ENZO BIOCHEM INC - Quarter Report: 2007 October (Form 10-Q)

     The following discussion of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and related notes and other information included elsewhere in this Quarterly Report on Form 10-Q.

Forward-Looking Statements

      Our disclosure and analysis in this report, including but not limited to the information discussed in this Item 2, contain forward-looking information about our Company’s financial results and estimates, business prospects and products in research that involve substantial risks and uncertainties. From time to time, we also may provide oral or written forward-looking statements in other materials we release to the public. Forward-looking statements give our current expectations or forecasts of future events. You can identify these statements by the fact that they do not relate strictly to historic or current facts. They use words such as anticipate,” estimate,” expect,” project,” intend,” plan,” believe,” will,” and other words and terms of similar meaning in connection with any discussion of future operations or financial performance. In particular, these include statements relating to future actions, prospective products or product approvals, future performance or results of current and anticipated products, sales efforts, expenses, interest rates, foreign exchange rates, intellectual property matters, the outcome of contingencies, such as legal proceedings, and financial results.

      We cannot guarantee that any forward-looking statement will be realized, although we believe we have been prudent in our plans and assumptions. Achievement of future results is subject to risks, uncertainties and inaccurate assumptions. Should known or unknown risks or uncertainties materialize, or should underlying assumptions prove inaccurate, actual results could vary materially from past results and those anticipated, estimated or projected. As a result, investors are cautioned not to place undue reliance on any of our forward-looking statements. Investors should bear this in mind as they consider forward-looking statements.

      We do not assume any obligation to update or revise any forward-looking statement that we make, even if new information becomes available or other events occur in the future. We are also affected by other factors that may be identified from time to time in our filings with the Securities and Exchange Commission, some of which are set forth in Item 1A -Risk Factors in our Form 10-K filing for the 2007 fiscal year. You are advised to consult any further disclosures we make on related subjects in our Forms 10-Q, 8-K and 10-K reports to the Securities and Exchange Commission. Although we have attempted to provide a list of important factors which may affect our business, investors are cautioned that other factors may prove to be important in the future and could affect our operating results. You should understand that it is not possible to predict or identify all such factors or to assess the impact of each factor or combination of factors on our business. Consequently, you should not consider any such list to be a complete set of all potential risks or uncertainties.

Overview

     We are a life sciences and biotechnology company focused on harnessing genetic processes to develop research tools, diagnostics and therapeutics and on serving as a provider of diagnostic services to the medical community. Since our founding in 1976, our strategic focus has been on the development of enabling technologies in the life sciences field. Our pioneering work in genomic analysis coupled with our extensive patent estate and enabling platforms have strategically positioned us to play an important role in the rapidly growing life sciences and molecular medicine marketplaces.

     We are comprised of three operating segments, of which the Therapeutics and Life Sciences segments have evolved out of our core competencies: the use of nucleic acids as informational molecules and the use of compounds for immune modulation. Below are brief descriptions of each of the three operating segments (see Note 13 in the notes to consolidated financial statements):

     Enzo Life Sciences is a company that manufactures, develops and markets biomedical research products and tools to research and pharmaceutical customers world-wide and has amassed a large patent and technology portfolio. The pioneering platforms developed by Enzo Life Sciences enable the development of a wide range of products in the research products marketplace. We are internationally recognized and acknowledged as a leader in manufacturing, in-licensing, and commercialization of over 5,000 innovative high quality research reagents in key research areas. The division is an established source for a comprehensive panel of products to scientific experts in the fields of gene expression, non-radioactive labeling and detection, adipokines & obesity, apoptosis, cell cycle, cytoskeletal research, DNA damage & repair, immunology & cancer research, inflammation, neurobiology, nitric oxide & oxidative stress, and signal transduction.

     Enzo Therapeutics is a biopharmaceutical company that has developed multiple novel approaches in the areas of gastrointestinal, infectious, ophthalmic and metabolic diseases, many of which are derived from the pioneering work of Enzo Life Sciences. Enzo Therapeutics has focused its efforts on developing treatment regimens for diseases and conditions for which current treatment options are ineffective, costly, and/or cause unwanted side effects. This focus has generated a clinical and preclinical pipeline, as well as more than 40 patents and patent applications.

     Enzo Clinical Labs is a regional clinical laboratory to the New York Metropolitan and New Jersey areas. The Company believes this allows us to capitalize firsthand on our extensive advanced molecular and cytogenetic capabilities and the broader trends in predictive diagnostics. Enzo Clinical Labs offers a menu of routine and esoteric clinical laboratory tests or procedures used in general patient care by physicians to establish or support a diagnosis, monitor treatment or medication, and search for an otherwise undiagnosed condition. We operate a full-service clinical laboratory in Farmingdale, New York, a network of 19 patient service centers, a stand alone “stat” or rapid response laboratory in New York City, and a full-service phlebotomy department.

     The Company’s sources of revenue have been from the direct sales of products consisting of labeling and detection reagents for the genomics and sequencing markets, as well as through non-exclusive distribution agreements with other companies, and royalty and license fee income.

16

     Another source of revenue has been from the clinical laboratory service market. Payments for clinical laboratory testing services are made by the Medicare program, healthcare insurers and patients. Fees billed to patients, Medicare, and third-party payers are billed on the Clinical Lab’s standard gross fee schedule, subject to any limitations on fees negotiated with the third-party payers or with the ordering physicians on behalf of their patients.

     The Company incurs additional costs as a result of our participation in the Medicare programs, as billing and reimbursement for clinical laboratory testing is subject to considerable and complex federal regulations. Compliance with applicable laws and regulations, as well as internal compliance policies and procedures, adds further complexity and costs to our operations. Government payers such as Medicare, as well as healthcare insurers have taken steps and may continue to take steps to control the costs, utilizations and delivery of healthcare services, including clinical laboratory services. Principally as a result of reimbursement reductions and measures adopted by the Centers for Medicare & Medicaid Services, or CMS, which establishes procedures and continuously evaluates and implements changes in the reimbursement process to control utilization. Despite the added cost and complexity of participating in the Medicare program, we continue to participate because we believe that our other business may depend, in part, on continued participation in Medicare since we believe certain ordering physicians may want a single laboratory capable of performing all of their clinical laboratory testing services, regardless of who pays for such services.

     Information systems are used extensively in virtually all aspects of the clinical laboratory operations, including testing, billing, customer service, logistics, and management of medical data. Our success depends, in part, on the continued and uninterrupted performance of our information technology systems. Through maintenance, staffing, and investments in our information technology system, we expect to limit the risk associated with our heavy reliance on these systems.

     The clinical laboratory is subject to seasonal fluctuations in operating results and cash flows. Typically, testing volume declines during the summer months, year end holiday periods and other major holidays, reducing net revenues and operating cash flows. Testing volume is also subject to declines in winter months due to inclement weather, which varies in severity from year to year.

     Recent Developments

     Axxora Life Science, Inc. Acquisition

     Effective May 31, 2007, Enzo Life Sciences entered into a Stock Purchase Agreement pursuant to which Enzo Life Sciences purchased all of the issued and outstanding capital stock of Axxora Life Sciences, Inc. (“Axxora”) for an aggregate purchase price of $16.3 million in cash, exclusive of acquisition costs of approximately $1 million and assumed debt of $475,000. Upon consummation of the acquisition Axxora became a wholly-owned subsidiary of Enzo Life Sciences. The consolidated statements for the three months ended October 31, 2007 include the results of operations of Axxora. Axxora is included in the Life Sciences segment.

     Axxora is a developer, manufacturer and distributor of reagents for the research and biochemical industries and is based in the U.S. with wholly-owned subsidiaries in the U.S., Switzerland, Germany and the United Kingdom, as well as distributors located in other major markets throughout the world. Axxora’s electronic marketplace enables customers to purchase research reagents from internationally recognized manufacturers covering all areas of the life sciences research reagents field. As a result of this transaction, Enzo Life Sciences has expanded its product offerings both through internal manufacturing and distribution and increases its geographic distribution. The acquisition was financed with the Company’s cash and cash equivalents.

17

---

Results of Operations
Three months ended October 31, 2007 as compared to October 31, 2006

Comparative Financial Data for the Three Months Ended October 31,
(in 000’s)								Increase
Revenues:		2007			2006			(Decrease)			% Change
Product sales		$  5,863			$  1,092			$  4,771			437	%
Royalty and license fee income		2,318			1,297			1,021			79
Clinical laboratory services		11,266			8,053			3,213			40
Total revenues		19,447			10,442			9,005			86
Costs and expenses and other (income):
Cost of products		4,434			609			3,825			628	%
Cost of laboratory services		5,131			3,496			1,635			47
Research and development		1,703			1,862			(159	)		(9	)
Selling, general and administrative		7,404			5,517			1,887			34
Provision for uncollectible accounts receivable		1,159			914			245			27
Legal expenses		2,449			2,156			293			14
Interest income		(1,460	)		(911	)		(549	)		60
Other income		(26	)		(2,000	)		1,974			-
Total costs and expenses - net		20,794			11,643			9,151			79
Loss before income taxes		($  1,347	)		($ 1,201	)		($   146	)		(12	)%

Consolidated Results:

      The “2008 period” and the “2007 period” refer to the fiscal three months ended October 31, 2007 and 2006, respectively.

     Product revenues during three months ended October 31, 2007 were $5.9 million compared to $1.1 million in the year ago period, an increase of $4.8 million or 437%. The increase is due to the inclusion of Axxora product sales of $5.1 million for the quarter ended October 31, 2007 partially offset by a decline of $0.3 million in the 2008 period over the 2007 period product sales of Enzo Life Sciences New York (“New York”) products.

     Royalty and license fee income during three months ended October 31, 2007 was $2.3 million compared to $1.3 million in the year ago period, an increase of $1.0 million or 79%. Royalties are earned from net sales of Digene products subject to a license and from a License Agreement with Abbott which was entered into in the third quarter of fiscal 2007. During three months ended October 31, 2007, the Company recognized royalties of approximately $1.9 million from Digene, an increase of approximately $0.6 million over the prior year ago period, and royalties and license fees of approximately $0.4 million under the Abbott License Agreement. There are no expenses relating to royalty and license fee income.

     Clinical laboratory revenues during three months ended October 31, 2007 were $11.3 million compared to $8.1 million in the 2007 period, an increase of $3.2 million or 40%. The Company experienced an increase in service revenues during the 2008 period primarily due to an expansion of an insurance provider agreement with United Healthcare in January 2007, which was partially offset by an increase in the contractual adjustment, which reduced gross billings by 80.6% as compared to 76.9% in the 2007 period. The increase in the contractual adjustment is due to continued competitive pricing throughout the industry which has negatively impacted reimbursement rates for tests.

18

---

     The cost of product revenues during the three months ended October 31, 2007 was $4.4 million compared to $0.6 million in the 2007 period, an increase of $3.8 million. The increase is primarily due to the inclusion of Axxora’s cost of product revenues of approximately $4.0 million for the quarter ended October 31, 2007, which includes the impact of an inventory fair value adjustment of $0.6 million related to sales of inventory acquired from Axxora. Gross profit margin was also negatively affected during the 2008 period as compared to the 2007 period by the decline in product revenues relating to New York products.

     The cost of clinical laboratory services during the three months ended October 31, 2007 was $5.1 million as compared to $3.5 million in the prior period, an increase of $1.6 million or 47%. Due to the increased volume of patients serviced and tests performed, the Company incurred increased costs primarily relating to reagent costs of $0.9 million, laboratory personnel costs of $0.4 million, and outside testing costs of $0.2 million.

     Research and development expenses were approximately $1.7 million during the three months ended October 31, 2007, compared to $1.9 million in the 2007 period, a decrease of $0.2 million or 9%. The decrease was primarily due to a decrease at the Therapeutic segment of $0.2 million in clinical trial activities and payroll and payroll related costs and a decrease of $0.1 million in supplies and related costs at Enzo Life Sciences – New York, partially offset by the inclusion of research and development incurred by Axxora of $0.1 million.

     Selling, general and administrative expenses were approximately $7.4 million during the three months ended October 31, 2007 as compared to $5.5 million in the 2007 period, an increase of $1.9 million or 34%. Included in the 2008 period is approximately $1.5 million of selling, general and administrative expenses related to Axxora‘s operations. The expense increases for the other Companies’ operations were in consulting, payroll and payroll related personnel costs of $0.4 million.

     The provision for uncollectible accounts receivable, relating to the clinical laboratory segment was $1.2 million for the three months ended October 31, 2007, compared to $0.9 million during the year ago period, a increase of $0.3 million or 27% and is due to the increase in clinical laboratory revenue of 40% and the composition of patients being serviced.

     Legal expense was $2.4 million during the three months ended October 31, 2007 compared to $2.1 million in the year ago period, an increase of $0.3 million or 14%, due to an increase in ongoing patent litigation.

     Interest income increased by $0.5 million or 60% to $1.5 million during the three months ended October 31, 2007 compared to $0.9 million during the 2007 period. The increase was due to higher invested cash generated from the proceeds from the Registered Direct Offerings of common stock in December 2006 and February 2007. The net cash proceeds from these fiscal 2007 offerings were $57.0 million. The Company earns interest by investing primarily in short term (30 to 90 days) commercial paper with high credit ratings and money market funds.

     Other income was $26,000 during the three months ended October 31, 2007 versus $2.0 million in the year ago period. During the 2007 period, the Company recognized a $2.0 million gain on a patent litigation settlement.

      The Company's effective tax rate benefit (provision) for the three months ended October 31, 2007 was 8.5%, compared to (3.7%) during the three months ended October 31, 2006.

19

---

      The tax benefit for the three months ended October 31, 2007 was based on state and local taxes and book to tax differences for inventory acquired from Axxora and differed from the expected net operating loss carryforward benefit at the U.S. federal statutory rate of 34% primarily due to the inability to recognize such benefit. The carryforward benefit cannot be recognized because of uncertainties relating to future taxable income, in terms of both its timing and its sufficiency.

The tax provision for the three months ended October 31, 2006 was based on state and local taxes, and differed from the expected net operating loss benefit at the U.S. federal statutory rate of 34% primarily due the inability to recognize such benefit. The carry forward benefit cannot be recognized because of uncertainties relating to future taxable income, in terms of both its timing and its sufficiency, which would enable the Company to realize the federal carryforward benefit.

Segment Results

     The Life Sciences segment’s income before taxes was approximately $1.1 million for the three months ended October 31, 2007 as compared to $2.5 million in the 2007 period. The decrease is primarily due to the Company’s $2.0 million patent litigation settlement with Sigma Aldrich in the 2007 period, partially offset by an increase in royalties and license fee income in the 2008 period. Revenues from product shipments increased by $4.8 million due to the inclusion of products sales of $5.1 million in the 2008 period from Axxora, offset by declines in New York product unit shipments. Royalty and license fee income increased $1.0 million from the existing Digene agreement and the Abbott License Agreement entered into in the third quarter of fiscal 2007. The segment’s gross margin of $3.7 million was negatively impacted by $0.6 million representing the fair value adjustment attributed to the sale of inventory acquired from Axxora. Segment operating expenses, such as selling, general and administrative, increased by approximately $1.4 million during the 2008 period due to the inclusion of $1.5 million of Axxora’s expenses for the three months ended October 31, 2007, offset primarily by lower payroll and related expenses for the New York operations.

     The Therapeutics segment’s loss before income taxes was approximately $0.9 million for the three months ended October 31, 2007 as compared to a loss of $1.1 million for the 2007 period. The decrease in the loss of $0.2 million was primarily due to decreases in clinical trial activities, consulting, payroll and payroll related costs.

     The Clinical Laboratory segment’s income before taxes was $1.4 million for the three months ended October 31, 2007 as compared to $0.4 million in the 2007 period. The 2008 period was positively impacted by an increase in laboratory service revenues of $3.2 million or 40%, due to the expansion of an insurance provider agreement effective January 2007, which increased gross profit by approximately $1.6 million. The increase in gross profit was offset by an increase in the provision for uncollectible accounts receivable for the three months ended October 31, 2007 of approximately $0.3 million over the 2007 period. The increase in the provision for uncollectible accounts receivable and other operating expenses of $.3 million is attributed to the 40% increase in service revenues.

     The Other segment’s loss before taxes for the three months ended October 31, 2007 of approximately $3.0 million was comparable to the operating loss in the 2007 period. The Other segment’s 2008 period loss reflects an increase in general and administrative expenses of $0.2 million and legal expenses of $0.3 million offset by an increase in interest income of $0.5 million due to increased invested cash balances generated from the issuance of common stock in fiscal 2007. The increase in legal costs is attributed to ongoing patent litigation.

20

---

Liquidity and Capital Resources

At October 31, 2007, our cash and cash equivalents were $103.8 million, a decrease of $1.4 million from cash and cash equivalents at July 31, 2007. The decrease in cash during the three months ended October 31, 2007 was primarily due to the cash flow impacts discussed below. The Company had working capital of $113.2 million at October 31, 2007 compared to $113.9 million at July 31, 2007. The decrease in working capital was primarily the result of the decrease in cash and cash equivalents and other changes in current assets of $1.9 million offset by a decrease in current liabilities of approximately $1.2 million due to the timing of disbursements for trade payables and accrued expenses during the three month period.

Net cash used in operating activities for the three months ended October 31, 2007 was approximately $1.2 million as compared to net cash provided by operating activities of $2.3 million for the three months ended October 31, 2006. The increase in net cash used by operating activities in the 2008 period over the 2007 period of $3.5 million was primarily due to changes in operating assets and liabilities including: accounts receivable, accounts payable and accrued liabilities.

Net cash used in investing activities was approximately $0.6 million as compared to $0.3 million in the year ago period, primarily due to an increase in capital expenditures.

Net cash provided financing activities was approximately $0.3 million versus net cash provided by investing activities of $0.1 million in the year ago period due to an increase in the proceeds from exercise of stock options.

The Company believes that its current cash position is sufficient for its foreseeable liquidity and capital resource needs over the next 12 months, although there can be no assurance that future events will not alter such view.

Contractual Obligations

There were no significant changes to the Contractual Obligations disclosed in the Annual Report on Form 10-K for the 2007 fiscal year.

Management is not aware of any material claims, disputes or settled matters concerning third party reimbursement that would have a material effect on our financial statements.

Critical Accounting Policies

General

The Company’s discussion and analysis of its financial condition and results of operations are based upon Enzo Biochem, Inc.’s consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires the Company to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses; these estimates and judgments also affect related disclosure of contingent assets and liabilities. On an on-going basis, we evaluate our estimates, including those related to contractual adjustments, allowance for uncollectible accounts, inventory, intangible assets and income taxes. The Company bases its estimates on experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

21

---

Product revenues

Revenues from product sales are recognized when the products are shipped and title transfers, the sales price is fixed or determinable and collectibility is reasonably assured. The revenue from the non-exclusive distribution agreements are recognized when shipments are made to their respective customers and reported to the Company. The Company has certain non-exclusive distribution agreements, which provide for consideration to be paid to the distributors for the manufacture of certain products. The Company records such consideration provided to distributors under these non-exclusive distribution agreements as a reduction to product revenues. The Company did not recognize any revenue from these distributors during the 2008 and 2007 periods. During the quarter ended October 31, 2007, one customer in the Life Science segment represented 16% of total product revenues.

Royalties

Royalty revenues are recorded in the period earned. Royalties received in advance of being earned are recorded as deferred revenues.

License fees and multiple element arrangements

When evaluating multiple element arrangements, the Company considers whether the components of the arrangement represent separate units of accounting as defined in Emerging Issues Task Force (“EITF”) Issue No. 00-21, Revenue Arrangements with Multiple Deliverables (“EITF 00-21”). Application of this standard requires subjective determinations and requires management to make judgments about the fair value of the individual elements and whether such elements are separable from the other aspects of the contractual relationship.

Revenues - Clinical laboratory services

Revenues from the clinical laboratory are recognized upon completion of the testing process for a specific patient and reported to the ordering physician. These revenues and the associated accounts receivable are based on gross amounts billed or billable for services rendered, net of a contractual adjustment, which is the difference between amounts billed to payers and the expected approved reimbursable settlements from such payers.

The following is a table of the Clinical Labs segment’s net revenues and percentages by revenue category for the three months ended October 31, 2007 and 2006:

Net revenues		Three months ended					Three months ended
		October 31, 2007					October 31, 2006
Revenue category		(In 000’s)		(in %)			(In 000’s)		(in %)
Medicare		2,145		19			$ 1,954		24
Third-party payer		6,508		58			5,011		62
Patient self-pay		1,516		13			632		8
HMO’s		1,097		10			456		6
Total		$ 11,266		100	%		$ 8,053		100	%

The Company provides services to certain patients covered by various third-party payers, including the Federal Medicare program. Revenue, net of contractual adjustments, from direct billings under the Federal Medicare program during the three months ended October 31, 2007 and 2006 were approximately 19% and 24%, respectively, of the clinical lab segment’s revenue. Laws and regulations governing Medicare are complex and subject to interpretation for which action for noncompliance includes fines, penalties and exclusion from the Medicare programs.

The Company believes that it is in compliance with all applicable laws and regulations and is not aware of any pending or threatened investigations involving allegations of potential wrongdoing.

22

---

Other than the Medicare program, one provider whose programs are included in the “Third-party payer” and “Health Maintenance Organizations” (“HMO’s”) categories represents 25% of the Clinical Labs services net revenue for the three months ended October 31, 2007. Other than the Medicare program, no other provider included in the “Third-party payer” and HMO’s categories exceeded 10% of the Clinical Labs services net revenue for the three months ended October 31, 2006.

Contractual Adjustment

The Company’s estimate of contractual adjustment is based on significant assumptions and judgments, such as its interpretation of payer reimbursement policies, and bears the risk of change. The estimation process is based on the experience of amounts approved as reimbursable and ultimately settled by payers, versus the corresponding gross amount billed to the respective payers. The contractual adjustment is an estimate that reduces gross revenue, based on gross billing rates, to amounts expected to be approved and reimbursed. Gross billings are based on a standard fee schedule we set for all third-party payers, including Medicare, HMO’s and managed care. The Company adjusts the contractual adjustment estimate quarterly, based on its evaluation of current and historical settlement experience with payers, industry reimbursement trends and other relevant factors. The other relevant factors that affect our contractual adjustment include the monthly and quarterly review of: 1) current gross billings and receivables and reimbursement by payer, 2) current changes in third party arrangements. 3) the growth of in-network provider arrangements and managed care plans specific to our Company.

Our clinical laboratory business is primarily dependent upon reimbursement from third-party payers, such as Medicare (which principally serves patients 65 and older) and insurers. We are subject to variances in reimbursement rates among different third-party payers, as well as constant changes of reimbursement rates. Changes that decrease reimbursement rates or coverage would negatively impact our revenues. The number of individuals covered under managed care contracts or other similar arrangements has grown over the past several years and may continue to grow in the future. In addition, Medicare and other government healthcare programs continue to shift to managed care. These trends will continue to reduce our revenues per test.

During the three months ended October 31, 2007 and 2006, the contractual adjustment percentages, determined using current and historical reimbursement statistics, were 80.6% and 76.9%, respectively, of gross billings. The Company believes the negative impact on revenues from the decline in reimbursement rates or the shift to managed care, other primary third-party payers, or similar arrangements may be offset by the positive impact of an increase in the number of tests we perform. However, there can be no assurance that we can increase the number of tests we perform or that if we do increase the number of tests we perform, that we can maintain that higher number of tests performed, or that an increase in the number of tests we perform would result in increased revenue.

The Company estimates (by using a sensitivity analysis) that each 1% point change in the contractual adjustment percentage could have resulted in a change in Clinical Labs services revenues of approximately $580,000 for the three months ended October 31, 2007, and could have resulted in a change in the net accounts receivable of approximately $325,000 as of October 31, 2007.

Our clinical laboratory financial billing system records gross billings using a standard fee schedule for all payers and does not record contractual adjustment by payer at the time of billing. Therefore, we are unable to quantify the effect of contractual adjustment recorded during the current period that relate to revenue recorded in a previous period. However, we can reasonably estimate our contractual adjustment to revenue on a timely basis based on our quarterly review process, which includes:

• an analysis of industry reimbursement trends;

• an evaluation of third-party reimbursement rates changes and changes in reimbursement arrangements with third-party payers;

• a rolling monthly analysis of current and historical claim settlement and reimbursement experience with payers;

• an analysis of current gross billings and receivables by payer.

23

---

Accounts Receivable and Allowance for Doubtful Accounts

Accounts receivable are reported at realizable value, net of allowances for doubtful accounts, which is estimated and recorded in the period of the related revenue.

The following is a table of the Company’s net accounts receivable by segment. The clinical laboratory segment’s net receivables are detailed by billing category and as a percent to its total net receivables. At October 31, 2007 and July 31, 2007, approximately 66% and 69%, respectively, of the Company’s net accounts receivable relates to its clinical laboratory business, which operates in the New York Metropolitan and New Jersey Metropolitan areas.

The Life Sciences segment’s accounts receivable, of which $1.8 million or 36% and $1.8 million or 39% represents foreign receivables as of October 31, 2007 and July 31, 2007 respectively, includes royalties and license fee income receivables of $2.3 and $1.8 million, as of October 31, 2007 and July 31, 2007, respectively, of which approximately $1.9 and $1.5 million, respectively is from Digene Corporation (Note 12).

Net accounts receivable		As of					As of
		October 31, 2007					July 31, 2007
Billing category		(In 000’s)		(in %)			(In 000’s)		(in %)
Clinical laboratory
Medicare		$ 1,770		19	%		$ 1,628		17	%
Third-party payers		4,561		48			5,856		60
Patient self-pay		2,824		30			1,678		17
HMO’s		408		3			671		6
Total Clinical laboratory		$ 9,563		100	%		$ 9,833		100	%
Total Life Sciences		4,971					4,520
Total accounts receivable		$ 14,534					$ 14,353

Changes in the Company’s allowance for doubtful accounts are as follows:

In 000’s		October 31, 2007			July 31, 2007
Beginning balance		$ 1,404			$ 1,033
Provision for uncollectible accounts receivable		1,159			4,653
Write-offs		(1,324	)		(4,282	)
Ending balance		$ 1,239			$ 1,404

For the Clinical Labs segment, the allowance for doubtful accounts represents amounts that the Company does not expect to collect after the Company has exhausted its collection procedures. The Company estimates its allowance for doubtful accounts in the period the related services are billed and adjusts the estimate in future accounting periods as necessary. It bases the estimate for the allowance on the evaluation of historical collection experience, the aging profile of accounts receivable, the historical doubtful account write-off percentages, payer mix, and other relevant factors.

The allowance for doubtful accounts includes the balances, after receipt of the approved settlements from third-party payers for the insufficient diagnosis information received from the ordering physician, which result in denials of payment, and the uncollectible portion of receivables from self payers, including deductibles and copayments, which are subject to credit risk and patients’ ability to pay. During the three months ended October 31, 2007 and 2006, the Company determined an allowance for doubtful accounts less than 210 days and wrote off 100% of accounts receivable over 210 days, as it assumed those accounts are uncollectible, except for certain fully reserved balances, principally related to Medicare, until the payer’s filing date deadline occurs.

24

---

The Company’s collection experience on Medicare receivables beyond 210 days has been insignificant. The Company adjusts the historical collection analysis for recoveries, if any, on an ongoing basis.

The Company’s ability to collect outstanding receivables from third-party payers is critical to its operating performance and cash flows. The primary collection risk lies with uninsured patients or patients for whom primary insurance has paid but a patient portion remains outstanding. The Company also assesses the current state of its billing functions in order to identify any known collection or reimbursement issues in order to assess the impact, if any, on the allowance estimates, which involves judgment. The Company believes that the collectibility of its receivables is directly linked to the quality of its billing processes, most notably, those related to obtaining the correct information in order to bill effectively for the services provided. Should circumstances change (e.g. shift in payer mix, decline in economic conditions or deterioration in aging of receivables), our estimates of net realizable value of receivables could be reduced by a material amount.

Billing for laboratory services is complicated because of many factors, especially: the differences between our standard gross fee schedule for all payers and the reimbursement rates of the various payers we deal with, disparity of coverage and information requirements among the various payers, and disputes with payers as to which party is responsible for reimbursement.

The following tables indicate the Clinical Labs Aged Gross Receivables by Payer Group (in 000’s), which is prior to adjustment to gross receivables for 1) contractual adjustment, 2) fully reserved balances not yet written off and 3) other revenue adjustments.

															Third
															Party
(in 000’s)			Total						Medicare						Payers						Self-pay						HMO’s
As of October 31, 2007			Amount		%				Amount		%				Amount		%				Amount		%				Amount		%
1-30 days		$	15,568		52	%		$	3,609		45	%		$	2,307		31	%		$	6,907		62	%		$	2,745		84	%
31-60 days			4,087		14	%			723		9	%			1,369		18	%			1,833		16	%			162		5	%
61-90 days			3,075		10	%			1,007		12	%			1,072		15	%			870		8	%			126		4	%
91-120 days			2,192		7	%			643		8	%			814		11	%			657		6	%			78		2	%
121-150 days			1,808		6	%			496		6	%			759		10	%			471		4	%			82		3	%
Greater than 150 days* .			3,258		11	%			1649		20	%			1,120		15	%			430		4	%			59		2	%
Totals		$	29,988		100	%		$	8,127		100	%		$	7,441		100	%		$	11,168		100	%		$	3,252		100	%
															Third
															Party
(in 000’s)			Total						Medicare						Payers						Self-pay						HMO’s
As of July 31, 2007			Amount		%				Amount		%				Amount		%				Amount		%				Amount		%
1-30 days		$	18,120		50			$	3,630		40			$	2,309		30			$	8,561		59			$	3,620		69
31-60 days			5,306		15				614		7				1,434		19				2,731		19				527		10
61-90 days			3,795		10				629		7				1,222		16				1,735		12				209		4
91-120 days			2,811		8				530		6				732		10				881		6				668		13
121-150 days			1,589		4				405		4				779		10				263		2				142		2
Greater than 150 days** .			4,760		13				3,246		36				1,173		15				226		2				115		2
Totals		$	36,381		100	%		$	9,054		100	%		$	7,649		100	%		$	14,397		100	%		$	5,281		100	%

*	Total includes $1,041 fully reserved over 210 days as of October 31, 2007.
**	Total includes $2,432 fully reserved over 210 days as of July 31, 2007.

25

---

Income Taxes

The Company accounts for income taxes under the liability method of accounting for income taxes. Under the liability method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. The liability method requires that any tax benefits recognized for net operating loss carry forwards and other items be reduced by a valuation allowance where it is not more likely than not the benefits will be realized in the foreseeable future. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Under the liability method, the effect of a change in tax rates on deferred tax assets and liabilities is recognized in income in the period that includes the enactment date.

On August 1, 2007, the Company adopted Financial Accounting Standards Board (FASB) Interpretation No. 48, “Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109” (FIN 48). The interpretation requires that we determine whether it is more likely than not that a tax position will be sustained upon examination by the appropriate taxing authority. If a tax position meets the more likely than not recognition criteria, FIN 48 requires that the tax position be measured at the largest amount of benefit greater than 50 percent likely of being realized upon ultimate settlement. The adoption of FIN 48 has not had a material effect on our financial condition or results of operations.

Inventory

The Company values inventory at the lower of cost (first-in, first-out) or market. Work-in-process and finished goods inventories consist of material, labor, and manufacturing overhead. On a quarterly basis, we review inventory quantities on hand and analyze the provision for excess and obsolete inventory based on our estimate of sales forecasts based on sales history and anticipated future demand. Our estimate of future product demand may not be accurate and we may understate or overstate the provision for excess and obsolete inventory. Accordingly, unanticipated changes in demand could have a significant impact on the value of our inventory and results of operations. At October 31, 2007 and July 31, 2007, respectively, the reserve for excess and obsolete inventory was $428,000 and $379,000.

Recent Accounting Pronouncements

On August 1, 2007, the Company adopted FIN 48. FIN 48 prescribes a "more-likely-than-not" threshold for the recognition and derecognition of tax positions, provides guidance on the accounting for interest and penalties relating to tax positions and requires that the cumulative effect of applying the provisions of FIN 48 be reported as an adjustment to the opening balance of retained earnings or other appropriate components of equity or net assets in the statement of financial position. The Company did not have any significant unrecognized tax positions and there was no material effect on our financial condition or results of operations as a result of implementing FIN 48. See Note 10, "Income Taxes," for additional information relating to the Company's implementation of FIN 48.

In September 2006, the FASB issued Statement of Financial Accounting Standards No. 157, “Fair Value Measurements” (SFAS 157). SFAS 157 establishes a common definition of fair value of financial instruments sets a framework for measuring fair value and expands disclosure about such fair value measurements. The Statement applies only to fair value measurements that are already required or permitted by other accounting standards and is effective for fiscal years beginning after November 15, 2007. The Company does not believe that the adoption of FAS 157 will have a material effect on the Company’s financial statement disclosures.

26

---

In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities - Including an amendment of FASB Statement No. 115.” SFAS No. 159 permits entities to choose to measure many financial instruments and certain other items at fair value that are not currently required to be measured at fair value. The objective of SFAS No. 159 is to provide opportunities to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply hedge accounting provisions. SFAS No. 159 also establishes presentation and disclosure requirements designed to facilitate comparisons between companies that choose different measurement attributes for similar types of assets and liabilities. SFAS No. 159 is effective for fiscal years beginning after November 15, 2007. The Company has not completed the assessments as to whether the impact of the adoption of SFAS No. 159 will have a material impact on its financial condition or results of operations.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Foreign Currency Exchange Rate Risk

The financial reporting of our non-US. subsidiaries is denominated in currencies other than the U.S. dollar. Since the functional currency of our non-US. subsidiaries is the local currency, foreign currency translation adjustments are accumulated as a component of accumulated other comprehensive income in stockholders’ equity. Assuming a hypothetical aggregate change of 10% in the exchange rates of foreign currencies against the U.S. dollar at October 31, 2007, our assets and liabilities would increase or decrease by approximately $1,425,000 and $510,000, respectively, and our net sales and net earnings would increase or decrease by approximately $1,194,000 and $39,000, respectively, on an annual basis. We also maintain intercompany balances and loans receivable with subsidiaries with different local currencies. These amounts are at risk of foreign exchange losses if exchange rates fluctuate. Assuming a hypothetical aggregate change of 10% in the exchange rates of foreign currencies against the U.S. dollar at October 31, 2007, our pre-tax earnings would be favorably or unfavorably impacted by approximately $24,000 on an annual basis.

Interest Rate Risk

Our excess cash is invested in highly liquid, short term (30 – 90 days) commercial paper and money market funds with high credit ratings. Changes in interest rates may affect the investment income we earn on cash and cash equivalents debt and therefore affect our cash flows and results of operations. As of October 31, 2007, we were exposed to interest rate change market risk with respect to our short-term investments of $100.8 million. The short-term investments earn interest ranging from 4.60% to 5.50% . Each 100 basis point (or 1%) fluctuation in interest rates would increase or decrease interest income on the short-term investments by approximately $1 million on an annual basis.

27

---

Item 4. Controls and Procedures

     (a) Evaluation of Disclosure Controls and Procedures

As of the end of the period covered by this report, the Company’s management conducted an evaluation (as required under Rules 13a-15(b) and 15d-15(b) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) of the Company’s “disclosure controls and procedures” (as such term is defined under the Exchange Act), under the supervision and with the participation of the principal executive officer and the principal financial officer. Based on this evaluation, the principal executive officer and the principal financial officer concluded that the Company’s disclosure controls and procedures are effective as of the end of the period covered by this report. Notwithstanding the foregoing, a control system, no matter how well designed and operated can provide only reasonable, not absolute, assurance that it will detect or uncover failures within the Company to disclose material information otherwise required to be set forth in the Company’s periodic reports.

     (b) Changes in Internal Controls over Financial Reporting

There was no change in the Company’s internal controls over financial reporting during the Company’s most recently completed fiscal period that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II – OTHER INFORMATION

Item 1.     Legal Proceedings

There have been no material developments with respect to previously reported legal proceedings discussed in the annual report on Form 10-K for the fiscal year ended July 31, 2007 filed with the Securities and Exchange Commission.

Item 1A.     Risk Factors

There have been no material changes from the risk factors disclosed in Part 1, Item 1, of the Company's Annual Report on Form 10-K for the fiscal year ended July 31, 2007.

Item 6.     Exhibits

	Exhibit No.	Exhibit
	31.1	Certification of Elazar Rabbani, Ph.D. pursuant to Section 302 of
		the Sarbanes-Oxley Act of 2002.
	31.2	Certification of Barry Weiner pursuant to Section 302 of the
		Sarbanes-Oxley Act of 2002.
	32.1	Certification of Elazar Rabbani, Ph.D. pursuant to 18 U.S.C. ss.
		1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
		Act of 2002.
	32.2	Certification of Barry Weiner pursuant to 18 U.S.C. ss.1350, as
		adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
		2002.

28

---

SIGNATURES

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

		ENZO BIOCHEM, INC.
		(Registrant)
Date: December 10, 2007		by:  /s/Barry Weiner
		Chief Financial Officer

29

---