ORCHID CELLMARK INC - FORM 10-Q

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EX-32 - SECTION 906 CEO AND CFO CERTIFICATION - ORCHID CELLMARK INC	dex32.htm
EX-31.1 - SECTION 302 CEO CERTIFICATION - ORCHID CELLMARK INC	dex311.htm
EX-31.2 - SECTION 302 CFO CERTIFICATION - ORCHID CELLMARK INC	dex312.htm

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 March 31, 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 ¨ 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 May 11, 2011, the registrant had 30,010,174 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 March 31, 2011 and December 31, 2010		1
	Consolidated Statements of Operations for the three months ended March 31, 2011 and 2010		2
	Consolidated Statements of Cash Flows for the three months ended March 31, 2011 and 2010		3
	Consolidated Statement of Stockholders’ Equity and Comprehensive Income/Loss for the three months ended March 31, 2011		4
	Notes to Consolidated Financial Statements		5
ITEM 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		13
ITEM 3.	Quantitative and Qualitative Disclosures About Market Risk		18
ITEM 4.	Controls and Procedures		18

PART II - OTHER INFORMATION
ITEM 1.	Legal Proceedings		20
ITEM 1A.	Risk Factors		23
ITEM 2.	Unregistered Sales of Equity Securities and Use of Proceeds		24
ITEM 3.	Defaults Upon Senior Securities		24
ITEM 4.	Reserved		24
ITEM 5.	Other Information		24
ITEM 6.	Exhibits		25

SIGNATURE			26

PART I – FINANCIAL INFORMATION

Item 1. FINANCIAL STATEMENTS

ORCHID CELLMARK INC. AND SUBSIDIARIES

Consolidated Balance Sheets

(In thousands, except share and per share data)


	March 31, 2011 (Unaudited)			December 31, 2010
Assets
Current assets:
Cash and cash equivalents	$	8,619		$	8,107
Available-for-sale securities		8,649			11,714
Accounts receivable, net		10,820			9,781
Inventory		1,884			1,836
Prepaids and other current assets		1,260			1,213

Total current assets		31,232			32,651
Fixed assets, net		6,228			5,791
Goodwill		9,430			9,396
Other intangibles, net		3,546			3,901
Other assets		810			774

Total assets	$	51,246		$	52,513


Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable	$	3,189		$	3,282
Accrued expenses and other current liabilities		6,217			6,198
Deferred revenue		1,065			1,014

Total current liabilities		10,471			10,494
Other liabilities		202			216

Total liabilities		10,673			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 par value; authorized 150,000,000 shares; issued 30,155,445 at March 31, 2011 and 30,098,269 at December 31, 2010		30			30
Additional paid-in capital		374,081			373,860
Accumulated other comprehensive income		762			36
Treasury stock at cost, 163,259 common shares at March 31, 2011 and 2010		(1,587	)		(1,587	)
Accumulated deficit		(332,713	)		(330,536	)

Total stockholders’ equity		40,573			41,803

Total liabilities and stockholders’ equity	$	51,246		$	52,513

See accompanying notes to consolidated financial statements.

ORCHID CELLMARK INC. AND SUBSIDIARIES

Consolidated Statements of Operations

Three months ended March 31, 2011 and 2010

(In thousands, except per share data)

(Unaudited)


	2011			2010
Revenues:
Service revenues	$	16,609		$	14,116
Other revenues		7			14

Total revenues		16,616			14,130

Operating expenses:
Cost of service revenues		11,326			9,380
Research and development		364			397
Marketing and sales		1,574			1,311
General and administrative		4,736			3,806
Restructuring		—			444
Amortization of intangible assets		364			463

Total operating expenses		18,364			15,801

Operating loss		(1,748	)		(1,671	)
Other income (expense):
Interest income		43			44
Other (expense), net		(1	)		(4	)

Total other income (expense), net		42			40

Loss before income tax expense		(1,706	)		(1,631	)
Income tax expense		471			404

Net loss	$	(2,177	)	$	(2,035	)

Basic and diluted net loss per share	$	(0.07	)	$	(0.07	)

Shares used in computing basic and diluted net loss per share		29,953			29,935

See accompanying notes to consolidated financial statements.

ORCHID CELLMARK INC. AND SUBSIDIARIES

Consolidated Statements of Cash Flows

Three months ended March 31, 2011 and 2010

(In thousands)

(Unaudited)


	2011			2010
Cash flows from operating activities:
Net loss	$	(2,177	)	$	(2,035	)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Stock-based compensation expense		169			354
Depreciation and amortization		859			950
Provision for losses on accounts receivable		104			(15	)
Loss on sale of assets		4			—
Changes in assets and liabilities, net of effect of acquisition:
Accounts receivable		(1,118	)		2,160
Inventory		(48	)		(250	)
Prepaids and other current assets		(48	)		(9	)
Other assets		(36	)		—
Accounts payable		(92	)		(44	)
Accrued expenses and other current liabilities, including restructuring		110			1,411
Deferred revenue		51			94
Income taxes payable		(91	)		324
Other liabilities		(14	)		39

Net cash provided by (used in) operating activities		(2,327	)		2,979

Cash flows from investing activities:
Purchases of available-for-sale securities		—			(2,285	)
Maturities of available-for-sale securities		3,410			—
Capital expenditures		(808	)		(678	)

Net cash provided by (used in) investing activities		2,602			(2,963	)

Cash flows from financing activities:
Proceeds from issuance of common stock		44			—

Net cash provided by financing activities		44			—

Effect of foreign currency translation on cash and cash equivalents		193			(313	)

Net increase (decrease) in cash and cash equivalents		512			(297	)
Cash and cash equivalents at beginning of period		8,107			8,600

Cash and cash equivalents at end of period	$	8,619		$	8,303

See accompanying notes to consolidated financial statements.

ORCHID CELLMARK INC. AND SUBSIDIARIES

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

Three months ended March 31, 2011

(In thousands)

(Unaudited)


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

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

Net loss		—		—		—		—			—			(2,177	)		(2,177	)

Gain(loss) on available-for-sale securities		—		—		—		(1	)		—			—			(1	)

Foreign currency translation adjustment		—		—		8		727			—			—			735


Comprehensive loss																	(1,443	)

Issuance of common stock from exercise of stock options		12		—		44		—			—			—			44

Stock-based compensation expense		—		—		169		—			—			—			169


Balance at March 31, 2011		30,110	$	30	$	374,081	$	762		$	(1,587	)	$	(332,713	)	$	40,573

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 amended (the Annual Report), as filed with the Securities and Exchange Commission (SEC) on April 29, 2011.

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 FASB 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 (in thousands):


	March 31, 2011		Quoted Prices in Active Markets (Level 1)		Significant Other Inputs (Level 2)		Significant Observable Inputs (Level 3)
March 31, 2011
Available-for-sale securities	$	8,649	$	8,649	$	—	$	—


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

(4) Inventory

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


	March 31, 2011		December 31, 2010
Raw materials	$	1,531	$	1,491
Work in progress		344		335
Finished goods		9		10

	$	1,884	$	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 three months ended March 31, 2011 (in thousands):


Balance as of January 1, 2011	$	9,396
Effect of foreign currency translation		34

Balance as of March 31, 2011	$	9,430

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 March 31, 2011 and December 31, 2010 (in thousands):


	March 31, 2011							December 31, 2010
	Cost (1)		Accumulated Amortization			Net		Cost (1)		Accumulated Amortization			Net
Customer list	$	7,271	$	(5,903	)	$	1,368	$	7,238	$	(5,823	)	$	1,415
Patents and know-how		4,900		(3,760	)		1,140		4,898		(3,655	)		1,243
Trademark/tradename		4,268		(3,578	)		690		4,241		(3,467	)		774
Base technology		6,021		(5,673	)		348		6,006		(5,537	)		469
Non-compete agreements		20		(20	)		—		20		(20	)		—

Totals	$	22,480	$	(18,934	)	$	3,546	$	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 $216 thousand and $139 thousand as of March 31, 2011 and December 31, 2010, respectively.

Amortization expense associated with intangible assets was $364 thousand and f$463 thousand or the three months ended March 31, 2011 and March 31, 2010, respectively.

(6) Fixed Assets

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


	March 31, 2011			December 31, 2010
Laboratory equipment	$	13,735		$	13,128
Leasehold improvements		8,400			8,086
Computers and software		5,183			5,120
Furniture and fixtures		1,730			1,947

		29,048			28,281
Less accumulated depreciation and amortization		(22,820	)		(22,490	)

	$	6,228		$	5,791

Depreciation expense associated with fixed assets was $495 thousand and $487 thousand for the three months ended March 31, 2011 and March 31, 2010, respectively.

(7) Accrued Expenses and Other Current Liabilities

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


	March 31, 2011		December 31, 2010
VAT and other taxes	$	3,180	$	2,747
Professional fees		373		313
Employee compensation		762		1,394
Restructuring		127		290
Facility related accruals		521		374
Other		1,254		1,080

	$	6,217	$	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 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 quarter of 2011, as compared to $444 thousand for the three months ended March 31, 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 March 31, 2011. The expenses in 2010 relate 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 March 31, 2011 and December 31, 2010, the Company had approximately $127 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 three months ended March 31, 2011		(163	)


Restructuring liability as of March 31, 2011	$	127

(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 the UK taxing authorities 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

There have been no recent accounting pronouncements or changes in accounting pronouncements during the three months ended March 31, 2011, as compared to the recent accounting pronouncements described in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2010, that are of significance, or potential significance to the Company.

(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 March 31, 2011 and 2010 was $1.4 million and $2.8 million, respectively. The difference from net loss for the three months ended March 31, 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 balance sheets consists of cumulative foreign currency translation adjustments of $735 thousand and unrealized loss 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, between the Company and American Stock Transfer & Trust Company, as rights agent (such Rights, to the extent outstanding, together with the shares of the Common Stock, the “Shares”), 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.

Unless extended, the tender offer is currently scheduled to expire at 5:00 p.m., New York City time, on Tuesday, May 17, 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. 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 includes termination provisions for both the Company and LabCorp and provides that, in connection with the termination of the Merger Agreement 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. Neither the tender offer nor the merger is subject to a financing condition. The Company can provide no assurance that these transactions will be completed. 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 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, 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, 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.

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. As a result of these developments, the Enzo v. Amersham case has been stayed pending the outcome of the Connecticut Federal Court case.

On February 12, 2010, a complaint was filed in the United States District Court for the Western District of Wisconsin by Genetic Technologies Limited naming the Company as a defendant, along with eight other companies. The complaint, entitled Genetic Technologies Limited v. Beckman Coulter, Inc., et al., alleges that the defendants infringed U.S. Patent No. 5,612,179 through the sale and use of certain products and services. On March 31, 2011, the Company and Genetic Technologies Limited executed a Settlement Agreement pursuant to which: (i) the Company paid Genetic Technologies Limited $750,000 in settlement of all claims without either of the parties admitting or denying the allegations raised in the suit; and (ii) Genetic Technologies Limited granted the Company a nonexclusive, worldwide, perpetual, irrevocable, royalty-free license under the patents which were the subject of the litigation.

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 19, 2011, a putative class action lawsuit was filed 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. The Company believes the allegations described in the complaint are entirely without merit, and the defendants intend to vigorously defend such action.

On April 20, 2011, a putative class action lawsuit was filed by a single plaintiff in the New Jersey Superior Court, Mercer County, Chancery Division against the Company, LabCorp, the Purchaser, and individual members of the Company’s Board of Directors (Docket No. L-1099-11). The action, styled 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 shareholder value; and (ii) LabCorp and the Company aided and abetted the individual directors’ breaches of fiduciary duty. Plaintiff seeks: (i) to enjoin the acquisition of the Company by the Purchaser and LabCorp; (ii) that the Merger Agreement be declared unlawful; (iii) to prevent the transaction unless and until the Company adopts and implements a procedure to obtain the highest possible price for the company; (iv) to rescind, to the extent already implemented, the Merger Agreement or any of the terms thereof; and (v) monetary damages in an unspecified amount as well as costs and fees, 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.

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) certain 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, a putative 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, the Purchaser, and individual members of the Company’s Board of Directors (Docket No. 3:11-cv-02508-AET). The action, styled 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 shareholder 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. The Company believes the allegations described in the complaint are entirely without merit, and the defendants intend to vigorously defend such action.

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 the 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 Orchid’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 Orchid, 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 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 contemplated thereby.

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, the Company has evaluated subsequent events through the date these consolidated financial statements were issued.

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

For information concerning lawsuits filed against the Company and the Company’s directors in connection with the Merger Agreement, see Note 13 - Litigation 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 March 31, 2011 and for the three months ended March 31, 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.

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 66% and 60% of our total revenues for the three months ended March 31, 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 October 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.

Our operations in the US accounted for 34% and 40% of our total revenues for the three months ended March 31, 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.

Unless extended, the tender offer is currently scheduled to expire at 5:00 p.m., New York City time, on Tuesday, May 17, 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. 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 includes termination provisions for both us and LabCorp and provides that, in connection with the termination of the Merger Agreement 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. Neither the tender offer nor the merger is subject to a financing condition. We can provide no assurance that these transactions will be completed. 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 and the tender offer, please see our Current Report on Form 8-K, filed with the Securities and Exchange Commission, 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. 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 March 31, 2011, as compared to the three months ended March 31, 2010, total revenues increased approximately 18%, and gross margin, as percentage of service revenues, decreased by two percentage points to approximately 32%. For the three months ended March 31, 2011 as compared to the same period in 2010, our UK revenues increased by approximately 28% as measured in US dollars, primarily as a result of increased forensics revenues due to increased volume as well as increased paternity and agriculture revenues. For the three months ended March 31, 2011, as compared to the three months ended March 31, 2010, our US revenues were relatively unchanged. In the first quarter of 2011, our US revenues were impacted by a significant increase in revenues from testing services involving DNA profile uploads into the CODIS and individual state databases and an increase in revenues from government and private paternity testing services, and to a lesser extent, an increase in government and private paternity testing services, offset in part by a decrease in our forensic casework business. Gross margin, as a percentage of service revenue decreased primarily as a result of price decreases in our US-based business, partially offset by higher forensic volume in our UK operations. For the three months ended March 31, 2011, our operating

expenses, other than cost of service revenues, increased by approximately 10% as compared to the same period in 2010, primarily as a result of increased general and administrative expenses, primarily related to the $750 thousand incurred to settle the litigation with Genetic Technologies Limited, as well as other legal and professional fees incurred in connection with the negotiation and execution of the Merger Agreement, and sales and marketing expenses. 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 March 31, 2011 and 2010:


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

Total revenues	$	16,616		$	14,130		$	2,486			18	%
Cost of service revenues		11,326			9,380			1,946			21
Research and development		364			397			(33	)		(8	)
Marketing and sales		1,574			1,311			263			20
General and administrative		4,736			3,806			930			24
Restructuring expense		—			444			(444	)		(100	)
Amortization of intangible assets		364			463			(99	)		(21	)
Total other income expense, net		42			40			2			5
Income tax expense		471			404			67			17
Net loss		(2,177	)		(2,035	)		(142	)		7

Revenues

Total revenues for the three months ended March 31, 2011 of $16.6 million represented an increase of $2.5 million, or approximately 18%, as compared to revenues of $14.1 million for the comparable period in 2010.

Revenues from our UK-based testing services of $11.0 million for the three months ended March 31, 2011 increased by $2.4 million, or approximately 28%, as compared to $8.5 million for the comparable period in 2010. For the three months ended March 31, 2011, as compared to the comparable period in 2010, our UK revenues were favorably impacted by approximately 3% 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 a significant increase in forensics revenues, as well as increases in our paternity and immigration businesses.

Our US service revenues for the three months ended March 31, 2011 of $5.6 million increased by approximately 1%, as compared to $5.6 million for the comparable period in 2010.In the first quarter of 2011, our US revenues were impacted by a significant increase in CODIS and individual state database testing services, and to a lesser extent, an increase in government and private paternity testing services, offset by a decrease in our forensic casework testing services due in part to budgetary constraints at the state and local levels.

During the three months ended March 31, 2011 and 2010, we recognized $7 thousand and $14 thousand, respectively, in other revenues, specifically license revenues.

Cost of Service Revenues

Cost of service revenues were $11.3 million, or approximately 68% of service revenues, for the three months ended March 31, 2011, compared to $9.4 million, or approximately 66% of service revenues, for three months ended March 31, 2010. For three months ended March 31, 2011, as compared to the comparable period in 2010, our UK cost of service revenues were unfavorably impacted by approximately 3% 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 March 31, 2011, as compared to the comparable period in 2010, increased due to higher personnel and lab supplies as a result of increased volume in our UK operations. Our gross margin percentage decreased by two percentage points primarily as a result of price and volume decreases in our US-based testing services as well as price decreases in our UK operations. 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.

Research and Development

Research and development expenses for the three months ended March 31, 2011 and 2010 were $364 thousand and $397 thousand, respectively. This decrease was 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 three months ended March 31, 2011 and 2010 were $1.6 million and $1.3 million, respectively. The increase in marketing and sales expenses was due to increased program costs in the US and increased customer service expenses in the UK.

General and Administrative

General and administrative expenses for the three months ended March 31, 2011 and 2010 were $4.7 million and $3.8 million, respectively. The increase in general and administrative expenses is primarily due to the $750 thousand to settle the litigation with Genetic Technologies Limited and other legal and professional fees, including legal fees incurred in connection with the negotiation and execution of the Merger Agreement. We expect general and administrative costs to increase over the next few months as a result of the increase in costs incurred in connection with our proposed acquisition by LabCorp, including defending the lawsuits filed against us in connection with the proposed acquisition.

Restructuring

During the three months ended March 31, 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 $444 thousand of restructuring expenses recognized in the three months ended March 31, 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 March 31, 2011 and 2010, we recorded $364 thousand and $463 thousand of amortization expense, respectively.

Income Tax Expense

During the three months ended March 31, 2011 and 2010, we recorded income tax expense of $471 thousand and $404 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 March 31, 2011, we reported a net loss of $2.2 million, which represents an increase of $142 thousand compared to a net loss of $2.0 million for the three months ended March 31, 2010.

LIQUIDITY AND CAPITAL RESOURCES

As of March 31, 2011, we had $17.3 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 $20.8 million at March 31, 2011 from $22.2 million at December 31, 2010. The decrease in cash was primarily a result of the $750 thousand settlement of the litigation with Genetic Technologies Limited, an increase in our accounts receivable, as well as the increased net loss incurred during the first quarter 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 three months ended March 31, 2011 and 2010:


	(In thousands)									% Change
	2011			2010			$ Change			% Change
Cash provided by (used) in:
Operating activities	$	(2,327	)	$	2,979		$	(5,306	)		>(100)
Investing activities		2,602			(2,963	)		5,565			>(100)
Financing activities		44			—			44			100

Net cash used in operations for the three months ended March 31, 2011 was $2.3 million, compared with net cash provided by operations of $3.0 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 quarter of 2011. Investing activities during the three months ended March 31, 2011 consisted of the maturity of available-for-sale securities and investing activities during the three months ended March 31, 2010 consisted of the purchase of available-for-sale securities, as well as capital expenditures. Financing activities for the first quarter of 2011 consisted of stock options exercised. There was $44 thousand in financing activities, consisting of proceeds from stock options for the first quarter of 2011.

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 the acquisition by LabCorp and the related litigation. 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. 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. 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 three months ended March 31, 2011 to our contractual obligations and commercial commitments as reported in the Annual Report for the year ended December 31, 2010, as amended, as filed with the SEC, or the Annual Report.

Off-Balance Sheet Arrangements

None.

Critical Accounting Policies

There were no changes during the three months ended March 31, 2011 to our critical accounting policies as reported in our Annual Report.

Recently Issued Accounting Pronouncements

There have been no recent accounting pronouncements or changes in accounting pronouncements during the three months ended March 31, 2011, as compared to the recent accounting pronouncements described in the Annual Report, that are of significance, or potential significance to the us.

Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Interest Rate Sensitivity

Our exposure to market risk is principally confined to our cash equivalents, which are conservative in nature, with a focus on preservation of capital. Due to the short-term nature of our investments and 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 March 31, 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. 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 March 31, 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 March 31, 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 March 31, 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:

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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;

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

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

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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;

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our plan to continue to make investments in our business;

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our expectation about our significant uses of liquidity;

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

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our expectation that general and administrative costs will increase over the next few months as a result of the increase in costs incurred in connection with our proposed acquisition by LabCorp, including defending the lawsuits filed against us in connection with the proposed acquisition;

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

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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. 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. (Enzo) v. Amersham PLC, et al. (Amersham), filed in October 2002. By their complaint, plaintiffs allege that certain defendants (i) breached their distributorship agreements by selling certain products for commercial development (which they allege was not authorized), (ii) infringed plaintiffs’ patents through the sale and use of certain products, and (iii) are liable for unfair competition and tortious interference with contractual relations. We did not have a contractual relationship with plaintiffs, but we are alleged to have purchased the product at

issue from one of the other defendants. We sold the business unit that was allegedly engaged in the unlawful conduct. As a result, there is no relevant injunctive relief to be sought from us. The complaint seeks damages in an undisclosed amount. Most of the fact discovery in the case has been taken, and a Markman hearing to construe the patent claims was conducted in early July 2005. On July 17, 2006, the Court ruled in our favor on its construction of the patents asserted against us, and the co-defendants, including us, moved for summary judgment on all claims against us in January 2007. A hearing on the defendants’ motions for summary judgment occurred on July 17-18, 2007, and the Court reserved ruling on the motions, taking them under advisement. Such matter has been delayed due to the death of the judge and the assignment of a new judge.

In other litigation brought by Enzo against another defendant under the same patents asserted against us, a Connecticut Federal Court has invalidated the patents asserted there and asserted against us in the New York case. That decision was reversed in part by the Court of Appeals on March 26, 2010. As a result of these developments, the Enzo v. Amersham case has been stayed pending the outcome of the Connecticut Federal Court case.

On February 12, 2010, a complaint was filed in the United States District Court for the Western District of Wisconsin by Genetic Technologies Limited naming us as a defendant, along with eight other companies. The complaint, entitled Genetic Technologies Limited v. Beckman Coulter, Inc., et al., alleges that the defendants infringed U.S. Patent No. 5,612,179 through the sale and use of certain products and services. On March 31, 2011, we and Genetic Technologies Limited executed a Settlement Agreement pursuant to which: (i) we paid Genetic Technologies Limited $750,000 in settlement of all claims without either of the parties admitting or denying the allegations raised in the suit; and (ii) Genetic Technologies Limited granted us a nonexclusive, worldwide, perpetual, irrevocable, royalty-free license under the patents which were the subject of the litigation.

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) 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 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 their 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 19, 2011, a complaint regarding a putative class action lawsuit was filed 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 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 their 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 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. We believe the allegations described in the complaint are entirely without merit, and the defendants intend to vigorously defend such action.

On April 20, 2011, a putative class action lawsuit was filed by a single plaintiff in the New Jersey Superior Court, Mercer County, Chancery Division against us, LabCorp, the Purchaser, and individual members of our Board of Directors (Docket No. L-1099-11). The action, styled 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 our market value; (b) act in the interests of equity owners; and (c) maximize shareholder value; and (ii) we and LabCorp aided and abetted the individual directors’ breaches of fiduciary duty. Plaintiff seeks: (i) to enjoin the acquisition of us by the Purchaser and LabCorp; (ii) that the Merger Agreement be declared unlawful; (iii) to prevent the transaction unless and until we adopt and implement a procedure to obtain the highest possible price for us; (iv) to rescind, to the extent already implemented, the Merger Agreement or any of the terms thereof; and (v) monetary damages in an unspecified amount as well as costs and fees, 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 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, 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). The action, styled 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 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.

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

Except as set forth below, 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.

Our proposed acquisition by LabCorp may cause disruption to our business and, if the proposed transactions do not occur, we will have incurred significant expenses, may need to pay a termination fee under the Merger Agreement, and our stock price may decline.

On April 5, 2011, we entered into the Merger Agreement with LabCorp and 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.

Unless extended, the tender offer is currently scheduled to expire at 5:00 p.m., New York City time, on Tuesday, May 17, 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. 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.

The announcement of the Merger Agreement may result in a loss of personnel and may disrupt our sales and marketing, research and development and other business activities, which may negatively impact our financial performance. The Merger Agreement generally requires us to operate our business in the ordinary course pending consummation of the proposed transactions, but it also includes certain contractual restrictions on the conduct of our business that may negatively affect our ability to execute our business strategies and attain our financial goals. Additionally, the announcement of the proposed transactions may negatively impact our relationships with third parties, including our private and government customers.

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. We can provide no assurance that these transactions will be completed.

We cannot predict whether the closing conditions for the proposed transactions will be satisfied. As a result, we cannot assure you that the proposed transactions will be completed. If the transactions are not completed because these conditions are not satisfied or for other reasons, the market price of our Common Stock may decline. In addition, if the proposed transactions do not occur, we will remain liable for considerable related expenses that we have incurred. In addition, the Merger Agreement contemplates circumstances in which 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.

For additional details regarding the Merger Agreement and the tender offer, please see our Current Report on Form 8-K, filed with 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.

We may incur substantial costs as a result of litigation and other proceedings resulting from our proposed acquisition by LabCorp.

Since the announcement of our proposed acquisition by LabCorp on April 6, 2011, seven putative class action lawsuits have been filed against us, the individual members of our Board of Directors, LabCorp and the Purchaser seeking, among other things, monetary damages and to enjoin the proposed transactions. We may be subject to additional actions in the future. We have only limited amounts of insurance, which may not provide coverage to offset a negative judgment or a settlement payment. We may be unable to obtain additional insurance in the future, or we may be unable to do so on favorable terms. Our insurers may dispute our claims for coverage. Regardless of merit or eventual outcome of these litigations, such actions can result in:

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the diversion of management’s time and attention;

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the expenditure of large amounts of cash on legal fees, expenses, and payment of damages or settlement costs;

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injury to our reputation; and

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significant delay in consummation of the tender offer or the inability of us, LabCorp and the Purchaser to complete the transactions contemplated by the Merger Agreement, the ultimate termination of the Merger Agreement and potential payment by us to LabCorp of a termination fee of $2.5 million and expense reimbursement of up to $0.5 million.

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

2.1(1)		Agreement and Plan of Merger, dated April 5, 2011, by and among Laboratory Corporation of America Holdings, OCM Acquisition Corp., and the Company (filed as Exhibit 2.1).

4.1(1)		Second Amendment, dated April 5, 2011, to Rights Agreement, dated as of July 27, 2001, as amended on March 31, 2003, between the Company and American Stock Transfer & Trust Company, as rights agent (filed as Exhibit 4.1).

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

(1)	Previously filed with the SEC as Exhibits to, and incorporated herein by reference from, the Company’s Current Report on Form 8-K as filed with the SEC on April 6, 2011 (File No. 000-30267).

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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