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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended September 30, 2011

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

For the transition period from to

Commission file number: 000-30267

ORCHID CELLMARK INC.

(Exact name of registrant as specified in its charter)


Delaware		22-3392819
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

4390 US Route One Princeton, NJ		08540
(Address of principal executive offices)		(Zip code)

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

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

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

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

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act) Yes ¨ No x

As of November 11, 2011, the registrant had 30,143,043 shares of common stock outstanding.

ORCHID CELLMARK INC.

INDEX TO FORM 10-Q


		Page
PART I - FINANCIAL INFORMATION
ITEM 1.	Financial Statements (unaudited)		1
	Consolidated Balance Sheets as of September 30, 2011 and December 31, 2010		1
	Consolidated Statements of Operations for the three and nine months ended September 30, 2011 and 2010		2
	Consolidated Statements of Cash Flows for the nine months ended September 30, 2011 and 2010		3
	Consolidated Statement of Stockholders’ Equity and Comprehensive Income/Loss for the nine months ended September 30, 2011		4
	Notes to Consolidated Financial Statements		5
ITEM 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		14
ITEM 3.	Quantitative and Qualitative Disclosures About Market Risk		21
ITEM 4.	Controls and Procedures		22

PART II - OTHER INFORMATION
ITEM 1.	Legal Proceedings		23
ITEM 1A.	Risk Factors		27
ITEM 2.	Unregistered Sales of Equity Securities and Use of Proceeds		27
ITEM 3.	Defaults Upon Senior Securities		27
ITEM 4.	Reserved		27
ITEM 5.	Other Information		27
ITEM 6.	Exhibits		27

SIGNATURE			29

PART I – FINANCIAL INFORMATION

Item 1. FINANCIAL STATEMENTS

ORCHID CELLMARK INC. AND SUBSIDIARIES

Consolidated Balance Sheets

(In thousands, except share and per share data)


	September 30, 2011 (Unaudited)			December 31, 2010
Assets
Current assets:
Cash and cash equivalents	$	5,478		$	8,107
Available-for-sale securities		8,468			11,714
Accounts receivable, net		11,341			9,781
Inventory		2,006			1,836
Prepaids and other current assets		983			1,213

Total current assets		28,276			32,651
Fixed assets, net		6,223			5,791
Goodwill		9,405			9,396
Other intangibles, net		2,824			3,901
Other assets		771			774

Total assets	$	47,499		$	52,513


Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable	$	4,033		$	3,282
Accrued expenses and other current liabilities		5,985			6,198
Deferred revenue		980			1,014

Total current liabilities		10,998			10,494
Other liabilities		174			216

Total liabilities		11,172			10,710

Commitments and contingencies

Stockholders’ equity:
Preferred stock; authorized 5,000,000 shares
Series A redeemable convertible preferred stock; $0.001 per share par value; designated 5 shares; no shares issued or outstanding		—			—
Series A junior participating preferred stock; $0.001 per share par value; designated 1,000,000 shares; no shares issued or outstanding		—			—
Common stock; $0.001 per share par value; authorized 150,000,000 shares; issued 30,143,043 at September 30, 2011 and 30,098,269 at December 31, 2010		30			30
Additional paid-in capital		374,420			373,860
Accumulated other comprehensive income		208			36
Treasury stock at cost, 163,259 common shares at September 30, 2011 and December 31, 2010		(1,587	)		(1,587	)
Accumulated deficit		(336,744	)		(330,536	)

Total stockholders’ equity		36,327			41,803

Total liabilities and stockholders’ equity	$	47,499		$	52,513

See accompanying notes to consolidated financial statements.

ORCHID CELLMARK INC. AND SUBSIDIARIES

Consolidated Statements of Operations

Three and nine months ended September 30, 2011 and 2010

(In thousands, except per share data)

(Unaudited)


	Three months ended September 30,						Nine months ended September 30,
	2011			2010			2011			2010
Revenues:
Service revenues	$	16,141		$	17,279		$	49,285		$	47,079
Other revenues		8			13			15			27

Total revenues		16,149			17,292			49,300			47,106

Operating expenses:
Cost of service revenues		11,879			10,780			35,031			30,729
Research and development		335			344			1,017			1,232
Marketing and sales		1,455			1,525			4,568			4,301
General and administrative		3,288			3,502			13,071			10,631
Restructuring		—			538			—			1,502
Amortization of intangible assets		360			462			1,084			1,386

Total operating expenses		17,317			17,151			54,771			49,781

Operating income (loss)		(1,168	)		141			(5,471	)		(2,675	)
Other income (expense)		(11	)		58			149			113

Income (loss) before income tax expense		(1,179	)		199			(5,322	)		(2,562	)
Income tax expense		151			864			886			1,723

Net loss	$	(1,330	)	$	(665	)	$	(6,208	)	$	(4,285	)


Basic and diluted net loss per share	$	(0.04	)	$	(0.02	)	$	(0.21	)	$	(0.14	)


Shares used in computing basic and diluted net loss per share		29,980			29,935			29,970			29,935

See accompanying notes to consolidated financial statements.

ORCHID CELLMARK INC. AND SUBSIDIARIES

Consolidated Statements of Cash Flows

Nine months ended September 30, 2011 and 2010

(In thousands)

(Unaudited)


	2011			2010
Cash flows from operating activities:
Net loss	$	(6,208	)	$	(4,285	)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Stock-based compensation expense		482			792
Depreciation and amortization		2,693			2,777
Provision for losses on accounts receivable		67			36
Gain on sale of assets		4			22
Changes in assets and liabilities, net of effect of acquisition:
Accounts receivable		(1,668	)		(1,419	)
Inventory		(170	)		(269	)
Prepaids and other assets		232			(161	)
Accounts payable		752			396
Accrued expenses and other current liabilities, including restructuring		254			2,995
Deferred revenue		(34	)		213
Income taxes payable		(467	)		1,252
Other liabilities		(42	)		21

Net cash (used in) provided by operating activities		(4,105	)		2,370

Cash flows from investing activities:
Purchases of available-for-sale securities		—			(9,404	)
Maturities of available-for-sale securities		3,410			3,887
Capital expenditures		(2,025	)		(2,096	)

Net cash provided by (used in) investing activities		1,385			(7,613	)

Cash flows from financing activities:
Proceeds from issuance of common stock		74			—

Net cash provided by financing activities		74			—

Effect of foreign currency translation on cash and cash equivalents		17			1,142

Net decrease in cash and cash equivalents		(2,629	)		(4,101	)
Cash and cash equivalents at beginning of period		8,107			8,600

Cash and cash equivalents at end of period	$	5,478		$	4,499

See accompanying notes to consolidated financial statements.

ORCHID CELLMARK INC. AND SUBSIDIARIES

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

Nine months ended September 30, 2011

(In thousands)

(Unaudited)


	Common Stock				Additional		Accumulated Other		Treasury Stock			Accumulated Deficit			Total
	Number of Shares		Amount		Paid-in Capital		Comprehensive Income/Loss		Treasury Stock			Accumulated Deficit			Stockholders’ Equity

Balance at January 1, 2011		30,098	$	30	$	373,860	$	36	$	(1,587	)	$	(330,536	)	$	41,803

Net loss		—		—		—		—		—			(6,208	)		(6,208	)

Gain on available-for-sale securities		—		—		—		1		—			—			1

Foreign currency translation adjustment		—		—		4		171		—			—			175


Comprehensive loss																(6,032	)

Issuance of common stock from exercise of stock options		45		—		74		—		—			—			74

Stock-based compensation expense		—		—		482		—		—			—			482


Balance at September 30, 2011		30,143	$	30	$	374,420	$	208	$	(1,587	)	$	(336,744	)	$	36,327

See accompanying notes to consolidated financial statements.

ORCHID CELLMARK INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(1) Basis of Presentation

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

The accompanying unaudited consolidated financial statements should be read in conjunction with the audited consolidated financial statements and footnotes thereto included in the Company’s Annual Report on Form 10-K, for the year ended December 31, 2010, as filed with the Securities and Exchange Commission (“SEC”) on March 15, 2011, as amended by Amendment No. 1 thereto, as filed with the SEC on April 29, 2011 (collectively, the “Annual Report”).

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

(2) Net Loss per Share

Net loss per share is computed in accordance with the Financial Accounting Standards Board’s (“FASB”) Accounting Standards Codification (“ASC”) 260-10, Earnings Per Share, by dividing the net loss for the period by the weighted average number of shares of common stock outstanding. During each period presented, the Company has certain options that have not been included in the calculation of diluted net loss per share because to do so would be anti-dilutive. As such, the numerator and the denominator used in computing both basic and diluted net loss per share for each period are equal.

(3) Fair Value Measurements and Marketable Securities

Fair value of financial and non-financial assets and liabilities is defined as an exit price, which is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The three-tier hierarchy for inputs used to measure fair value, which prioritizes the inputs to valuation techniques used to measure fair value, is as follows:

Level 1 – quoted prices (unadjusted) in active markets for identical assets or liabilities.

Level 2 – quoted prices for similar assets and liabilities in active markets or inputs that are observable for the asset or liability, either directly or indirectly through market corroboration, for substantially the full term of the financial instrument.

Level 3 – unobservable inputs based on the Company’s assumptions used to measure assets and liabilities at fair value.

A financial asset or liability’s classification within the hierarchy is determined based on the lowest level input that is significant to the fair value measurement. The assessment of the significance of a particular input to the fair value measurement requires judgment, and may affect the valuation of the assets and liabilities being measured and their placement within the fair value hierarchy.

The following is a schedule of marketable securities at September 30, 2011 and December 31, 2010 (in thousands):


			Quoted Prices in Active Markets (Level 1)		Significant Other Inputs (Level 2)		Significant Observable Inputs (Level 3)
September 30, 2011 Available-for-sale securities	$	8,468	$	8,468	$	—	$	—


December 31, 2010 Available-for-sale securities	$	11,714	$	11,714	$	—	$	—

(4) Inventory

Inventory is comprised of the following at September 30, 2011 and December 31, 2010 (in thousands):


	September 30, 2011		December 31, 2010
Raw materials	$	1,542	$	1,491
Work in progress		450		335
Finished goods		14		10

	$	2,006	$	1,836

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

(5) Goodwill and Other Intangible Assets

The following table sets forth the activity for goodwill during the nine months ended September 30, 2011 (in thousands):


Balance as of January 1, 2011	$	9,396
Effect of foreign currency translation		9

Balance as of September 30, 2011	$	9,405

Goodwill is evaluated for impairment on an annual basis, or more frequently if impairment indicators arise, using a fair-value based test that compares the fair value of the asset to its carrying value.

The following table sets forth the Company’s other intangible assets at September 30, 2011 and December 31, 2010 (in thousands):


	September 30, 2011							December 31, 2010
	Cost (1)		Accumulated Amortization			Net		Cost (1)		Accumulated Amortization			Net
Customer list	$	7,248	$	(5,982	)	$	1,266	$	7,238	$	(5,823	)	$	1,415
Patents and know-how		4,899		(3,967	)		932		4,898		(3,655	)		1,243
Trademark/tradename		4,248		(3,738	)		510		4,241		(3,467	)		774
Base technology		6,010		(5,894	)		116		6,006		(5,537	)		469
Non-compete agreements		20		(20	)		—		20		(20	)		—

Totals	$	22,425	$	(19,601	)	$	2,824	$	22,403	$	(18,502	)	$	3,901

(1)

Cost includes the cumulative historical effect of foreign currency translation on intangible assets acquired in a prior business combination. This cumulative historical effect of foreign currency translation amounted to $161 thousand and $139 thousand as of September 30, 2011 and December 31, 2010, respectively.

Amortization expense associated with intangible assets was $360 thousand and $1.1 million, respectively, for the three and nine months ended September 30, 2011. Amortization expense associated with intangible assets was $462 thousand and $1.4 million, respectively, for the three and nine months ended September 30, 2010.

(6) Fixed Assets

Fixed assets are comprised of the following at September 30, 2011 and December 31, 2010 (in thousands):


	September 30, 2011			December 31, 2010
Laboratory equipment	$	13,611		$	13,128
Leasehold improvements		8,978			8,086
Computers and software		5,424			5,120
Furniture and fixtures		1,810			1,947

		29,823			28,281
Less accumulated depreciation and amortization		(23,600	)		(22,490	)

	$	6,223		$	5,791

Depreciation expense associated with fixed assets was $520 thousand and $1.6 million, respectively, for the three and nine months ended September 30, 2011. Depreciation expense associated with fixed assets was $437 thousand and $1.4 million, respectively, for the three and nine months ended September 30, 2010.

(7) Accrued Expenses and Other Current Liabilities

Accrued expenses and other current liabilities are comprised of the following at September 30, 2011 and December 31, 2010 (in thousands):


	September 30, 2011		December 31, 2010
VAT and other taxes	$	2,583	$	2,747
Professional fees		318		313
Employee compensation		1,355		1,394
Restructuring		28		290
Facility related accruals		407		374
Other		1,294		1,080

	$	5,985	$	6,198

(8) Restructuring

The consolidation of the Company’s East Lansing, Michigan paternity testing operations into its Dayton, Ohio facility and the consolidation of its Nashville Combined DNA Index System (“CODIS”) testing operation into its Dallas, Texas facility were both substantially completed as of December 31, 2010. As such, no additional restructuring charges were incurred in the first nine months of 2011, as compared to $1.5 million of restructuring charges in the nine months ended September 30, 2010. The Company announced the planned East Lansing consolidation on October 20, 2009 and completed this consolidation during the quarter ended March 31, 2010. The Company announced the planned Nashville consolidation on January 14, 2010 and completed this consolidation during the quarter ended September 30, 2010. The expenses in 2010 related primarily to employee severance costs and facility closure costs.

The restructuring liability is included as part of accrued expenses and other current liabilities on the Company’s consolidated balance sheet.

As of September 30, 2011 and December 31, 2010, the Company had approximately $28 thousand and $290 thousand, respectively, in restructuring accruals outstanding that are related to severance and facility obligations.

A summary of the restructuring activity is as follows (in thousands):


	Total

Restructuring liability as of December 31, 2010	$	290
Cash payments in the nine months ended September 30, 2011		(262	)


Restructuring liability as of September 30, 2011	$	28

(9) Income Taxes

The Company recognizes interest and penalties related to uncertain tax positions in income tax expense. The tax years 2007 through 2009 remain open to examination by taxing authorities in the United Kingdom (“UK”) and the tax years 2007 through 2009 remain open to examination by the US taxing authorities. In addition, the US taxing authorities may examine the tax years from the Company’s inception in 1995 through 2006, but are barred from adjusting the tax liabilities in excess of the net operating losses generated in any of those tax years.

(10) Recently Issued Accounting Pronouncements

In June 2011, FASB issued new guidance on the presentation of comprehensive income. Specifically, the new guidance allows an entity to present components of net income and other comprehensive income in one continuous statement, referred to as the statement of comprehensive income, or in two separate, but consecutive statements. The new guidance eliminates the current option to report other comprehensive income and its components in the statement of changes in stockholders’ equity. Although the new guidance changes the presentation of comprehensive income, there are no changes to the components that are recognized in net income or other comprehensive income under current accounting guidance. This new guidance is effective for fiscal years and interim periods beginning after December 15, 2011. The Company does not believe its adoption of the new guidance in the first quarter of fiscal 2012 will have an impact on its consolidated financial position, results of operations or cash flows.

In September 2011, the FASB issued guidance that simplified how entities test for goodwill impairment. This guidance permits entities to first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform a two-step goodwill impairment test. This guidance is effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011, and early adoption is permitted. This guidance is not expected to have a material effect on the Company’s financial condition or results of operations.

(11) Comprehensive Loss

Comprehensive income is comprised of net earnings, foreign currency translation adjustments, and unrealized gains and losses on available-for-sale securities. Total comprehensive loss for the three months ended September 30, 2011 and 2010 was $1.9 million and $257 thousand, respectively, and total comprehensive loss for the nine months ended September 30, 2011 and 2010 was $6.0 million and $4.2 million, respectively. The difference from net loss for the three and nine months ended September 30, 2011 and 2010 consists of foreign currency translation adjustments and unrealized gains and losses on available-for-sale securities. Accumulated other comprehensive loss as reflected in the Consolidated Statement of Stockholders’ Equity and Comprehensive Income (Loss) includes cumulative foreign currency translation adjustments of $175 thousand and unrealized gain on available-for-sale securities of $1 thousand.

(12) Agreement and Plan of Merger

On April 5, 2011, the Company entered into an Agreement and Plan of Merger (the “Merger Agreement”), with Laboratory Corporation of America Holdings, a Delaware corporation (“LabCorp”), and OCM Acquisition Corp., a Delaware corporation and a wholly owned subsidiary of LabCorp (“Purchaser”), pursuant to which LabCorp will acquire the Company in a two-step transaction. Pursuant to the Merger Agreement, and subject to its terms and conditions, on April 19, 2011, Purchaser commenced a cash tender offer to purchase all outstanding shares of the Company’s common stock, par value $0.001 per share (the “Common Stock”), including, to the extent outstanding, the associated preferred stock purchase rights (the “Rights”) issued under the Rights Agreement, dated July 27, 2001, as amended (the “Rights Agreement”), between the Company and American Stock Transfer & Trust Company, as rights agent, at a purchase price of $2.80 per share, net to the seller in cash, without interest thereon and subject to any required tax withholding. At the close of business on May 16, 2011, the Rights Agreement and the Rights expired pursuant to their terms. As a result, the Rights are no longer outstanding and the Purchaser’s tender offer is only for the outstanding shares of Common Stock (the “Shares”). On June 15, 2011, the

Company, LabCorp and the Purchaser entered into Amendment No. 1 to the Merger Agreement to amend the Merger Agreement to allow for extensions of the Purchaser’s tender offer of one or more successive periods of not more than 30 calendar days each under Sections 1.1(e)(i) and 1.1(e)(ii) of the Merger Agreement.

Unless extended as set forth in filings with the SEC, the tender offer is currently scheduled to expire at 5:00 p.m., New York City time, on Monday, November 14, 2011, after which time, if all conditions to the tender offer have been satisfied or waived, Purchaser will accept for payment all Shares validly tendered pursuant to the offer and not validly withdrawn. The Purchaser may extend the tender offer past this time in certain circumstances as required or permitted by the Merger Agreement, as amended, and applicable law. The tender offer has been repeatedly extended since it was first commenced in April 2011. If successful, the tender offer will be followed by the merger of Purchaser into the Company, with the Company being the surviving corporation and becoming a wholly owned subsidiary of LabCorp. In the merger, Shares not purchased in the tender offer (other than Shares held by stockholders who properly demand and perfect their appraisal rights under Delaware law) will be converted into the right to receive the same $2.80 per share cash payment, without interest, paid in the tender offer.

In addition, the Merger Agreement, as amended, includes termination provisions for both the Company and LabCorp and provides that, in connection with the termination of the Merger Agreement, as amended, under certain circumstances, the Company would be obligated to pay LabCorp a termination fee of $2.5 million and reimburse LabCorp for certain out-of-pocket expenses up to $0.5 million. The consummation of the tender offer and the merger are subject to conditions, including the Purchaser’s acquisition of a majority of the outstanding shares of the Company’s Common Stock on a fully-diluted basis and the expiration or termination of the waiting period under the Hart-Scott-Rodino Antitrust Improvement Act of 1976, as amended (the “HSR Act”). Neither the tender offer nor the merger is subject to a financing condition. On May 17, 2011, both the Company and LabCorp received a request from the US Federal Trade Commission (the “FTC”) for additional information under the HSR, in connection with the tender offer. As a result, the waiting period under the HSR Act was extended. The Company and LabCorp are cooperating with the FTC’s requests for additional information. The Company can provide no assurance that these transactions will be completed. Pursuant to the terms of the Merger Agreement, as of November 15, 2011, either the Company or LabCorp may terminate the Merger Agreement and abandon the proposed transaction if the tender offer is not completed by such date as a result of the waiting period under the HSR Act not having expired or terminated by such date. Except where explicitly stated otherwise, information contained in this report does not take into account, or give any effect to, the impact of the proposed transactions with LabCorp. For additional details regarding the Merger Agreement, as amended, and the tender offer, please see the Company’s Current Report on Form 8-K, filed with the SEC on April 6, 2011, and the Company’s Solicitation/Recommendation Statement on Schedule 14D-9 relating to the tender offer, including amendments on Schedule 14D-9/A, filed with the SEC.

(13) Legal Proceedings

On or about November 21, 2001, a complaint was filed in the United States District Court for the Southern District of New York naming the Company as a defendant, along with certain of the Company’s former officers and underwriters. An amended complaint was filed on April 19, 2002. The complaint, as amended, purportedly was filed on behalf of persons purchasing the Company’s stock between May 4, 2000 and December 6, 2000, and alleges violations of Sections 11, 12(a)(2) and 15 of the Securities Act of 1933, as amended, and Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, as amended, and Rule 10b-5 promulgated thereunder. The amended complaint alleges that, in connection with the Company’s May 5, 2000 initial public offering (the “IPO”), the defendants failed to disclose additional and excessive commissions purportedly solicited by and paid to the underwriter defendants in exchange for allocating shares of the Company’s stock to preferred customers and alleged agreements among the underwriter defendants and preferred customers tying the allocation of IPO shares to agreements to make additional aftermarket purchases at pre-determined prices. Plaintiffs claim that the failure to disclose these alleged arrangements made the Company’s registration statement on Form S-1 filed with the SEC in May 2000 and the prospectus, a part of the registration statement, materially false and misleading. On or about July 15, 2002, the Company filed a motion to dismiss all of the claims against the Company and the Company’s former officers. On October 9, 2002, the Court dismissed without prejudice only the Company’s former officers, Dale R. Pfost and Donald R. Marvin, from the litigation in exchange for the Company entering into a tolling agreement with plaintiffs’ executive committee. On February 19, 2003, the Company received notice of the Court’s decision to dismiss the Section 10(b) claims against the Company. Plaintiffs and the defendant issuers involved in related IPO securities litigation, including us, have agreed in principal on a settlement that, upon a one-time surety payment by the defendant issuers’ insurers, would release the defendant issuers and the individual officers and directors from claims and any future payments or out-of-pocket costs. On March 10, 2005, the Court issued a memorandum and order (i) preliminarily approving the settlement, contingent on the parties’ agreement on modifications of the proposed bar order in the settlement documents, (ii) certifying the parties’ proposed settlement classes, (iii) certifying the proposed class representatives for the purposes of the settlement only and (iv) setting a further hearing for the purposes of (a) making a final determination as to the form, substance and program of notice of proposed settlement and (b) scheduling a public fairness hearing in order to determine whether the settlement can be finally

approved by the Court. On April 24, 2006, the Court held a fairness hearing and took the motion for final approval under advisement. On October 5, 2009, the Court granted the plaintiffs’ motion for an order of final approval of the settlement, plan of allocation and certification of the class. Such settlement does not require any payment by the Company to the plaintiffs. The defendant issuers’ share of the settlement amount is funded by the insurers. Notices of appeal have been filed by six groups of appellants. None of the notices state the basis for appeal.

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

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

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

On October 5, 2009, the Federal trial Court entered an Opinion and Order approving another Settlement, Plan of Allocation, and Settlement Class Certification. A number of appeals had been filed with respect to that Opinion and Order. Some appeals have been withdrawn or dismissed, and there remains only one unresolved appeal with regard to the Opinion and Order, in a case unrelated to the Company.

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

In other litigation brought by Enzo against another defendant under the same patents asserted against the Company, a Connecticut Federal Court has invalidated the patents asserted there and asserted against the Company in the New York case. That decision was reversed in part by the Court of Appeals on March 26, 2010. The United States Supreme Court denied further review in June 2011. As a result of these developments, the Enzo v. Amersham case had been stayed pending the outcome of the Connecticut Federal Court case, which is scheduled for trial in early 2012.

In August 2011, the New York Federal Court judge lifted the stay in the New York case, and the co-defendants, including the Company, moved again for summary judgment on all patent-related claims against us. A hearing on the defendants’ motions for summary judgment had yet to be scheduled.

On April 11, 2011, a putative class action lawsuit was filed by a single plaintiff in the Superior Court of New Jersey Chancery Division, Mercer County (Docket No. C 000032 11) against the Company, LabCorp, Purchaser and individual members of the Company’s Board of Directors. This action, captioned Bruce Ballard v. Orchid Cellmark, et al., alleges that (i) individual members of the Company’s Board of Directors violated their fiduciary duties to the Company’s stockholders, including the duties of loyalty, care, candor, and good faith, and failed to maximize value for the Company’s stockholders by agreeing to the Merger Agreement, and (ii) the Company, LabCorp, and Purchaser aided and abetted the individual defendants in the breach of their fiduciary duties. The plaintiff seeks (i) to enjoin the acquisition of the Company by Purchaser and LabCorp or, in the alternative, to rescind the Merger Agreement to the extent already implemented, (ii) an order requiring the Company’s Board of Directors and LabCorp to disclose all material information related to the Merger Agreement, and (iii) monetary damages in an unspecified amount. The Company believes the allegations described in the complaint are entirely without merit, and the defendants intend to vigorously defend such action.

On April 13, 2011, a putative class action lawsuit was filed by a single plaintiff in the Court of Chancery for the State of Delaware (Case No. 6373-VCN) against the Company, LabCorp, Purchaser, and individual members of the Company’s Board of Directors. The action, styled Herbert Silverberg v. Thomas Bologna, et al., alleges that (i) individual members of

the Company’s Board of Directors violated their fiduciary duties of care and loyalty owed to the Company’s stockholders by (a) failing to properly value the Company, (b) failing to maximize the Company’s value, (c) agreeing to terms in the Merger Agreement and other terms that favor LabCorp, and (d) putting LabCorp’s interests above those of the Company’s stockholders; and (ii) LabCorp and Purchaser aided and abetted the individual defendants in the breach of their fiduciary duties. The plaintiff seeks (i) to enjoin the acquisition of the Company by Purchaser and LabCorp and the implementation of deal protection devices in the Merger Agreement and deployment of the Company’s poison pill, and (ii) monetary damages in an unspecified amount. The Company believes the allegations described in the complaint are entirely without merit, and the defendants intend to vigorously defend such action.

On April 18, 2011, a putative class action lawsuit was filed by a single plaintiff in the Court of Chancery for the State of Delaware (Case No. 6389-VCN) against the Company, LabCorp, Purchaser, and individual members of the Company’s Board of Directors. The action, styled Gene Nannetti v. Thomas Balogna [sic], et al., alleges that (i) individual members of the Company’s Board of Directors violated their fiduciary duties of good faith, independence, and loyalty owed to the Company’s stockholders by (a) failing to maximize the Company’s value, (b) failing to properly value the Company, and (c) ignoring or not protecting against conflicts of interest resulting from their interrelationships or connections with the proposed sale of the Company, and (ii) the Company, LabCorp, and Purchaser aided and abetted the individual defendants in the breach of their fiduciary duties. The plaintiff seeks (i) to enjoin the acquisition of the Company by Purchaser and LabCorp or, in the alternative, to rescind the sale of the Company and award plaintiff rescissory damages, and (ii) an accounting of all profits and any special benefits allegedly improperly received by the defendants in an unspecified amount. The Company believes the allegations described in the complaint are entirely without merit, and the defendants intend to vigorously defend such action.

On April 29, 2011, a putative class action lawsuit was filed by a single plaintiff in the Court of Chancery for the State of Delaware (Case No. 6433-VCN) against the Company, LabCorp, Purchaser, and individual members of the Company’s Board of Directors. The action, styled Bruce Locke vs. Orchid Cellmark Inc., et al., alleges that (i) individual members of the Company’s Board of Directors violated their fiduciary duties of good faith, loyalty, fair dealing, due care and candor owed to the Company’s stockholders by (a) failing to secure the best transaction available for the Company’s stockholders and (b) agreeing to unreasonable and preclusive deal protection measures that will deter superior offers for the Company, and (ii) LabCorp aided and abetted the individual defendants in the breach of their fiduciary duties by, among other things, (a) entering into the Merger Agreement and (b) otherwise rendering substantial assistance to the Company’s Board of Directors in connection with the breaches. The plaintiff seeks (i) to enjoin the acquisition of the Company by Purchaser and LabCorp, (ii) rescission, to the extent already implemented, of the acquisition of the Company by Purchaser and LabCorp, or alternatively, the awarding of rescissory damages and appropriate compensatory damages to the Company’s stockholders, (iii) to require the individual defendants to properly exercise their fiduciary duties to the Company’s stockholders, (iv) to require the individual defendants to disclose all material information relating to the proposed transaction and (v) fees and costs, among other relief. The Company believes the allegations described in the complaint are entirely without merit, and the defendants intend to vigorously defend such action.

The three actions pending in the Court of Chancery of the State of Delaware have been consolidated into one action, captioned In re Orchid Cellmark Inc. Shareholder Litigation, Docket Number 6373-VCN. On May 4, 2011, the plaintiffs filed a motion for preliminary injunction seeking to enjoin the tender offer.

On May 2, 2011, the Company received a copy of a complaint regarding a putative class action lawsuit that was filed on April 19, 2011 by a single plaintiff in the Superior Court of New Jersey, Chancery Division in Mercer County (Docket No. L-1083-11) against the Company, LabCorp, Purchaser, and individual members of the Company’s board of directors. The action, captioned Harrison Kletzel v. Orchid Cellmark Inc., et al., alleges that (i) individual members of the Company’s board of directors violated their fiduciary duties of good faith, loyalty, and due care owed to the Company’s stockholders by (a) failing to undertake an appropriate evaluation of the Company’s worth as a merger candidate or in liquidation, (b) failing to engage in a meaningful auction process and (c) failing to act independently, and, (ii) LabCorp, the Company and Purchaser aided and abetted the individual defendants in the breach of their fiduciary duties. The plaintiff seeks (i) to enjoin the acquisition of the Company by Purchaser and LabCorp, (ii) to enjoin the implementation of the deal protection devices in the Merger Agreement and deployment of the Company’s poison pill, (iii) to direct the individual defendants to exercise their fiduciary duties to maximize stockholder value in any proposed sale of the Company, (iv) to impose a constructive trust, in favor of the plaintiff and members of the proposed class, upon any benefits improperly received by defendants as a result of their wrongful conduct, and (v) monetary damages in an unspecified amount as well fees and costs, among other relief.

On May 2, 2011, a punitive class action lawsuit was filed by a single plaintiff in the United States District Court for the District of New Jersey against the Company, LabCorp, Purchaser, and individual members of the Company’s Board of Directors (Docket No. 3:11-cv-02508-AET-LHG). The action, captioned Nicholas Tsatsis v. Orchid Cellmark, Inc., alleges that: (i) individual members of the Company’s Board of Directors violated their fiduciary duties of good faith and loyalty owed to the Company’s stockholders by failing to: (a) fully inform themselves of the Company’s market value, (b) act in the interests of equity owners and (c) maximize stockholder value; (ii) individual defendants breached their fiduciary duty through materially inadequate disclosures and material disclosure omissions; (iii) LabCorp and the Company aided and abetted the individual director’s breaches of fiduciary duty because LabCorp obtained sensitive non-public information concerning the Company’s operations and thus had the advantage to acquire the Company at an unfair price; and (iv) defendants violated section 14(e) of the Exchange Act by failing to provide adequate disclosures in the Solicitation/Recommendation Statement dated April 19, 2011, rendering it materially false and misleading. Plaintiff seeks: (i) to have the Merger Agreement declared unlawful and unenforceable; (ii) to enjoin the defendants from proceeding with the Merger Agreement or consummating the transaction unless and until the Company adopts and implements a procedure or process, such as an auction, to obtain the highest possible price for the Company; (iii) to rescind, to the extent already implemented, the Merger Agreement or any of the terms thereof; and (iv) monetary damages in an unspecified amount as well as costs, fees, and disbursements, among other relief.

On May 4, 2011, the Company first learned that a putative class action lawsuit was filed on April 20, 2011 by a single plaintiff in the New Jersey Superior Court, Mercer County, Chancery Division against the Company, LabCorp, Purchaser, and individual members of the Company’s Board of Directors (Docket No. L-1099-11). The action, captioned Betty Greenberg v. Orchid Cellmark, Inc., et al., alleges that: (i) individual members of the Company’s Board of Directors violated their fiduciary duties of good faith and loyalty owed to the Company’s stockholders by failing to: (a) fully inform themselves of the Company’s market value, (b) act in the interests of equity owners and (c) maximize stockholder value; and (ii) LabCorp and the Company aided and abetted the individual directors’ breaches of fiduciary duty. Plaintiff seeks: (i) to have the Merger Agreement declared unlawful and unenforceable; (ii) to enjoin the defendants from proceeding with the Merger Agreement or consummating the transactions unless and until the Company adopts and implements a procedure or process, such as an auction, to obtain the highest possible price for the Company; (iii) to rescind, to the extent already implemented, the Merger Agreement or any of the terms thereof; and (iv) monetary damages in an unspecified amount as well as costs, fees, disbursements, among other relief.

On May 11, 2011, the Superior Court of New Jersey Chancery Division stayed the actions filed by the three shareholders in that court: Bruce Ballard v. Orchid Cellmark, et al. (Docket No. C 000032 11), Harrison Kletzel v. Orchid Cellmark Inc., et al., (Docket No. L-1083-11), and Betty Greenberg v. Orchid Cellmark, Inc., et al. (Docket No. L-1099-11), finding that the allegations were substantially similar to those made by the plaintiffs in the three actions filed in the Delaware Court of Chancery where a motion for preliminary injunction was scheduled for argument on May 12, 2011. Under principles of comity and fairness and in order to avoid duplicative litigation, the Superior Court of New Jersey Chancery Division ordered the three actions pending in that court be stayed until further order of the Court.

On May 12, 2011, the Delaware Court of Chancery denied the motion for a preliminary injunction filed in the consolidated Silverberg, Nannetti, and Locke actions finding there was no reasonable likelihood of success on the plaintiffs’ claims for breach of fiduciary duty by the individual directors of the Company’s Board of Directors and thus no attendant likelihood of success on the plaintiffs’ claims for aiding and abetting a breach of fiduciary duty by the Company, LabCorp, and the Purchaser. On May 13, 2011, the plaintiffs in these actions filed a motion to appeal, on an expedited basis, the denial of their motion for a preliminary injunction. On May 16, 2011, the Supreme Court of the State of Delaware refused to allow the plaintiffs’ appeal.

On May 12, 2011, a motion for preliminary injunction was filed in the United States District Court of New Jersey in Tsatsis v. Orchid Cellmark, Inc., (Docket No. 3:11-cv-02508-AET-LHG), seeking to enjoin the defendants from proceeding with the Merger Agreement or consummating the transaction as described above in paragraph seven of this Section (i) of Item 8. On May 13, 2011, the United States District Court of New Jersey denied the plaintiff’s request for an expedited hearing on the motion for a preliminary injunction. The Company and LabCorp opposed the request for a preliminary injunction and the defendants filed motions to dismiss the action for failure to state a claim. On June 24, 2011, the plaintiff filed a voluntary dismissal of this action, and on July 7, 2011, the Court entered that dismissal.

The Company and LabCorp believe the allegations in each of the complaints described above are entirely without merit, and the defendants intend to vigorously defend each action. However, even a meritless lawsuit potentially may delay consummation of the transactions contemplated by the Merger Agreement, including the Offer and the Merger.

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

(14) Subsequent Events

In accordance with ASC 855-10, Subsequent Events, the Company has evaluated subsequent events through the date the accompanying consolidated financial statements were issued and no such events warrant disclosure in these notes.

For information concerning the Merger Agreement, as amended, with LabCorp, see Note 12 – Agreement and Plan of Merger above.

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

This Management’s Discussion and Analysis of Financial Condition and Results of Operations as of September 30, 2011 and for the three and nine months ended September 30, 2011 and 2010 should be read in conjunction with our unaudited Consolidated Financial Statements and related unaudited Notes to Consolidated Financial Statements included elsewhere in this Quarterly Report on Form 10-Q, as well as our audited Consolidated Financial Statement and related Notes to Consolidated Financial Statements contained in our Annual Report on Form 10-K for the year ended December 31, 2010, as amended, or the Annual Report.

OVERVIEW

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

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

Our operations in the UK accounted for 65% and 66% of our total revenues for the three months ended September 30, 2011 and 2010, respectively, and for 65% and 63% of our total revenues for the nine months ended September 30, 2011 and 2010, respectively. In 2007, UK police forces commenced soliciting competitive bids for all forensic testing services in a series of regional tenders. In February 2008, we were awarded, overall, a significant portion of the service packages we bid on in the North West/South West and Wales regional tender. We were awarded work from nine of the fourteen police forces that participated in this tender. Under the terms of the award, we are providing forensic services, including DNA testing of database crime scene samples, forensic casework and database testing services under the UK’s Police and Criminal Evidence Act, or PACE, for multiple police forces that collectively tendered their work. In August 2010, such contracts were extended for a two-year term ending in 2013. In September 2010, we commenced work for five additional UK police forces in the East Midlands region under three-year contracts awarded under the National Forensic Procurement Project. Under the terms of the award, we are conducting DNA analysis of crime scene samples for submission to the UK’s National DNA Database. Following the announcement in December 2010 by the UK’s Home Office to implement a wind down of the Forensic Science Service, or the FSS, the Association of Chief Police Officers, working with the National Police Improvement Agency, established a national program, involving an acceleration of the ongoing regional tendering process, to manage and transition all forensics services from the FSS to other service providers by March 2012. Under this program, in July 2011, we were awarded a significant amount of new PACE, DNA and forensic casework from the East Midlands Region, the Eastern Region and the West Midlands Region. The contracts for this work have an initial two-year term with varying additional yearly renewal options from two to seven years. We have completed the transition of this new work in the third quarter of 2011. During July and August 2011, we were awarded three new forensic tenders in the UK. The first award has a three-year term with a one-year extension. The second award has a one-year term with up to four one-year extensions. Transition of work under these two contracts has been completed. The third award involves the supply of a significant amount of forensic casework services to the

Metropolitan Police, and we are currently engaged in implementation discussions and contract finalization. The contract for this work will be for two years with two one-year extensions. We estimate the incremental annual revenue from these new awards will be approximately $12 million (at the current exchange rate). In the third quarter of 2011, we were also awarded a forensic tender to retain work previously performed by us. This retained contract has a 32-month term, with annual reviews, and the option of two one-year extensions.

Our operations in the US accounted for 35% and 34% of our total revenues for the three months ended September 30, 2011 and 2010, respectively, and for 35% and 37% of our total revenues for the nine months ended September 30, 2011 and 2010, respectively. We continue to experience price competition in our forensics and paternity testing businesses. We are focused on improving our operational execution to increase throughput in our laboratories and lower aggregate operating costs. In particular, in our forensics business we have reduced our sample processing time and decreased the number of Combined DNA Index System, or CODIS, samples that need to be retested. In October 2009, we announced a consolidation of our East Lansing, Michigan paternity testing operations into our Dayton, Ohio facility, which we completed during the quarter ended March 31, 2010. In January 2010, we announced a planned consolidation of our Nashville, Tennessee forensic DNA testing facility into our Dallas, Texas facility, which we completed in the quarter ended September 30, 2010. We achieved these consolidations within the time frames and range of costs previously disclosed and our operating costs have been favorably impacted by the consolidation of these testing facilities. We currently are focused on achieving continued operational efficiencies, cost reductions and increased scalability from these consolidations.

Proposed Acquisition by Laboratory Corporation of America Holdings

On April 5, 2011, we entered into an Agreement and Plan of Merger, or Merger Agreement, with Laboratory Corporation of America Holdings, or LabCorp, and OCM Acquisition Corp., a wholly owned subsidiary of LabCorp, or the Purchaser, pursuant to which LabCorp will acquire us in a two-step transaction. Pursuant to the Merger Agreement, and subject to its terms and conditions, on April 19, 2011, Purchaser commenced a cash tender offer to purchase all outstanding shares of our Common Stock, including, to the extent outstanding, the Rights issued under the Rights Agreement, dated July 27, 2001, as amended, between us and American Stock Transfer & Trust Company, as rights agent, at a purchase price of $2.80 per share, net to the seller in cash, without interest thereon and subject to any required tax withholding. At the close of business on May 16, 2011, the Rights Agreement and the Rights expired pursuant to their terms. As a result, the Rights are no longer outstanding and the Purchaser’s tender offer is only for the outstanding shares of Common Stock. On June 15, 2011, we, LabCorp and the Purchaser entered into Amendment No. 1 to the Merger Agreement to amend the Merger Agreement to allow for extensions of the Purchaser’s tender offer of one or more successive periods of not more than 30 calendar days each under Sections 1.1(e)(i) and 1.1(e)(ii) of the Merger Agreement

Unless extended as set forth in filings with the Securities and Exchange Commission, or SEC, the tender offer is currently scheduled to expire at 5:00 p.m., New York City time, on Monday, November 14, 2011, after which time, if all conditions to the tender offer have been satisfied or waived, Purchaser will accept for payment all shares of our Common Stock validly tendered pursuant to the offer and not validly withdrawn. The Purchaser may extend the tender offer past this time in certain circumstances as required or permitted by the Merger Agreement, as amended, and applicable law. The tender offer has been repeatedly extended since it was first commenced in April 2011. If successful, the tender offer will be followed by the merger of Purchaser into us, with our company being the surviving corporation and becoming a wholly owned subsidiary of LabCorp. In the merger, shares of our Common Stock not purchased in the tender offer (other than shares of our Common Stock held by stockholders who properly demand and perfect their appraisal rights under Delaware law) will be converted into the right to receive the same $2.80 per share cash payment, without interest, paid in the tender offer.

In addition, the Merger Agreement, as amended, includes termination provisions for both us and LabCorp and provides that, in connection with the termination of the Merger Agreement, as amended, under certain circumstances, we would be obligated to pay LabCorp a termination fee of $2.5 million and reimburse LabCorp for certain out-of-pocket expenses up to $0.5 million. The consummation of the tender offer and the merger are subject to conditions, including the Purchaser’s acquisition of a majority of the outstanding shares of our Common Stock on a fully-diluted basis and the expiration or termination of the waiting period under the Hart-Scott-Rodino Antitrust Improvement Act of 1976, as amended, or the HSR Act. Neither the tender offer nor the merger is subject to a financing condition. On May 17, 2011, both we and LabCorp received a request from the US Federal Trade Commission, or FTC, for additional information under the HSR Act, in connection with the tender offer. As a result, the waiting period under the HSR Act was extended. We and LabCorp are cooperating with the FTC’s requests for additional information. We can provide no assurance that these transactions will be completed. Pursuant to the Merger Agreement, as of November 15, 2011, either we or LabCorp may terminate the Merger Agreement and abandon the proposed transaction if the tender offer is not completed by such date as a result of the waiting period under the HSR Act not having expired or terminated by such date. Except where explicitly stated otherwise, information contained

in this report does not take into account, or give any effect to, the impact of the proposed transactions with LabCorp. For additional details regarding the Merger Agreement, as amended, and the tender offer, please see our Current Report on Form 8-K, filed with the SEC, or the SEC, on April 6, 2011, and our Solicitation/Recommendation Statement on Schedule 14D-9 relating to the tender offer, including amendments on Schedule 14D-9/A, filed with the SEC.

Operating Highlights

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

For the three months ended September 30, 2011, as compared to the three months ended September 30, 2010, total revenues decreased by approximately 7%, while gross margin, as percentage of service revenues, decreased to 26% from 38%. For the three months ended September 30, 2011 as compared to the same period in 2010, our UK revenues decreased by approximately 8%, as measured in US dollars, primarily as a result of decreased forensics revenues, as well as a decrease in immigration revenues, offset, in part, by increased revenues for agricultural testing and paternity testing. For the three months ended September 30, 2011, as compared to the same period in 2010, our UK revenues were favorably impacted by approximately 4% as a result of the exchange rate movement of the British pound as compared to the US dollar. For the three months ended September 30, 2011, as compared to the same period in 2010, our US revenues decreased by approximately 4%, primarily as a result of a decrease in paternity testing revenues, as well as a decrease in other forensic revenues, partially offset by an increase in revenues from CODIS testing and forensic casework. Gross margin, as a percentage of service revenue decreased primarily as a result of price decreases in our UK-based business, lower volumes in our US paternity operations and higher UK costs. For the three months ended September 30, 2011, our operating expenses, other than cost of service revenues, decreased by approximately 15% as compared to the same period in 2010, primarily as a result of decreased restructuring expenses and decreased general and administrative expenses.

For the nine months ended September 30, 2011, as compared to the nine months ended September 30, 2010, total revenues increased by approximately 5%, and gross margin, as percentage of service revenues, decreased to approximately 29% from 35%. For the nine months ended September 30, 2011 as compared to the same period in 2010, our UK revenues increased by approximately 8%, as measured in US dollars, primarily as a result of increased forensics revenues due to increased volume, as well as increased agriculture and paternity revenues, offset, in part, by a decrease in immigration revenues. For the nine months ended September 30, 2011, as compared to the same period in 2010, our UK revenues were favorably impacted by approximately 5% as a result of the exchange rate movement of the British pound as compared to the US dollar. For the nine months ended September 30, 2011, as compared to the same period in 2010, our US revenues decreased by approximately 2%, primarily as a result of a decrease in paternity testing services, as well as a decrease in other forensic revenues, partially offset by an increase in CODIS testing revenues. Gross margin, as a percentage of service revenue decreased primarily as a result of price decreases in both our UK and US-based businesses. For the nine months ended September 30, 2011, our operating expenses, other than cost of service revenues, increased by approximately 4% as compared to the same period in 2010, primarily as a result of increased general and administrative expenses primarily related to legal and professional fees incurred in connection with the negotiation and execution of the Merger Agreement, as amended, and related transaction costs. This increase was partially offset by decreased restructuring expenses, as well as decreased research and development expenses.

RESULTS OF OPERATIONS

The following table sets forth a quarter-over-quarter comparison of the components of our net loss for the three months ended September 30, 2011 and 2010:


	(In thousands)						% Change
	2011		2010		$ Change		% Change

Total revenues	$	16,149	$	17,292		(1,143)		(7)
Cost of service revenues		11,879		10,780		1,099		10
Research and development		335		344		(9)		(3)
Marketing and sales		1,455		1,525		(70)		(5)
General and administrative		3,288		3,502		(214)		(6)
Restructuring		—		538		(538)		(100)
Amortization of intangible assets		360		462		(102)		(22)
Other income (expense)		(11)		58		(69)		>(100)
Income tax expense		151		864		(713)		(83)
Net loss		(1,330)		(665)		(665)		100

Revenues

Total revenues for the three months ended September 30, 2011 of $16.1 million represented a decrease of $1.2 million, or approximately 7%, as compared to revenues of $17.3 million for the comparable period in 2010.

Revenues from our UK-based testing services of $10.6 million for the three months ended September 30, 2011 decreased by $927 thousand, or approximately 8%, as compared to $11.5 million for the comparable period in 2010. For the three months ended September 30, 2011, as compared to the same period in 2010, our UK revenues were favorably impacted by approximately 4% as a result of the exchange rate movement of the British pound as compared to the US dollar. Our UK-based revenue decrease was driven by a decrease in forensics revenues due to decreased pricing, as well as a decrease in our immigration revenues, offset, in part, by increases in our agriculture and paternity revenues.

Our US service revenues for the three months ended September 30, 2011 of $5.6 million decreased by approximately 4%, as compared to $5.8 million for the same period in 2010. For the three months ended September 30, 2011, our US revenues were primarily impacted by decreases in our government paternity and private paternity testing services, as well as a decrease in other forensic revenues which consist of expert testimony and sample accessioning. These decreases were partially offset by increases in revenues from testing services involving DNA profile uploads into the CODIS and individual state databases, as well as an increase in revenues derived from our forensic casework business.

Cost of Service Revenues

Cost of service revenues were $11.9 million, or approximately 74% of service revenues, for the three months ended September 30, 2011, compared to $10.8 million, or approximately 62% of service revenues, for three months ended September 30, 2010. For three months ended September 30, 2011, as compared to the same period in 2010, our UK cost of service revenues were unfavorably impacted by approximately 4% as a result of the exchange rate movement of the British pound as compared to the US dollar. Cost of service revenues for the three months ended September 30, 2011, as compared to the same period in 2010, increased due to higher personnel and lab supplies in our UK operations. Our gross margin percentage decreased by eleven percentage points for the three months ended September 30, 2011 as compared to the same period in 2010 primarily as a result of price decreases in our UK forensic and paternity operations and increased UK cost of service revenue.

Research and Development

Research and development expenses for the three months ended September 30, 2011 and 2010 were $335 thousand and $344 thousand, respectively.

Marketing and Sales

Marketing and sales expenses for the three months ended September 30, 2011 and 2010 were $1.5 million and $1.5 million, respectively.

General and Administrative

General and administrative expenses for the three months ended September 30, 2011 and 2010 were $3.3 million and $3.5 million, respectively. The decrease in general and administrative expenses is primarily due to decreased compensation expense and other professional fees, partially offset by higher legal fees. The increase in legal fees of approximately $305 thousand, was incurred in connection with the negotiation and execution of the Merger Agreement, as amended, defending the securities derivative lawsuits filed against us in connection with the proposed acquisition, and cooperating with the FTC to obtain clearance of the proposed acquisition under the HSR Act. We expect general and administrative costs to continue to be significant over the next few months as a result of the costs related to the proposed acquisition of us by LabCorp.

Restructuring

During the three months ended September 30, 2011, we did not recognize any restructuring expenses related to the consolidation of our East Lansing, Michigan paternity testing operations into our Dayton, Ohio facility and the consolidation of our Nashville, Tennessee testing operation into our Dallas, Texas facility, as compared to $538 thousand of restructuring expenses recognized in the three months ended September 30, 2010. We announced the planned East Lansing consolidation on October 20, 2009 and substantially completed this consolidation during the quarter ended March 31, 2010. We announced the planned Nashville consolidation on January 14, 2010, and substantially completed this consolidation during the quarter ended September 30, 2010.

Amortization of Intangible Assets

During the three months ended September 30, 2011 and 2010, we recorded $360 thousand and $462 thousand of amortization expense, respectively.

Income Tax Expense

During the three months ended September 30, 2011 and 2010, we recorded income tax expense of $151 thousand and $864 thousand, respectively, primarily related to our UK business. No tax benefit was recorded relating to our US business’ losses as management deemed that it was not likely that such tax benefit would be realized.

Net Loss

For the three months ended September 30, 2011, we reported a net loss of $1.3 million, which represents an increase of $665 thousand compared to a net loss of $665 thousand for the three months ended September 30, 2010.

The following table sets forth a comparison of the components of our net loss for the nine months ended September 30, 2011 and 2010:


	(In thousands)									% Change
	2011			2010			$ Change			% Change

Total revenues	$	49,300		$	47,106			2,194			5
Cost of service revenues		35,031			30,729			4,302			14
Research and development		1,017			1,232			(215	)		(17	)
Marketing and sales		4,568			4,301			267			6
General and administrative		13,071			10,631			2,440			23
Restructuring		—			1,502			(1,502	)		(100	)
Amortization of intangible assets		1,084			1,386			(302	)		(22	)
Other income		149			113			36			32
Income tax expense		886			1,723			(837	)		(49	)
Net loss		(6,208	)		(4,285	)		(1,923	)		45

Revenues

Total revenues for the nine months ended September 30, 2011 of $49.3 million represented an increase of $2.2 million, or approximately 5%, as compared to revenues of $47.1 million for the same period in 2010.

Revenues from our UK-based testing services of $32.0 million for the nine months ended September 30, 2011 increased by $2.5 million, or approximately 8%, as compared to $29.5 million for the same period in 2010. For the nine months ended September 30, 2011, as compared to the same period in 2010, our UK revenues were favorably impacted by approximately 5% as a result of the exchange rate movement of the British pound as compared to the US dollar. Our UK-based revenue increase was driven by an increase in forensics revenues, as well as increases in our paternity and agriculture businesses, offset, in part, by a decrease in immigration revenues due to lower prices.

Our US service revenues for the nine months ended September 30, 2011 of $17.3 million decreased by approximately 2%, as compared to $17.6 million for the same period in 2010. For the nine months ended September 30, 2011, our US revenues were impacted by a decrease in revenues from government paternity testing services, as well as a decrease in other forensic revenues which consist of expert testimony and sample accessioning. These decreases were partially offset by an increase in testing services involving DNA profile uploads into the CODIS and individual state databases.

During the nine months ended September 30, 2011 and 2010, we recognized $15 thousand and $27 thousand, respectively, in other revenues, specifically license revenues.

Cost of Service Revenues

Cost of service revenues were $35 million, or approximately 71% of service revenues, for the nine months ended September 30, 2011, compared to $30.8 million, or approximately 65% of service revenues, for nine months ended September 30, 2010. For nine months ended September 30, 2011, as compared to the same period in 2010, our UK cost of service revenues were unfavorably impacted by approximately 5% as a result of the exchange rate movement of the British pound as compared to the US dollar. Cost of service revenues for the nine months ended September 30, 2011, as compared to the comparable period in 2010, increased due to higher personnel and lab supplies in our UK operations. Our gross margin percentage decreased by six percentage points for the nine months ended September 30, 2011 as compared to the same period in 2010 primarily as a result of price decreases in our UK and US-based businesses and increased UK cost of service revenue.

Research and Development

Research and development expenses for the nine months ended September 30, 2011 and 2010 were $1.0 million and $1.2 million, respectively. The greater expenses incurred in the 2010 period were primarily due to costs incurred in the 2010 period associated with the establishment of a CODIS laboratory at our Dallas, Texas testing facility.

Marketing and Sales

Marketing and sales expenses for the nine months ended September 30, 2011 and 2010 were $4.6 million and $4.3 million, respectively. The increase in marketing and sales expenses in 2011 was due to increased program costs and increased customer service expenses in the UK.

General and Administrative

General and administrative expenses for the nine months ended September 30, 2011 and 2010 were $13.1 million and $10.6 million, respectively. The increase in general and administrative expenses in 2011 was primarily due to the $750 thousand to settle the litigation with Genetic Technologies Limited in the first quarter of 2011, as well as increased legal and professional fees, including approximately $1.6 million in legal fees incurred in connection with the negotiation and execution of the Merger Agreement, as amended, defending the securities derivative lawsuits filed against us in connection with the proposed acquisition, and cooperating with the FTC to obtain clearance of the proposed acquisition under the HSR Act.

Restructuring

During the nine months ended September 30, 2011, we did not recognize any restructuring expenses related to the consolidation of our East Lansing, Michigan paternity testing operations into our Dayton, Ohio facility and the consolidation of our Nashville, Tennessee testing operation into our Dallas, Texas facility, as compared to $1.5 million of restructuring expenses recognized in the nine months ended September 30, 2010.

Amortization of Intangible Assets

During the nine months ended September 30, 2011 and 2010, we recorded $1.1 million and $1.4 million of amortization expense, respectively.

Income Tax Expense

During the nine months ended September 30, 2011 and 2010, we recorded income tax expense of $886 thousand and $1.7 million, respectively, primarily related to our UK business. No tax benefit was recorded relating to our US business’ losses as management deemed that it was not likely that such tax benefit would be realized.

Net Loss

For the nine months ended September 30, 2011, we reported a net loss of $6.2 million, which represents an increase of $1.9 million compared to a net loss of $4.3 million for the nine months ended September 30, 2010.

LIQUIDITY AND CAPITAL RESOURCES

As of September 30, 2011, we had $13.9 million in cash, cash equivalents and available-for-sale securities, as compared to $19.8 million as of December 31, 2010. Working capital decreased to $17.3 million at September 30, 2011 from $22.2 million at December 31, 2010. The decrease in cash was primarily a result of the increased net loss incurred during the first nine months of 2011, as well as an increase in our accounts receivable in the first nine months of 2011.

Sources of Liquidity

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

The following table sets forth a comparison of the components of our liquidity and capital resources for the nine months ended September 30, 2011 and 2010:


	(In thousands)									% Change
	2011			2010			$ Change			% Change
Cash provided by (used) in:
Operating activities	$	(4,105	)	$	2,370		$	(6,475	)		>(100	)
Investing activities		1,385			(7,613	)		8,998			>100
Financing activities		74			—			74			100

Net cash used in operations for the nine months ended September 30, 2011 was $4.1 million, compared with net cash provided by operations of $2.4 million for the comparable period in the prior year. The change in operating cash flows was mainly a result of the increased net loss as well as increased accounts receivable in the first nine months of 2011. Investing activities during the nine months ended September 30, 2011 consisted of the maturity of available-for-sale securities and investing activities during the nine months ended September 30, 2010 consisted of the purchase of available-for-sale securities, as well as capital expenditures. Financing activities during the nine months ended September 30, 2011 consisted of stock options exercised.

Expected Uses of Liquidity in 2011

Throughout 2011, we plan to continue making investments in our business. We expect the following to be significant uses of liquidity: cost of service revenues, salaries and related personnel costs, laboratory supplies, fees for the collection of samples, facility expenses, marketing expenses and general and administrative costs, including any increases thereto resulting from our proposed acquisition by LabCorp, the related litigation and our efforts to obtain clearance of the proposed acquisition under the HSR Act. Actual expenditures may vary substantially from our estimates. We expect to make capital expenditures related to the expansion of our UK facilities in Abingdon and Chorley. In addition, we may make additional investments in future acquisitions of businesses or technologies which would increase our capital expenditures.

We believe that our existing cash on hand will be sufficient to fund our operations at least through the next twelve months. We may need to raise additional capital through debt or equity financing to fund future growth opportunities or to operate our ongoing business activities if our future results of operations fall below our expectations or if our

proposed acquisition by LabCorp is not consummated. However, we may not be able to raise additional funds or raise funds on terms that are acceptable to us. If future financing is not available to us, or is not available on terms acceptable to us, we may not be able to fund our future 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 or if our proposed acquisition by LabCorp is not consummated. We also may need additional capital if we seek to acquire other businesses or technologies.

Commitments and Contingencies

There were no material changes during the nine months ended September 30, 2011 to our contractual obligations and commercial commitments as reported in the Annual Report.

Off-Balance Sheet Arrangements

None.

Critical Accounting Policies

There were no changes during the nine months ended September 30, 2011 to our critical accounting policies as reported in the Annual Report.

Recently Issued Accounting Pronouncements

In June 2011, the Financial Accounting Standards Board, or FASB, issued new guidance on the presentation of comprehensive income. Specifically, the new guidance allows an entity to present components of net income and other comprehensive income in one continuous statement, referred to as the statement of comprehensive income, or in two separate, but consecutive statements. The new guidance eliminates the current option to report other comprehensive income and its components in the statement of changes in stockholders’ equity. Although the new guidance changes the presentation of comprehensive income, there are no changes to the components that are recognized in net income or other comprehensive income under current accounting guidance. This new guidance is effective for fiscal years and interim periods beginning after December 15, 2011. We do not believe our adoption of the new guidance in the first quarter of fiscal 2012 will have an impact on our consolidated financial position, results of operations or cash flows.

Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Interest Rate Sensitivity

Our exposure to market risk is principally confined to our cash equivalents and available-for-sale securities, which are conservative in nature, with a focus on preservation of capital. Due to the short-term nature of our investments and our 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. As of September 30, 2011, we had no short-term or long-term debt obligations.

Foreign Currency Risk

Our business derives a substantial portion of its revenues from international operations. We record the majority of our foreign operational transactions, including all cash inflows and outflows, in the local currency, British pound. We record all of our US operational transactions, including cash inflows and outflows, in US dollars. We expect that international sales will continue to represent a significant portion of our revenues. The significant percentage of our revenues derived from our UK operations makes us vulnerable to future fluctuations in the exchange rate between the British pound and the US dollar. However, all of our operating expenses related to our UK operations also are subject to exchange rate fluctuations and thus provide a natural hedge against such exchange rate movements. Currently, there is no material adverse impact to our financial results from exchange rate movements.

Item 4. CONTROLS AND PROCEDURES

(a) Disclosure Controls and Procedures. As of September 30, 2011, we conducted an evaluation under the supervision and with the participation of our management, including our President and Chief Executive Officer and Vice President and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures. The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended, or the Exchange Act, means controls and other procedures of a company that are designed to ensure that information required to be disclosed by the company in the reports it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate, to allow timely decisions regarding required disclosure. Based on this evaluation, our President and Chief Executive Officer and Vice President and Chief Financial Officer concluded as of September 30, 2011 that our disclosure controls and procedures were adequate and effective.

(b) Changes in Internal Control over Financial Reporting. There were no changes in our internal control over financial reporting during the quarter ended September 30, 2011 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

(c) Limitations on the Effectiveness of Controls. Our disclosure controls and procedures are designed to provide reasonable assurance of achieving their objectives and our President and Chief Executive Officer and Vice President and Chief Financial Officer have concluded that our disclosure controls and procedures are adequate and effective at that reasonable assurance level. However, our management, including our President and Chief Executive Officer and Vice President and Chief Financial Officer, does not expect that our disclosure controls and procedures or our internal control over financial reporting will prevent all error and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within an organization have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake.

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

FORWARD-LOOKING STATEMENTS

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

•

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

•

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

•

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

•

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

•

our plan to continue to make investments in our business;

•

our expectation about our significant uses of liquidity;

•

our estimate that the incremental annual revenue from the three new forensic awards in the UK will be approximately $12 million (at the current exchange rate);

•

our belief that the allegations described in the putative class action lawsuits filed in connection with the Merger Agreement, as amended, are entirely without merit, and that the defendants intend to vigorously defend each action;

•

our expectation that general and administrative costs will increase over the next few months as a result of the increase in costs related to the proposed acquisition of us by LabCorp, including defending the securities derivative lawsuits filed against us in connection with the proposed acquisition and cooperating with the FTC to obtain clearance of the proposed acquisition under the HSR Act;

•

our expectation that UK sales will continue to represent a significant portion of our revenues; and

•

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

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

PART II – OTHER INFORMATION

Item 1. LEGAL PROCEEDINGS

On or about November 21, 2001, a complaint was filed in the United States District Court for the Southern District of New York naming us as a defendant, along with certain of our former officers and underwriters. An amended complaint was filed on April 19, 2002. The complaint, as amended, purportedly was filed on behalf of persons purchasing our stock between May 4, 2000 and December 6, 2000, and alleges violations of Sections 11, 12(a)(2) and 15 of the Securities Act of 1933, as amended, and Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, as amended, and Rule 10b-5 promulgated thereunder. The amended complaint alleges that, in connection with the our May 5, 2000 initial public offering, or IPO, the defendants failed to disclose additional and excessive commissions purportedly solicited by and paid to the underwriter defendants in exchange for allocating shares of our stock to preferred customers and alleged agreements among the underwriter defendants and preferred customers tying the allocation of IPO shares to agreements to make additional aftermarket purchases at pre-determined prices. Plaintiffs claim that the failure to disclose these alleged arrangements made our registration statement on Form S-1 filed with the SEC in May 2000 and the prospectus, a part of the registration statement, materially false and misleading. On or about July 15, 2002, we filed a motion to dismiss all of the claims against us and our former officers. On October 9, 2002, the Court dismissed without prejudice only our former officers, Dale R. Pfost and Donald R. Marvin, from the litigation in exchange for our entering into a tolling agreement with plaintiffs’ executive committee. On February 19, 2003, we received notice of the Court’s decision to dismiss the Section 10(b) claims against us. Plaintiffs and the defendant issuers involved in related IPO securities litigation, including us, have agreed in principal on a settlement that, upon a one-time surety payment by the defendant issuers’ insurers, would release the defendant issuers and the individual officers and directors from claims and any future payments or out-of-pocket costs. On March 10, 2005, the Court issued a memorandum and order (i) preliminarily approving the settlement, contingent on the parties’ agreement on modifications of the proposed bar order in the settlement documents, (ii) certifying the parties’ proposed settlement

classes, (iii) certifying the proposed class representatives for the purposes of the settlement only and (iv) setting a further hearing for the purposes of (a) making a final determination as to the form, substance and program of notice of proposed settlement and (b) scheduling a public fairness hearing in order to determine whether the settlement can be finally approved by the Court. On April 24, 2006, the Court held a fairness hearing and took the motion for final approval under advisement. On October 5, 2009, the Court granted the plaintiffs’ motion for an order of final approval of the settlement, plan of allocation and certification of the class. Such settlement does not require any payment by us to the plaintiffs. The defendant issuers’ share of the settlement amount is funded by the insurers. Notices of appeal have been filed by six groups of appellants. None of the notices state the basis for appeal.

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

In August 2011, the New York Federal Court judge lifted the stay in the New York case, and the co-defendants, including us, moved again for summary judgment on all patent-related claims against us. A hearing on the defendants’ motions for summary judgment had yet to be scheduled.

On April 11, 2011, a putative class action lawsuit was filed by a single plaintiff in the Superior Court of New Jersey Chancery Division, Mercer County (Docket No. C 000032 11) against us, LabCorp, Purchaser and individual members of our Board of Directors. This action, captioned Bruce Ballard v. Orchid Cellmark, et al., alleges that (i) individual members of our Board of Directors violated their fiduciary duties to our stockholders, including the duties of loyalty, care, candor, and good faith, and failed to maximize value for our stockholders by agreeing to the Merger Agreement, and (ii) we, LabCorp, and Purchaser aided and abetted the individual defendants in the breach of our and their respective fiduciary duties. The plaintiff seeks (i) to enjoin the acquisition of us by Purchaser and LabCorp or, in the alternative, to rescind the Merger Agreement to the extent already implemented, (ii) an order requiring our Board of Directors and LabCorp to disclose all material information related to the Merger Agreement, and (iii) monetary damages in an unspecified amount. We believe the allegations described in the complaint are entirely without merit, and the defendants intend to vigorously defend such action.

On April 13, 2011, a putative class action lawsuit was filed by a single plaintiff in the Court of Chancery for the State of Delaware (Case No. 6373-VCN) against us, LabCorp, Purchaser, and individual members of our Board of Directors. The action, styled Herbert Silverberg v. Thomas Bologna, et al., alleges that (i) individual members of our Board of Directors violated their fiduciary duties of care and loyalty owed to our stockholders by (a) failing to properly value us, (b) failing to maximize our value, (c) agreeing to terms in the Merger Agreement and other terms that favor LabCorp, and (d) putting LabCorp’s interests above those of our stockholders; and (ii) LabCorp and Purchaser aided and abetted the individual defendants in the breach of their fiduciary duties. The plaintiff seeks (i) to enjoin the acquisition of us by Purchaser and LabCorp and the implementation of deal protection devices in the Merger Agreement and deployment of our poison pill, and (ii) monetary damages in an unspecified amount. We believe the allegations described in the complaint are entirely without merit, and the defendants intend to vigorously defend such action.

On April 18, 2011, a putative class action lawsuit was filed by a single plaintiff in the Court of Chancery for the State of Delaware (Case No. 6389-VCN) against us, LabCorp, Purchaser, and individual members of our Board of Directors. The action, styled Gene Nannetti v. Thomas Balogna [sic], et al., alleges that (i) individual members of our Board of Directors violated their fiduciary duties of good faith, independence, and loyalty owed to our stockholders by (a) failing to maximize our value, (b) failing to properly value us, and (c) ignoring or not protecting against conflicts of interest resulting from their interrelationships or connections with the proposed sale of us, and (ii) we, LabCorp, and Purchaser aided and abetted the individual defendants in the breach of our and their respective fiduciary duties. The plaintiff seeks (i) to enjoin the acquisition of us by Purchaser and LabCorp or, in the alternative, to rescind the sale of us and award plaintiff rescissory damages, and (ii) an accounting of all profits and any special benefits allegedly improperly received by the defendants in an unspecified amount. We believe the allegations described in the complaint are entirely without merit, and the defendants intend to vigorously defend such action.

On April 29, 2011, a putative class action lawsuit was filed by a single plaintiff in the Court of Chancery for the State of Delaware (Case No. 6433-VCN) against us, LabCorp, Purchaser, and individual members of our Board of Directors. The action, styled Bruce Locke vs. Orchid Cellmark Inc., et al., alleges that (i) certain individual members of our Board of Directors violated their fiduciary duties of good faith, loyalty, fair dealing, due care and candor owed to our stockholders by (a) failing to secure the best transaction available for our stockholders and (b) agreeing to unreasonable and preclusive deal protection measures that will deter superior offers for us, and (ii) LabCorp aided and abetted the individual defendants in the breach of their fiduciary duties by, among other things, (a) entering into the Merger Agreement and (b) otherwise rendering substantial assistance to our Board of Directors in connection with the breaches. The plaintiff seeks (i) to enjoin the acquisition of us by Purchaser and LabCorp, (ii) rescission, to the extent already implemented, of the acquisition of us by Purchaser and LabCorp, or alternatively, the awarding of rescissory damages and appropriate compensatory damages to our stockholders, (iii) to require the individual defendants to properly exercise their fiduciary duties to our stockholders, (iv) to require the individual defendants to disclose all material information relating to the proposed transaction and (v) fees and costs, among other relief. We believe the allegations described in the complaint are entirely without merit, and the defendants intend to vigorously defend such action.

On May 2, 2011, we received a copy of a complaint regarding a putative class action lawsuit that was filed on April 19, 2011 by a single plaintiff in the Superior Court of New Jersey, Chancery Division in Mercer County (Docket No. L-1083-11) against us, LabCorp, Purchaser, and individual members of our board of directors. The action, captioned Harrison Kletzel v. Orchid Cellmark Inc., et al., alleges that (i) individual members of our board of directors violated their fiduciary duties of good faith, loyalty, and due care owed to our stockholders by (a) failing to undertake an appropriate evaluation of the our worth as a merger candidate or in liquidation, (b) failing to engage in a meaningful auction process and (c) failing to act independently, and, (ii) we, LabCorp, and Purchaser aided and abetted the individual defendants in the breach of our and their respective fiduciary duties. The plaintiff seeks (i) to enjoin the acquisition of us by Purchaser and LabCorp, (ii) to enjoin the implementation of the deal protection devices in the Merger Agreement and deployment of our poison pill, (iii) to direct the individual defendants to exercise their fiduciary

duties to maximize stockholder value in any proposed sale of us, (iv) to impose a constructive trust, in favor of the plaintiff and members of the proposed class, upon any benefits improperly received by defendants as a result of their wrongful conduct, and (v) monetary damages in an unspecified amount as well fees and costs, among other relief.

On May 2, 2011, a putative class action lawsuit was filed by a single plaintiff in the United States District Court for the District of New Jersey against us, LabCorp, the Purchaser, and individual members of our Board of Directors (Docket No. 3:11-cv-02508-AET-LHG). The action, captioned Nicholas Tsatsis v. Orchid Cellmark, Inc., alleges that: (i) individual members of our Board of Directors violated their fiduciary duties of good faith and loyalty owed to our stockholders by failing to: (a) fully inform themselves of our market value, (b) act in the interests of equity owners and (c) maximize shareholder value; (ii) individual defendants breached their fiduciary duty through materially inadequate disclosures and material disclosure omissions; (iii) we and LabCorp aided and abetted the individual director’s breaches of fiduciary duty because LabCorp obtained sensitive non-public information concerning our operations and thus had the advantage to acquire us at an unfair price; and (iv) defendants violated section 14(e) of the Exchange Act by failing to provide adequate disclosures in the Solicitation/Recommendation Statement dated April 19, 2011, rendering it materially false and misleading. Plaintiff seeks: (i) to have the Merger Agreement declared unlawful and unenforceable; (ii) to enjoin the defendants from proceeding with the Merger Agreement or consummating the transaction unless and until we adopt and implement a procedure or process, such as an auction, to obtain the highest possible price for us; (iii) to rescind, to the extent already implemented, the Merger Agreement or any of the terms thereof; and (iv) monetary damages in an unspecified amount as well as costs, fees, and disbursements, among other relief. We believe the allegations described in the complaint are entirely without merit, and the defendants intend to vigorously defend such action.

On May 4, 2011, we first learned that a putative class action lawsuit was filed on April 20, 2011 by a single plaintiff in the New Jersey Superior Court, Mercer County, Chancery Division against us, LabCorp, Purchaser, and individual members of our Board of Directors (Docket No. L-1099-11). The action, captioned Betty Greenberg v. Orchid Cellmark, Inc., et al., alleges that: (i) individual members of our Board of Directors violated their fiduciary duties of good faith and loyalty owed to our stockholders by failing to: (a) fully inform themselves of the our market value, (b) act in the interests of equity owners and (c) maximize stockholder value; and (ii) we and LabCorp aided and abetted the individual directors’ breaches of fiduciary duty. Plaintiff seeks: (i) to have the Merger Agreement declared unlawful and unenforceable; (ii) to enjoin the defendants from proceeding with the Merger Agreement or consummating the transactions unless and until we adopt and implement a procedure or process, such as an auction, to obtain the highest possible price for us; (iii) to rescind, to the extent already implemented, the Merger Agreement or any of the terms thereof; and (iv) monetary damages in an unspecified amount as well as costs, fees, disbursements, among other relief.

On May 12, 2011, the Delaware Court of Chancery denied the motion for a preliminary injunction filed in the consolidated Silverberg, Nannetti, and Locke actions finding there was no reasonable likelihood of success on the plaintiffs’ claims for breach of fiduciary duty by the individual directors of our Board of Directors and thus no attendant likelihood of success on the plaintiffs’ claims for aiding and abetting a breach of fiduciary duty by us, LabCorp, and the Purchaser. On May 13, 2011, the plaintiffs in these actions filed a motion to appeal, on an expedited basis, the denial of their motion for a preliminary injunction. On May 16, 2011, the Supreme Court of the State of Delaware refused to allow the plaintiffs’ appeal.

On May 12, 2011, a motion for preliminary injunction was filed in the United States District Court of New Jersey in Tsatsis v. Orchid Cellmark, Inc., (Docket No. 3:11-cv-02508-AET-LHG), seeking to enjoin the defendants from proceeding with the Merger Agreement or consummating the transaction as described above in paragraph seven of this Section (i) of Item 8. On May 13, 2011, the United States District Court of New Jersey denied the plaintiff’s request for an expedited hearing on the motion for a preliminary injunction. We and LabCorp opposed the request for a preliminary injunction and the defendants filed motions to dismiss the action for failure to state a claim. On June 24, 2011, the plaintiff filed a voluntary dismissal of this action, and on July 7, 2011, the Court entered that dismissal.

We and LabCorp believe the allegations in each of the complaints described above are entirely without merit, and the defendants intend to vigorously defend each action. However, even a meritless lawsuit potentially may delay consummation of the transactions contemplated by the Merger Agreement, including the Offer and the Merger.

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

Item 1A. RISK FACTORS

There have not been any material changes to the risk factors disclosed under the heading “Risk Factors” appearing in Item 1A of the Annual Report, as supplemented by our Quarterly Report on Form 10-Q for the quarter ended March 31, 2011.

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

Not applicable.

Item 3. DEFAULTS UPON SENIOR SECURITIES

Not applicable.

Item 4. [RESERVED.]

Item 5. OTHER INFORMATION

Not applicable.

Item 6. EXHIBITS

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


Exhibit Number		Description

31.1		Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

31.2		Certification of Principal Financial and Accounting Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

32		Certifications of Principal Executive Officer and Principal Financial and Accounting Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002



101*		The following materials from the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2011, formatted in XBRL (eXtensible Business Reporting Language); (i) Consolidated Balance Sheets as of September 30, 2011 and December 31, 2010, (ii) Consolidated Statements of Operations for the three and nine months ended September 30, 2011 and 2010, (iii) Consolidated Statements of Cash Flows for the nine months ended September 30, 2011 and 2010, (iv) Consolidated Statement of Stockholders’ Equity and Comprehensive Income/Loss for the nine months ended September 30, 2011 and (v) Notes to Consolidated Financial Statements.

*		Pursuant to Rule 406T of Regulation S-T, the Interactive Data Files on Exhibit 101 hereto are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, are deemed not filed for purposes of Section 18 of the Securities and Exchange Act of 1934, as amended, and otherwise are not subject to liability under those sections.

SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

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ORCHID CELLMARK INC 10-Q