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

OVERVIEW

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

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

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

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

Operating Highlights

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

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

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

RESULTS OF OPERATIONS

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

                                                      (In thousands)
                                             2009         2008        $ Change      % Change

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

Revenues

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

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

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

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

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

Cost of Service Revenues

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

Research and Development

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

Marketing and Sales

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

General and Administrative

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

Amortization of Intangible Assets

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

Total Other Income (Expense), Net

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

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

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

Income Tax Expense

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

Net Loss

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

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

                                                  (In thousands)
                                          2009         2008       $ Change      % Change

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

Revenues

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

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

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

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

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

Cost of Service Revenues

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

Research and Development

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

Marketing and Sales

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

General and Administrative

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

Amortization of Intangible Assets

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

Total Other Income (Expense), Net

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

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

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

Income Tax Expense

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

Net Loss

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

LIQUIDITY AND CAPITAL RESOURCES

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

Sources of Liquidity

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

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

                                               (In thousands)
                                      2009         2008        $ Change      % Change
       Cash provided by (used in):
. . .