry forwards will begin to expire in 2005. Utilization of our net operating losses to offset future taxable
income, if any, may be substantially limited due to change of ownership provisions in the Internal Revenue Code of 1986. We have not yet determined the extent to which limitations were triggered as a result of past financings or may be
triggered as a result of future financings. This annual limitation is likely to result in the expiration of certain net operating losses prior to their use.



Compensation Charges



In prior years, we recorded deferred compensation resulting from the granting of stock options to employees, directors, or consultants with exercise
prices below the fair market value of the underlying common stock at the date of their grant. During 2001, 2002 and 2003, all stock options were granted with grant prices equal to the fair value of our common stock at the grant date. The portion of
these deferred compensation amounts which resulted from grants to consultants is subject to remeasurement at the end of each reporting period based upon the changes in the fair value of our common stock until the consultant completes performance
under his or her respective option agreement.



Critical Accounting
Policies



Our critical accounting policies are as
follows:



| |  | revenue recognition
| | - | -------------------



| |  | valuation of long-lived and intangible assets and goodwill
| | - | ----------------------------------------------------------



| |  | income taxes
| | - | ------------



| |  | stock based compensation
| | - | ------------------------



Revenue Recognition



We are engaged in the development and delivery of genetic testing, or genotyping, services that generate information related to genetic susceptibility, uniqueness, or the genetic variability that distinguishes one organism from another. We
recognize DNA laboratory services revenues at the time test results are completed and reported. Deferred revenues represent the unearned portion of payments received in advance of tests being completed and reported. Unbilled receivables represent
revenue, which has been earned on completed and reported tests, but has not been billed to the customer. Revenues from license arrangements, including license fees creditable against future royalty obligations of the licensee, are recognized when an
arrangement is entered into if we have no significant continuing involvement under the terms of the arrangement. If we have significant continuing involvement under such an arrangement, license fees were deferred and recognized over the estimated
performance period. Management has made estimates and assumptions relating to the performance period, which are subject to change. Changes in these estimates and assumptions could affect the amount of revenues from licenses reported in any given
period. Revenues from research and development agreements are recognized when related research expenses are incurred and when we have satisfied specific obligations under the terms of the respective agreements.



Valuation of Long-Lived and Intangible Assets and Goodwill



We assess the impairment of amortizable identifiable intangibles, including
goodwill, and long-lived assets whenever events or changes in circumstances indicate that the carrying value may not be recoverable. Factors we consider important which could trigger an impairment review include the following:



| |  | significant underperformance relative to expected historical or projected future operating results;
| | - | ---------------------------------------------------------------------------------------------------



| |  | significant changes in the manner of our use of the acquired assets or the strategy for our overall business;
| | - | -------------------------------------------------------------------------------------------------------------



| |  | significant negative industry or economic trends; and
| | - | -----------------------------------------------------



| |  | significant decrease in market value of assets.
| | - | -----------------------------------------------



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When we determine that the carrying value of amortizable intangibles and other long-lived assets may not
be recoverable based upon the existence of one or more of the above indicators of impairment, we measure any impairment based on a projected discounted cash flow method using a discount rate determined by our management to be commensurate with the
risk inherent in our current business. Net amortizable intangible assets and long-lived assets, excluding goodwill, amounted to $ 26.0 million as of December 31, 2003. Goodwill is subject to at least an annual recoverability assessment pursuant to
the provisions of Statement of Financial Accounting Standards (SFAS) No. 142, Goodwill and Other Intangible Assets.



Accounting for Income Taxes.



We have generated net operating losses for tax purposes since inception. As of December 31, 2003, these losses generated net operating loss carryforwards
of approximately $213.0 million and $186.0 million for Federal and state income tax purposes, respectively. In addition, due to our restructuring efforts certain charges written off in the current and prior years were not deductible for income tax
purposes. These differences result in gross deferred tax assets. We must assess the likelihood that the gross deferred tax assets, net of any deferred tax liabilities will be recovered from future taxable income and to the extent we believe the
recovery is not likely, we have established a valuation allowance.



Significant management judgment is required in determining this valuation allowance. We have recorded a valuation allowance of approximately $107.0 million as of December 31, 2003, due to uncertainties related to our ability to utilize some
of our net deferred tax assets, primarily consisting of certain net operating loss carryforwards before they expire. The valuation allowance is based on our estimates of taxable income and the period over which the net deferred tax assets will be
recoverable.



In certain situations, a taxing authority may
challenge positions that the Company has adopted in the income tax filings. Accordingly, the Company may apply different tax treatment for these selected transactions in filing its tax return than for income tax financial reporting purposes. The
Company regularly assesses its position for such transactions and includes reserves for those differences in position. The reserves are utilized or reversed once the statute of limitations has expired or the matter is otherwise resolved.



Conversely, if we are profitable in the future at levels which cause
management to conclude that it is more likely than not that we will realize all or a portion of the net deferred tax assets, for which a valuation has been recorded, we would record the estimated net realizable value of the net deferred tax asset at
that time and would then recognize income tax expense at a rate equal to our combined Federal and state effective rate of approximately 40%.



Stock Option Compensation



We account for options granted to employees and directors in accordance with Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock
Issued to Employees,and related interpretations. As such, compensation expense is recorded on fixed stock option grants only if the current fair value of the underlying stock exceeds the exercise price of the option at the date of grant and it
is recognized on a straight-line basis over the vesting period. We account for stock options granted to non-employees on a fair-value basis in accordance with Statement of Financial Accounting Standards (SFAS) No. 123, Accounting for Stock-Based
Compensation and Emerging Issues Task Force Issue (EITF) No. 96-18, Accounting for Equity Instruments That Are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or Services. As a result, the non-cash
charge to operations for non-employee options with vesting or other performance criteria is affected each reporting period by changes in the fair value of our common stock. As required, we also provide pro forma net loss attributable to common
stockholders and pro forma net loss attributable to common stockholders per common share disclosures for employee and director stock option grants as if the fair-value-based method defined in SFAS No. 123 had been applied (see Note 1 to our
consolidated financial statements).



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Recently Issued Accounting Pronouncements



In December 2002, the Financial Accounting Standards Board (FASB) issued Statement of Accounting Standards (SFAS) No. 148,
Accounting for Stock-Based CompensationTransition and Disclosure (SFAS 148). SFAS 148 provides alternative methods of transition for a voluntary change to the fair value method of accounting for stock-based employee compensation as
originally provided by SFAS 123, Accounting for Stock Based Compensation(SFAS 123). Additionally, SFAS 148 amends the disclosure requirements of SFAS 123 to require prominent disclosure in both the annual and interim financial statements
about the method of accounting for stock-based compensation and the effect of the method used on reported results. The transitional requirements of SFAS 148 are effective for all financial statements for fiscal years ending after December 15, 2002.
We adopted the disclosure portion of this statement beginning in the fiscal quarter ended June 30, 2003. The application of the disclosure portion of this standard had no impact on our consolidated financial position or results of operations. On
April 22, 2003, the FASB determined that stock-based compensation should be recognized as a cost in the financial statements and that such cost be measured according to the fair value of stock options. The FASB issued an exposure draft, Share-Based
Payment, an Amendment of FASB Statements No. 123 and 95 on June 30, 2004. The eventual adoption of this proposed statement, if issued in final form by the FASB will have a material effect on our consolidated financial statements.



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. We have a certain amount of long-term debt recorded on our
books. The interest rates applicable to such debt are not variable with respect to market conditions.



Foreign Currency Risk



As a result of our acquisition of Cellmark, in February 2001, our acquisition of Lifecodes in December 2001, and a limited number of agreements with foreign companies, our business has become increasingly global, with international revenue
representing 42% of total revenue in the first nine months of 2004. We expect that international sales may continue to represent a significant portion of our revenue. Fluctuations in foreign currencies may have an impact on our financial results,
although to date the impact has been favorable, though not material. We are prepared to hedge against fluctuations in foreign currencies if the exposure is material, although we have not engaged in hedging activities to date.



Item 4. CONTROLS AND PROCEDURES



(a) Evaluation of Disclosure Controls and Procedures. Our principal executive officer and principal financial officer, after evaluating the effectiveness of our disclosure controls and procedures (as defined in Exchange Act Rules
13a-15(e) and 15d-15(e)) as of the end of the period covered by this Quarterly Report on Form 10-Q, have concluded that, based on such evaluation, our disclosure controls and procedures were adequate and effective to ensure that material information
relating to us, including our consolidated subsidiaries, was made known to them by others within those entities, particularly during the period in which this Quarterly Report on Form 10-Q was being prepared.



In designing and evaluating our disclosure controls and procedures, our
management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and our management necessarily was required to apply its judgment in
evaluating the cost-benefit relationship of possible controls and procedures.



Section 404 of the Sarbanes-Oxley Act of 2002 requires that management document and test the companys internal controls over financial reporting and include in its Annual Report on Form 10-K for the year ended
December 31, 2004 a report on managements assessment of the effectiveness of the companys internal controls over financial reporting. The companys independent auditor will also be required to attest to and report on
managements assessment. The companys compliance with these requirements and the independent auditors attestation of that assessment has required, and continues to require, the commitment of significant financial and management
resources. While management intends to complete its assessment of internal controls over financial reporting and to implement, document and test any required changes in order to comply with the Section 404 requirements, there can be no assurance
that such efforts, and the attestation and report of the companys independent auditors on managements assessment, will be completed on a timely basis.



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(b) Changes in Internal Controls. There were no changes in our internal control over financial reporting, that
occurred during the quarter ended September 30, 2004, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.



FORWARD-LOOKING STATEMENTS



This report may contain 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:



| |  | our expectation of future levels of revenues, and gross margins and cash expenditures, and uses of liquidity;
| | - | -------------------------------------------------------------------------------------------------------------



| |  | our expectation that we will generate approximately $60.0 million in total revenues for the year ended December 31, 2004, fueled by our growth in forensics, animal and food testing,
and private paternity businesses;
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | our expectation that our operating efficiency improvements and expected revenue growth will result in improved gross margins in 2004;
| | - | -------------------------------------------------------------------------------------------------------------------------------------



| |  | our expectation of realizing gross margin of approximately 45 percent in 2004;
| | - | ------------------------------------------------------------------------------



| |  | our expectation that general and administrative expenses will decrease in future periods;
| | - | -----------------------------------------------------------------------------------------



| |  | our expectation that loss from continuing operations will continue to improve for the remainder of 2004;
| | - | --------------------------------------------------------------------------------------------------------



| |  | our expectation to have adequate capital to fund operations in the future based on existing cash on hand, and our stated expectation of attaining operating income for the full year;
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | our intention to focus our operations on providing services related to genetic uniqueness;
| | - | ------------------------------------------------------------------------------------------



| |  | our expected levels of testing services and anticipated growth of businesses in certain areas;
| | - | ----------------------------------------------------------------------------------------------



| |  | our belief that our continued ability to add to our customer base and retain our existing customers strengthens our top line and our ability to meet our financial objectives for
2004 and beyond;
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | our expectation that we will experience continued growth in our UK business;
| | - | ----------------------------------------------------------------------------



| |  | our expectation that testing volumes under the Maple Leaf agreement will increase in the fourth quarter of 2004;
| | - | ----------------------------------------------------------------------------------------------------------------



| |  | our expectation that the full year effect of our restructuring plans will allow us achieve additional improvements in operating results during 2004;
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------



| |  | our belief that we do not need to raise additional capital in 2004;
| | - | -------------------------------------------------------------------



| |  | our expectation that our resource investments in both our UK operations and our US based forensics operations in preparation for the addition of new contracts attained in late 2003
and 2004 will provide us with sufficient resources for these and other recently secured contracts;
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | our belief that will be able to operate our ongoing business activities and sustain operating profitability and positive cash-flows;
| | - | ------------------------------------------------------------------------------------------------------------------------------------



| |  | our belief that we may make investments in future acquisitions of complementary businesses or technologies; and
| | - | ---------------------------------------------------------------------------------------------------------------



| |  | our belief that our existing cash on hand will be sufficient to fund our operations at least through the next twelve months.
| | - | ----------------------------------------------------------------------------------------------------------------------------



For further information, refer to the more specific factors and uncertainties
discussed throughout our Annual Report on Form 10-K for the year ended December 31, 2003 and in the Risk Factors section thereof. Except as required by law, we undertake no obligation to update any forward-looking statements. You should
also carefully consider the factors set forth in other reports or documents that we file from time to time with the Securities and Exchange Commission.



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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 Orchid as defendant, along with certain of our 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 there under. The amended complaint alleges that, in connection with our May 5, 2000 initial public offering, 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 Commission in May 2000 and the prospectus, a part of the registration statement, materially false and misleading. Plaintiffs seek unspecified damages. We believe that the allegations are without merit and have vigorously defended and intend
to continue to vigorously defend against Plaintiffs claims. In this regard, on or about July 15, 2002, we filed a motion to dismiss all of the claims against our officers and us. On October 9, 2002, the court dismissed without prejudice only
our individual officers, Dale R. Pfost and Donald R. Marvin, from the litigation in exchange for Orchid 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 Orchid. Plaintiffs and the defendant issuers 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. We are awaiting the courts approval of the settlement documents.



Prior to our acquisition of Lifecodes Corporation in December 2001, Lifecodes Corporation sold Medical Molecular Diagnostics
GmbH, (MMD), a wholly owned subsidiary of Lifecodes Corporation based in Dresden, Germany to Deutsche Knochenmarkspenderdatei gemeinnutzige Gesellschaft mbH (DKMS), pursuant to a Stock Purchase Agreement dated November 15, 2002 (the SPA). Upon the
acquisition of Lifecodes Corporation, we assumed Lifecodes Corporations obligations to DKMS under the SPA. On September 19, 2003, we received a complaint filed in the 9th Chamber for Trade Affairs in Cologne, Germany on behalf of DKMS through
a Request for Service Abroad of Judicial Documents. The complaint sought damages under the SPA for $5.2 million, or DKMSs cost to acquire MMD. DKMS claimed there were defects in the equipment of the MMD laboratory. We had not reserved any
amount related to this case and believed that the allegations were without merit. In addition, in December 2002, we filed a claim in the 29th Chamber for Trade Affairs in Tubingen, Germany against DKMS for $2.2 million of unpaid accounts receivables
that accrued during the year ended December 31, 2002. As of September 30, 2004 and December 31, 2003, we had fully reserved for this receivable. The accounts receivables were for HLA typing services conducted by the Diagnostics business unit upon
DKMS request, which we sold to Tepnel Life Sciences plc in January 2004. On September 16, 2004, the parties agreed to a settlement wherein the complaints in both matters would be withdrawn leaving no further obligation by or between the
parties, and we would receive $100,000 from the escrow that was established in November 2002 pursuant to the SPA which will be applied towards our costs incurred in connection with these proceedings.



We are a defendant in litigation pending in the Southern District of New York
entitled Enzo Biochem, Inc. et al. v. Amersham PLC, et al. The case was filed in October 2002 and is in the discovery phase. 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 fraud, unfair competition and tortious interference
with contractual relations. We did not have a contractual relationship with Plaintiffs, but is alleged to have purchased the product at issue from one of the other defendants. We have sold the business unit, which is 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.



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



Not Applicable.



Item 3. DEFAULTS UPON SENIOR SECURITIES



Not
Applicable.



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



Not Applicable.



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Item 5. OTHER INFORMATION



Not Applicable.



Item 6. EXHIBITS



|              |  |                                                                                                                                 
|------------- |  | --------------------------------------------------------------------------------------------------------------------------------
|ExhibitNumber |  | Description                                                                                                                     
|31.1          |  | Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002                              
|              | 
|31.2          |  | Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002                              
|              | 
|32            |  | Certifications of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.



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SIGNATURES



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 BIOSCIENCES, INC.
|                        |  |                         
|Date: November 12, 2004 |  | By:                      |  | /S/ MICHAEL E. SPICER                                           
|                        |  |                          |  | Michael E. Spicer Sr. Vice President and Chief Financial Officer



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Exhibits



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



|              |  |                                                                                                                                 
|------------- |  | --------------------------------------------------------------------------------------------------------------------------------
|ExhibitNumber |  | Description                                                                                                                     
|31.1          |  | Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002                              
|              | 
|31.2          |  | Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002                              
|              | 
|32            |  | Certifications of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.



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