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

OVERVIEW

We are engaged in the provision of DNA testing services that generate genetic profile information by analyzing an organism's unique genetic identity. We focus our business on DNA testing primarily for human identity and, to a lesser extent, agricultural 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 US accounted for 51% and 56% of our total revenues for the three months ended June 30, 2009 and 2008, respectively. We continue to experience significant price competition in our forensics and paternity testing businesses. As a result, we are focused on improving our operational execution to increase throughput in our laboratories and lower aggregate operating costs. In particular, in our forensics business we have reduced our sample processing time and decreased the number of samples that need to be retested. In addition, we believe that our forensic and paternity laboratory testing volumes, combined with the business that we acquired as part of the acquisition of ReliaGene Technologies Inc., or ReliaGene, have increased our operational efficiencies.

Our operations in the UK accounted for 49% and 44% of our total revenues for the three months ended June 30, 2009 and 2008, respectively. Prior to the three months ended June 30, 2008, a significant portion of our UK revenues were derived through our agreement with LGC Ltd., or LGC. LGC is a provider of analytical and diagnostic services and one of our competitors in providing DNA testing services in the UK. Our prior agreement with LGC was terminated effective July 15, 2007 and we then entered into a series of temporary extension agreements with LGC. LGC is now providing DNA testing services directly to several police forces in the UK that were previously serviced by us on a subcontract basis. We continue to provide some DNA testing services to police forces through LGC on a limited basis. We also continue to focus on providing our services directly to UK police forces. In 2007, we were successful in winning forensic work with different UK police forces and, in February 2008, we were awarded, overall, a significant portion of the service packages we bid on in the North West/South West and Wales regional tender. We were awarded work from nine of the fourteen police forces that participated in this tender. Under the terms of the award, we are providing forensic services, including DNA testing of database crime scene samples, forensic casework and database testing services under the UK's Police and Criminal Evidence Act, or PACE, for multiple police forces that collectively tendered their work. This award followed a rigorous and competitive bidding process. We believe that the actions we have taken to date have enabled us to successfully transition from our prior reliance on revenues derived from LGC to directly providing these services to police forces in the UK. In addition, we expect the remaining police forces in the UK to tender their work through the UK's National Procurement Plan with tendering expected to continue through at least a 24-month period.

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, insurance and other corporate expenses.

Our operating results improved for the three months ended June 30, 2009 as compared to the same period in 2008. Overall, for the three months ended June 30, 2009 as compared to the three months ended June 30, 2008, total revenues decreased approximately 4%, while gross margin, as percentage of service revenues, increased from approximately 33% to approximately 35%. For the three months ended June 30, 2009 as compared to the same period in 2008, our UK revenues increased by approximately 7% as a result of increased forensics revenues due to increased volume. In the US we experienced increased revenues in our forensic casework testing services, due to increased volume, and government paternity testing services. The increased revenues in our US forensic casework testing services and government paternity testing services were offset by a significant decrease in testing services involving DNA profile uploads into the Combined DNA Index System, or CODIS, and individual state databases. The increase in gross margin, as a percentage of service revenue, was the result of added sample volumes for our forensics testing services in the UK and forensics casework testing services and government paternity testing services in the US, as well as reductions in personnel and supply expenses. For the three months ended June 30, 2009, our operating expenses, other than cost of service revenues, decreased by approximately 15% as compared to the same period in 2008, as a result of decreased general and administrative and marketing and sales expenses, in particular decreased personnel costs and professional fees, as well as the impact of the exchange rate movement of the British pound as compared to the US dollar.

Our operating results also improved for the six months ended June 30, 2009 as compared to the same period in 2008. Overall, for the six months ended June 30, 2009 as compared to the six months ended June 30, 2008, total revenues decreased approximately 4%, while gross margin, as a percentage of service revenues, increased from approximately 30% to approximately 34%. We experienced revenue increases in our UK forensic and immigration testing services and in our US forensic casework and government paternity testing services. The increased revenues in some of our testing services were offset by decreased revenues in our private paternity and CODIS individual state database testing services. The increase in gross margin, as a percentage of service revenue, was primarily a result of increased forensic testing services. Cost of service revenues decreased due to lower personnel costs and lower lab supply costs as a result of process improvements. For the six months ended June 30, 2009, our operating expenses, other than cost of service revenues, decreased by approximately 16% as compared to the same period in 2008, primarily as a result of decreased general and administrative expenses, due to lower professional fees including legal expenses related to a sizable state paternity contract that was awarded to us and protested by a competitor in 2008.

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 June 30, 2009 and 2008:



                                                 (In thousands)
                                       2009          2008         $ Change       % Change
 Total revenues                      $ 14,687      $ 15,224      $     (537 )          (4 )%
 Cost of service revenues               9,557        10,223            (666 )          (7 )
 Research and development                 192           206             (14 )          (7 )
 Marketing and sales                    1,216         1,551            (335 )         (22 )
 General and administrative             3,730         4,359            (629 )         (14 )
 Amortization of intangible assets        465           477             (12 )          (3 )
 Total other income (expense), net          8           368            (360 )         (98 )
 Income tax expense (benefit)             138            (3 )           141          >100
 Net loss                                (603 )      (1,221 )           618            51

Revenues

Total revenues for the three months ended June 30, 2009 of $14.7 million represented a decrease of $537 thousand, or approximately 4%, as compared to revenues of $15.2 million for the comparable period in 2008.

Our US service revenues for the three months ended June 30, 2009 of $7.5 million decreased by approximately $1.0 million, or approximately 11%, as compared to $8.5 million for the comparable period in 2008, primarily due to a significant decrease in CODIS business, which we believe to be a temporary decline as state backlogs continue to build. We believe that a contributing factor to these backlogs is the transition in the bidding process that has given the states a more decisive role in deciding to whom and when they can outsource their CODIS business. This decrease was partly offset by increases in revenues from our forensic casework and government paternity testing services due to increased volume.

Revenues from our UK-based testing services of $7.1 million for the three months ended June 30, 2009 increased by $434 thousand, or approximately 7%, as compared to the comparable period in 2008. For the three months ended June 30, 2009, as compared to the comparable period in 2008, our UK revenues were unfavorably impacted approximately 21% as a result of the exchange rate movement of the British pound as compared to the US dollar. Despite the adverse effect of exchange rate movements, our UK-based revenue increase was driven by an increase in forensics revenues, as work awarded under the North West/South West and Wales's regional tender and pilot work has replaced and surpassed revenues previously generated under our expired LGC agreement. Partly offsetting the forensics revenue increase, we experienced revenue declines due to the expected decrease in agricultural testing and decreased revenue in paternity testing services.

We previously performed forensic testing services for several police forces throughout the UK through our subcontractor agreement with LGC. Prior to the three months ended June 30, 2008, a significant portion of our UK revenues were derived through our agreement with LGC Ltd., or LGC. LGC is a provider of analytical and diagnostic services and one of our competitors in providing DNA testing services in the UK. Our agreement with LGC was terminated effective July 15, 2007 and we then entered into a series of temporary extension agreements with LGC. LGC is now providing DNA testing services directly to several police forces in the UK that were previously serviced by us on a subcontract basis. We continue to provide some DNA testing services to police forces through LGC on a limited basis. We also continue to focus on providing our services directly to UK police forces. In 2007, we were successful in winning forensic work with different UK police forces and, in February 2008, we were awarded, overall, a significant portion of the service packages we bid on in the North West/South West and Wales regional tender. We were awarded work from nine of the fourteen police forces that participated in this tender. Under the terms of the award, we are providing forensic services, including DNA testing of database crime scene samples, forensic casework and PACE samples for multiple police forces that collectively tendered their work. This award followed a rigorous and competitive bidding process. In addition, we expect the remaining police forces in the UK to tender their work through the UK's National Procurement Plan, with tendering expected to continue through at least a 24-month period.

During the three months ended June 30, 2009 and 2008, we recognized zero and $60 thousand, respectively, in other revenues, specifically license revenues.

Cost of Service Revenues

Cost of service revenues were $9.6 million, or approximately 65% of service revenues, for the three months ended June 30, 2009, compared to $10.2 million, or approximately 67% of service revenues, for three months ended June 30, 2008. For three months ended June 30, 2009, as compared to the comparable period in 2008, our UK cost of service revenues were favorably impacted approximately 21% as a result of the exchange rate movement of the British pound as compared to the US dollar. In the US, cost of service revenues decreased due to lower personnel costs and to lower lab supply costs as a result of process improvements. Our gross margin percentage increased by approximately 2% from 33% for the three months ended June 30, 2008 to 35% for the three months ended June 30, 2009. This increase is a result of added sample volumes for our forensics testing services in the UK and forensics casework testing services and government paternity testing services in the US, productivity enhancements in the US and the UK, as well as reductions in personnel and supply expenses in the US.

Research and Development

Research and development expenses for the three months ended June 30, 2009 and 2008 were $192 thousand and $206 thousand, respectively. The decrease in research and development expenses was primarily due to reduced personnel costs and the impact of the exchange rate movement of the British pound as compared to the US dollar.

Marketing and Sales

Marketing and sales expenses for the three months ended June 30, 2009 and 2008 were $1.2 million and $1.6 million, respectively. The decrease in marketing and sales expenses was primarily due to decreased personnel costs and the impact of the exchange rate movement of the British pound as compared to the US dollar.

General and Administrative

General and administrative expenses for the three months ended June 30, 2009 and 2008 were $3.7 million and $4.4 million, respectively. The decrease in general and administrative expenses is primarily due to decreased professional fees, including non-recurring legal fees related to a sizable state paternity contract that was awarded to us and protested by a competitor in 2008 and the impact of the exchange rate movement of the British pound as compared to the US dollar.

Amortization of Intangible Assets

During the three months ended June 30, 2009 and 2008, we recorded $465 thousand and $477 thousand of amortization expense, respectively.

Total Other Income (Expense), Net

Interest income for the three months ended June 30, 2009 was $33 thousand, compared to $94 thousand during the same period of the prior year, due to lower interest rates and lower average cash balances in 2009.

Interest expense for the three months ended June 30, 2009 and 2008 was a benefit of $1 thousand and an expense of $10 thousand, respectively. This interest expense was related to debt assumed as result of the acquisition of ReliaGene.

Other expense for the three months ended June 30, 2009 was $26 thousand, primarily consisting of non-cash gains from reductions in the fair value of certain liabilities. Other income for the three months ended June 30, 2008 was $284 thousand, primarily consisting of non-cash gains from reductions in the fair value of certain liabilities.

Income Tax Expense

During the three months ended June 30, 2009 and 2008, we recorded an income tax expense of $138 thousand and an income tax benefit of $3 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 June 30, 2009, we reported a net loss of $603 thousand, which represents a decrease of 51% as compared to a net loss of $1.2 million for the three months ended June 30, 2008.

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

                                                 (In thousands)
                                        2009          2008        $ Change       % Change
  Total revenues                      $ 28,651      $ 29,751      $  (1,100 )          (4 )%
  Cost of service revenues              18,737        20,659         (1,922 )          (9 )
  Research and development                 351           426            (75 )         (18 )
  Marketing and sales                    2,380         3,123           (743 )         (24 )
  General and administrative             7,745         9,051         (1,306 )         (14 )
  Amortization of intangible assets        927           955            (28 )          (3 )
  Total other income (expense), net         (6 )         719           (725 )       >(100 )
  Income tax expense (benefit)             280          (249 )          529          >100
  Net loss                              (1,775 )      (3,495 )        1,720            49

Revenues

Total revenues for the six months ended June 30, 2009 of $28.7 million represented a decrease of $1.1 million, or approximately 4%, as compared to revenues of $29.8 million for the comparable period in 2008.

Our US service revenues for the six months ended June 30, 2009 of $15.0 million decreased by $1.5 million, or approximately 9%, as compared to $16.5 million for the comparable period in 2008, primarily due to a significant decrease in CODIS business, which we believe to be a temporary decline as state backlogs continue to build. We believe that a contributing factor to these backlogs is the transition in the bidding process that has given the states a more decisive role in deciding to whom and when they can outsource their CODIS business. This decrease was partly offset by increases in revenues from our forensic casework and government paternity testing services due to increased volume.

Revenues from our UK-based testing services of $13.5 million for the six months ended June 30, 2009 increased by $487 thousand, or approximately 4%, as compared to the comparable period in 2008. For the six months ended June 30, 2009, as compared to the comparable period in 2008, our UK revenues were unfavorably impacted approximately 25% as a result of the exchange rate movement of the British pound as compared to the US dollar. Despite the adverse effect of exchange rate movements, our UK-based revenue increase was driven by an increase in forensics revenues, as work awarded under the North West/South West and Wales's regional tender and pilot work has replaced and surpassed revenues previously generated under our expired LGC agreement. Partly offsetting the forensics revenue increase, we experienced revenue declines due to the expected decrease in agricultural testing and decreased revenue in paternity testing services.

We previously performed forensic testing services for several police forces throughout the UK through our subcontractor agreement with LGC. Prior to the three months ended June 30, 2008, a significant portion of our UK revenues were derived through our agreement with LGC Ltd., or LGC. LGC is a provider of analytical and diagnostic services and one of our competitors in providing DNA testing services in the UK. Our agreement with LGC was terminated effective July 15, 2007 and we then entered into a series of temporary extension agreements with LGC. LGC is now providing DNA testing services directly to several police forces in the UK that were previously serviced by us on a subcontract basis. We continue to provide some DNA testing services to police forces through LGC on a limited basis. We also continue to focus on providing our services directly to UK police forces. In 2007, we were successful in winning forensic work with different UK police forces and, in February 2008, we were awarded, overall, a significant portion of the service packages we bid on in the North West/South West and Wales regional tender. We were awarded work from nine of the fourteen police forces that participated in this tender. Under the terms of the award, we are providing forensic services, including DNA testing of database crime scene samples, forensic casework and PACE samples for multiple police forces that collectively tendered their work. This award followed a rigorous and competitive bidding process. In addition, we expect the remaining police forces in the UK to tender their work through the UK's National Procurement Plan, with tendering expected to continue through at least a 24-month period.

During the six months ended June 30, 2009 and 2008, we recognized $121 thousand and $192 thousand, respectively, in other revenues, specifically license revenues.

Cost of Service Revenues

Cost of service revenues were $18.7 million, or approximately 65% of service revenues, for the six months ended June 30, 2009, compared to $20.7 million, or approximately 70% of service revenues, for six months ended June 30, 2008. For six months ended June 30, 2009, as compared to the comparable period in 2008, our UK cost of service revenues were favorably impacted approximately 25% as a result of the exchange rate movement of the British pound as compared to the US dollar. In the US, cost of service revenues decreased due to lower personnel costs and to lower lab supply costs as a result of process improvements. Our gross margin percentage increased by approximately 4% from 30% for the six months ended June 30, 2008 to 34% for the six months ended June 30, 2009. This increase is a result of added sample volumes for our forensics testing services in the UK and forensics casework testing services and government paternity testing services in the US, productivity enhancements in the US and the UK, as well as reductions in personnel and supply expenses in the US.

Research and Development

Research and development expenses for the six months ended June 30, 2009 and 2008 were $351 thousand and $426 thousand, respectively. The decrease in research and development expenses was primarily due to reduced personnel costs and laboratory supplies and the impact of the exchange rate movement of the British pound as compared to the US dollar.

Marketing and Sales

Marketing and sales expenses for the six months ended June 30, 2009 and 2008 were $2.4 million and $3.1 million, respectively. The decrease in marketing and sales expenses was primarily due to decreased personnel and advertising costs and the impact of the exchange rate movement of the British pound as compared to the US dollar.

General and Administrative

General and administrative expenses for the six months ended June 30, 2009 and 2008 were $7.7 million and $9.1 million, respectively. The decrease in general and administrative expenses is primarily due to decreased professional fees, including non-recurring legal fees related to a sizable state paternity contract that was awarded to us and protested by a competitor in 2008 and the impact of the exchange rate movement of the British pound as compared to the US dollar.

Amortization of Intangible Assets

During the six months ended June 30, 2009 and 2008, we recorded $927 thousand and $955 thousand of amortization expense, respectively.

Total Other Income (Expense), Net

Interest income for the six months ended June 30, 2009 was $42 thousand, compared to $246 thousand during the same period of the prior year, due to lower interest rates and lower average cash balances in 2009.

Interest expense for the six months ended June 30, 2009 and June 30, 2008 was $2 thousand and $23 thousand, respectively. This interest expense was related to debt assumed as result of the acquisition of ReliaGene in the fourth quarter of 2007.

Other expense for the six months ended June 30, 2009 was $46 thousand, primarily consisting of non-cash gains from reductions in the fair value of certain liabilities. Other income for the six months ended June 30, 2008 was $496 thousand, primarily consisting of non-cash gains from reductions in the fair value of certain liabilities.

Income Tax Expense

During the six months ended June 30, 2009, we recorded an income tax expense of $280 thousand primarily related to our UK business. During the six months ended June 30, 2008, we recorded an income tax benefit of $249 thousand, primarily as a result a write down in our unrecognized income tax benefits and corresponding recognition of

an income tax benefit of $175 thousand. No tax benefit was recorded relating to our US business' losses as management deemed that it was not likely that such tax benefit would be realized.

Net Loss

For the six months ended June 30, 2009, we reported a net loss of $1.8 million, which represents a decrease of 49% as compared to a net loss of $3.5 million for the six months ended June 30, 2008.

LIQUIDITY AND CAPITAL RESOURCES

As of June 30, 2009, we had $16.6 million in cash and cash equivalents, as . . .