We operate in one industry segment involving medical screening devices, diagnostics, and supplies. All of our operations during the reporting period were conducted and managed within this segment, with a single management team that reports directly to our Chief Executive Officer. For information on revenues, profit or loss and total assets, andamong other financial data, attributable to the Company’sour operations, see the consolidated financial statements included herewith.

We plan to sell an integrated family of cost-effective products for the detection diagnosis and treatmentdiagnosis of cancer under the trade name ofCytoCore Solutions^®.CytoCore Solutions products are intended to address sample collection, specimen preparation, specimen evaluation (including detection/screening and diagnosis), treatment and patient monitoring within vertical markets related to specific cancers. CurrentCytoCore Solutionsproducts are focused upon cervical and breast cancer. CCI plansWe expect that this focus will later be expanded to include other gynecological cancers as well as bladder, lung, oral and breastanal cancers, among others. Within each of these markets, CCI anticipateswe anticipate that theCytoCore Solutionsproducts will be sold as individual value-added drop-in replacements for existing products and as integrated systems that improve the efficiency and effectiveness of clinical and laboratory operations.

Total revenue for the years ended December 31, 20092012 and 20082011 were $198,000 and $24,000, respectively. Sales of the collection system for the detection of breast cancer totaled $179,000, or 90% of total revenues, in 2012. There was $44,000no revenue from this system in 2011. License fee revenue totaled $17,000 or 9% in 2012 and $125,000, respectively. Of this total revenue, license fees$24,000 in 2011. Sales of ourSoftPaP^® product accounted for $40,000,revenue of $2,000, or 91%1%, of our revenue in 2009 and $66,000, or 53%, of our revenue in 2008. Sales of our current productSoftPap^®accounted for revenue of $4,000, or 10%, of our revenue in 2009 and $59,000, or 47%, of our revenue in 2008.

Clinical diagnostics laboratory analyzeslaboratories analyze or otherwise evaluatesevaluate samples obtained from the human body for the purpose of detecting the presence of disease, characterizing it as to type and extent,and/or monitoring the efficacy of treatment. The starting point in any clinical diagnostic test is the collection of a sample that contains the analyte of interest. To a very large extent, the characteristics of the sample collected determine the quality of the results of any tests performed on the sample. The sensitivityand/or accuracy of a test is, for example, likely to be reduced if the sample collection device or method does not capture a sufficient amount of the target analyte, alters the analyte of interest, or collects significant quantities of substances that interfere with the analysis. For this reason, sample collection is aone of our major focus of CytoCore.

We currently manufactures and sellsplan to sell theSoftPAP^®devicefor the collection of cervical cell samples that are used in the detection of cervical dysplasia, cancer and human papillomavirus (“HPV”) infections. CCI believesWe believe thatSoftPAP, which has been cleared by the Food and Drug Administration (“(‘FDA”) for sale in the United States and which is CE Marked for international distribution, is positioned as a premium value-added alternative to the spatula, broom and brush-style devices that have traditionally been used for these purposes. Unlike these traditional devices,SoftPAPcollects only exfoliated cells and does not scrape, cut or abrade the cervix. This unique sample collection method has been shown in clinical trials to reduce the frequency of false negative and false positive results when the sample is evaluated by cytological methods to detect the presence of dysplasia and cancer. A reduction in the false negative rate means that a greater percentage of patients who have cervical dysplasia, cancer or similar abnormalities are detected during cervical cancer screening (Pap testing) and can, therefore, be treated. A reduced false positive rate means that fewer patients are falsely identified as having cervical dysplasia or cancer, thus sparing these patients the unnecessary stress, discomfort and expense of the additional testing needed to verify that

We entered into an agreement with NeoMatrix, LLC, to sell their^® Halo System in several European countries and have an option to expand sales into the US and other countries in the future. TheHalo System, which is cleared by the FDA and CE marked, provides a convenient and non-invasive means for the collection of nipple aspirate fluid (NAF) that can be evaluated to provide an estimate of the risk that a woman has of developing breast cancer. As sample collection using Halo is fast, non-invasive, and can easily be performed in a physician’s office, we envision it becoming part of routine physical examinations in a manner analogous to a Pap smear.

Current methods for breast cancer screening primarily comprise manual palpitation of the breast and radiographic methods including classical radiography and mammography. Regular manual self examination is recommended for all women and periodic breast cancer screening using radiography or mammography is recommended for all women over the age of 40. These methods, however, are widely recognized as not providing the sensitivity needed in order to detect small early stage lesions and are adversely affected by the presence of high density breast tissue. The Halo method, on the other hand, can provide the sensitivity needed in order to detect early stage lesions and is largely insensitive to breast density. These characteristics make the Halo method suitable for routine use by women of all ages. In addition, unlike manual examination and radiography, Halo produces a sample that can be evaluated using standard cytological methods, thereby allowing patient stratification without the need for additional procedures.

SoftKit

SoftKitis a low cost device that captures a sample that can be evaluated to provide an assessment of the health of the entire female genital tract. CCI has obtained an exclusive license to sell PadKitWe are in the final stages of developingSoftKit for the collection of cellular samples that can be screened for a variety of gynecological cancers (including cervical, endometrial, and ovarian), and for the collection of gynecological samples to be tested for the presence of HPV. In the future, CCI may obtain licenses to sell PadKit forHPV and additional indications such as the collection of samples for sexually transmitted disease (“STD”) testing. PadKitSoftKit addresses a number of market niches and segments that are not addressed effectively bySoftPAPor traditional gynecological sampling devices. CCI believesWe believe that PadKit thusSoftKit complementsSoftPAPin theCytoCore Solutionsfamily of products. PadKitSoftKit is designed to eliminate the need for assistance from a medical professional when collecting gynecological samples for many screening applications. CCI believesWe believe that this feature, in addition to the range of tests that can be performed on a PadKitSoftKit sample and PadKit’sSoftKit’s low cost, makes PadKitSoftKit particularly attractive for use in large scale public health screening programs. CCI isWe are also evaluating the use of PadKitSoftKit in an internet-based, fee-for-service testing program outside of the United States. AdditionalStates.Additional uses, such as providing a simple and rapid means of monitoring patients who have had an abnormal Pap test or who are undergoing treatment for a gynecological cancer, are also being explored.

Cervical cytology specimens are traditionally prepared as “smears” where the cells on the collecting device are literally wiped or smeared onto a microscope slide. In the mid-1990s, an alternative method, variously called a “monolayer” or “liquid-based” preparation (“LBP”), was introduced. In this method, cells are washed off of the collection device into a preservative solution to form a cell suspension. A portion of this cell suspension is then transferred to a microscope slide. LBPs presently account for about 80% of the cervical cytology slides prepared in the United States, but despite the technical benefits of LBPs, only about 20% of the cervical cytology slides in the European Union and much lower percentages in the rest of the world are prepared in this manner. The primary limitations to greater adoption of LBPs outside of the United States are the high equipment and ancillary supply costs associated with the two predominant LBP methods.

We are party to an agreement with Synermed Select Partners, Inc. (“Synermed”) under which CCIwe will packageprivate label and market theirGluCyte^tm cell preservative with CCI’sourSoftPAP, Haloand PadKitSoftKit cell collection devices. CCIWe selected this preservative for inclusion in convenience kits due to both its technical performance and because itslides can be performedprepared manually from cells in this preservative, thus avoiding the high equipment and supply costs incurred when using competing methods. CCI believesWe believe that this methodology provides a cost effective means for laboratories to transition from smears to high quality LBPs. CCI intendsWe intend to introduce the manual version of convenience kits containingcombining the preservative withSoftPAPand the preservativeHalo in the European Union to address the demand for LBPs in that part of the world. CCI expectsWe expect that distribution of such manual kits will then be expanded by region. In parallel, CCI planswe plan to introduce a cytocentrifuge-based slide preparation system for use in low volume laboratories and to collaborate with Cell Solutions, an affiliate of Synermed, on selling the Cell Solutions automated slide preparation system to high volume laboratories in these countries. Unlike the rest of the world, where this preservative is already approved for use, it is approved only as a general cytology preservative in the United States and requires additional FDA approval before it can be sold for use in specific applications such as cervical cytology. CCIWe and Cell Solutions have agreed to collaborate on obtaining the necessary FDA approval. CCI isWe are also working with the manufacturer of PadKit to validate the preservative for this application,withSoftKit where CCI believeswe believe its superior ability to process bloody samples is of particular relevance. An independent clinical trial of PadKitrelevance and are evaluating other preservatives for use in combination with the preservative has recently been initiated by the UCLA School of Nursing.

Once a cytology specimen has been deposited onto a microscope slide, it is stained in order to assist the cytologist in detecting and identifying the various features of the deposited cells that are relevant to determining whether the cells are normal, dysplastic or cancerous. CCI isWe are developing several proprietary stains for use in cervical cytology and other screening applications. These stains are designed for automated evaluation using the AIPS Imager (see below), but some may also be evaluated visually or using a flow cytometer. CCI believesA study has been initiated in Germany to validate certain of these stains for use in cervical cytology as well as for use in other cytological assays. We believe that an added benefit of the CCIour proprietary stains is that after the specimen has been evaluated using these stains, it can be counterstained with Pap stain for conventional confirmation and archiving.

When “reading” a cytology specimen, a cytologist traditionally examines the specimen by eye through a conventional optical microscope to detect, classify, record, mark, and report abnormal cells. While performing this examination, the cytologist is also referring to the patient’s medical history, assessing specimen adequacy, and capturing a variety of metrics and other information needed for regulatory compliance and operational purposes. Despite the widespread deployment of computers in the laboratory, many of these operations are still largely paper-based. Even in laboratories where medical histories are available to the cytologists in electronic form and reports are prepared on a computer, it is not uncommon for the data, and sometimes even draft reports, to be initially captured on paper and then transcribed.

In 1994 AccuMed, a corporate predecessor to CytoCore, introduced the AcCell^tm® computer-assisted cytology workstation. AcCell provided a means to assist the cytologist by automatically capturing the information relevant to screening cytology specimens in electronic form, managing the captured information, and automatically generating the necessary specimen, regulatory and operational reports. The benefits of this approach were clearly demonstrated in several cytology laboratories where installation of the AcCell system reduced operating costs, eliminated transcription errors, and reduced the time needed to generate a reportable result.

The AIPS^tmAIPS™ Workstation is an updated and improved version of the AcCell device.Workstation. Like the AcCell, the AIPS Workstation is intended to reduce operating costs and improve operating efficiency in the cytology laboratory. Among the improvements and new features incorporated in theAIPS Workstation are a more efficient user interface, improved data management, workflow management and communications capabilities, and new features such as image capture, audio dictation, a “consult” mode, and support for continuing education and proficiency testing. In keeping with the AcCell tradition, patented context-sensitive software allows these capabilities to be provided in an unobtrusive manner that permits the cytologist to concentrate on evaluating specimens rather than on operating the instrument.

We believe that theAIPS Workstation hardware also incorporates several major advances over the AcCell, competing “computerized microscope” systems, and conventional cytology microscopes.“Fly-by-wire” “Fly-by-wire” technology, for example, allows the user to switch seamlessly between manual and computer-controlled specimen positioning and focusing and makes possible many of the improvements in system ergonomics. This is important as it has been documented that the poor ergonomics of conventional cytology microscopes are responsible for causing many cytologists to leave the field due to carpal tunnel syndrome and related medical problems. TheAIPS Workstation is expressly designed to address the root causes of many of these ergonomic problems and is, therefore, expected to improve the retention of trained cytologists, who are in increasingly short supply, by the laboratory. Unlike the AcCell and other computerized microscopes, the AIPS Workstation does not require an external PC for operation. Instead, all necessary computing power is embedded within the workstation frame. This provides multiple benefits ranging from eliminating a considerable quantity of equipment from a cytologist’s typically cramped work area to facilitating the periodic equipment validations that laboratories are required to perform.

In addition to use as part of a cytology screening system, theAIPS Workstation can also be used in conjunction with the AIPS Imager for automated cytological analysis, and in many other applications in which a conventional microscope is used such as pathology and hematology in a clinical laboratory, and applications outside of the clinical laboratory that range from drug discovery and quality control to metallurgy.

The intent of a medical screening program is to differentiate between patients who show no evidence of the target disease state (“normals”) and those who do (“abnormals”). Patients who have abnormal screening results are offeredfollow-up testing to confirm the presence of the disease, diagnosis to classify the disease state and determine its extent and, where appropriate, treatment for the disease. Patients who have a normal screening result are not offered these services. In order to allow scarce medical resources to be focused upon those patients having the greatest need, screening programs are structured to differentiate between normal and abnormal patients as accurately, rapidly, reliably and cost effectively as possible.

Although the evaluation of cervical cytology specimens by automated image analysis can be traced back to the 1940s and a number of capable systems have been developed, the FDA has not to date approved any automated image analysis system to “diagnose”, or classify as normal or abnormal, cervical cytology specimens without human intervention. The FDA has, however, approved several systems including the AccuMed TracCell^tmTracCell™ for use in “mapping” or “location-guided screening”. In these systems, image analysis is used to identify potentially abnormal cells which are then presented to a cytologist for classification. This approach, which has been shown to reduce the time required to differentiate between normal and abnormal specimens, is starting to behas been increasingly adopted by high volume laboratories, but is presently too expensive for most laboratories. We believe that our imager will be marketable at a price that will be affordable for most laboratories.

TheAIPS^tm Imager is an advanced version of the AccuMed TracCell location-guided cytology screening system that has been optimized for use with theour proprietary CCI stains described above.stains. As these stains are designed to be more effective in highlighting the cellular abnormalities associated with cancer and precancerous conditions than the traditional Pap stain used in conjunction with other automated cytology screening instruments, theAIPS Imager is expected to deliver superior performance when used in cytological screening applications. TheAIPS Imager is intended to work in conjunction with theAIPS Workstation.Workstation. When a specimen slide is evaluated by theAIPS Imager, the locations on the slide of any potentially abnormal cells are recorded to a data file. The slide is then movedtransmitted to anAIPS Workstation where the data file guides the workstation to present each of the potentially abnormal cells detected to the cytologist for classification.

We plan several additional software modules that will expand the capabilities of theAIPS Imager.Imager. These modules may include those for the analysis of specimens stained with our new CytoCore stains, bulk image capture and archiving, generation of time-optimized routing plans to maximize the efficiency of specimen review on anAIPS Workstation, and a “preview” module that assists the cytologist in evaluating difficult specimens. CCI hopesWe hope that this product family will also be expanded by the addition of application kits consisting of the stains and associated software that are needed for the automated screening of other types of cytology specimens.

Our core product development strategy is to develop theCytoCore Solutions System and its component products, enhance such products, and develop new and innovative diagnostic and screening devices for the early detection of various types of cancer. To implement this strategy, we have and will continue to utilize internal resources, sponsored and collaborative agreements with medical institutions, strategic partnerships with commercial entities, and licenses and acquisitions of intellectual property.

In the future, CytoCore anticipateswe anticipate expanding itsour portfolio to include other cytological assays and tests, tests for STDs, including HPV, and other markers of vaginal health, and medicinal products related to the treatment of diseases of the female reproductive system. TheIf we obtain significant funding our CytoCore product pipeline for 20112013 calls for the introduction of an workstation for computer assisted cytology andSoftKit, an improved cytology preservative for use withSoftPAP.SoftPAP, HaloIn 2013 CytoCore expects andSoftKit, and possibly a novel cytological stain.If we obtain significant funding we expect to introduce an automated imaging systemthe AIPS Workstation and to introduce the AIPS Imager with assay reagents for the location-guided screening of cervical cancer specimens and the PadKit sample collection device.in 2014. Reagents for use in the automated screening for additional conditions such as endometrial and bladder cancer are expected to be introduced in late 2014.

Our immediate chief objective is to achieve broad market acceptance of theSoftPAPcollection device, theHaloSystem and theCytoCore SolutionsSystem as a new screening and diagnostic tool for cervical and breast cancer screening, offering an alternativealternatives to the current Pap test methods. It is estimated thatAccording to Centers for Disease Control, there are approximately 6073 million annual Pap tests and 30 million mammograms given in the United States.States each year. Worldwide, approximately 180 million Pap and 60 million breast cancer screening tests are given andperformed annually. The potential market for each of these tests amounts to approximately 1.5 to 1.8 billion women require annual Pap testing.women. Many studies have shown that between 70 and 80% of a person’s entire healthcare expenditures over their whole life occur in the last four to six months of life. As a result, more and more attention is being given to the early detection of a disease or condition. Bio-molecular screening, diagnostic, and treatment products consequently are being developed to detect disease states early so they can be dealt with before they become life threatening and expensive to treat. CytoCore isWe are designing and developing its products to satisfy this paradigm shift and focus more on diagnostic methods and tools for early detection.

We also believe we are well positioned to capitalize on trends affecting the world’s population. The female population of the world is approximately 3 billion, of which 2 billion fallfalls in the range where reproductive healthcare monitoring is necessary and effective. This group falls into two sub-groups: (1) females in the United States and other countries where effective healthcare is available to most and where healthcare is more or less effective (estimated at between 300 and 400 million women), and (2) the remainder of the female world population, where healthcare is limited or non-existent. CytoCore believes itsWe believe our products can address the needs of both of these groups since the principal requirements for both groups —– minimal cost, near point-of-care delivery, ease of use, and reduced reliance on highly-trained and skilled professionals —- are the same. CytoCore isWe are developing itsour initial products to serve the needs of females in developed nations and economies, but anticipatesanticipate subsequent deployment of such products to less well-developed countries.

These trends are set against the major advances that are occurring in many areas related to healthcare. These advances range from a better and more nuanced understanding of disease states to the movement of genomics, proteomics and bioinformatics out of the research laboratory and into routine medical practice. These are supported by rapid advances in information, optical and software technology. This combination is making it possible to perform increasing numbers of screening and diagnostic tests at or near the point of care. CytoCore isWe are focused upon utilizing these advances to provide products that address the needs of these worldwide markets.

TheSoftPAPhas initially been targeted to the premium segment of the cervical cytology sampling market. This premium segment comprises almost the entire cervical sampling market except for public health programs and research hospitals. The Company expectsWe expect that theSoftPAPwill be primarily delivered to these customers through local and regional distributors who specialize in the value-added OB/GYN market. During the last quarterSoftPAP is presently registered for sale in a number of fiscal 2007, the Company entered into three distribution agreements with distributors in Italy, Spaincountries.

TheHalo System is being initially targeted toward general, ObGyn and Portugal. Each of these distributors agreed to act as the Company’s exclusive distributor in their respective territories. In 2008, the Company also entered into an international distribution agreementfamily medical practices for sales into Switzerland. However, the Company only realized minimal sales over the last few years. In 2009, the company shipped product to a distributor in Turkey.

In keeping with theCytoCore Solutions philosophy, bothSoftPAP and theHalo System are being offered as standalone products and, where allowed, in the form of convenience kits including our preservative.

If funding is obtained SoftKit is expected to be introduced into the European Unionmarket in 2013 with expansion into the Middle East and surrounding regionsAsia in 2014. The target market varies by country but is generally either selected clinical laboratories or national public health authorities. It is expected thatSoftKit will primarily incorporate our preservative, but other preservatives, which we are presently evaluating, will be also be made available to accommodate local and providing support to our distributors.

TheAIPS Workstation will be marketed to small and medium-sized hospitals and reference laboratories. The compact, low cost design of the workstation is intended to facilitate its deployment at or in proximity to the point of care. Once theAIPS Workstation has been successfully established in the laboratory market, our strategy is to form alliances with these laboratories and other medical products distribution companies and utilize their sales forces to broaden sales of the system to other markets, including hospitals, clinics, managed care organizations and office-based physician groups. Our marketing strategy to these organizations will vary depending upon the applicable cancer screening test.

Many countries in combination withwhich healthcare has been partially or fully nationalized utilize a “tender system” in which contracts to supply a specified quantity of a product for a specified period of time are periodically made available for bidding. We are taking theSoftPap product only. The correspondingPadKitmarketing strategy is being developed, but it is currently anticipated steps necessary to be based upon convenience kits containing PadKit and the preservative.OmniDropwill be sold as an incidental component of the AIPS Workstation and may also be sold as an independent product.

The development, manufacture, sale, and distribution of medical devices intended for commercial use are subject to extensive governmental regulation inworldwide. In the United States, byour products are regulated under the FDA and comparable authorities in certain

The FDA has adopted regulations governingregulatory systems in other major markets such as China and South America have been undergoing substantial changes and now in many respects resemble the design and manufacture of medical devices thatsystem in the EU. In particular, the CE Mark is now accepted or required in essentially all significant markets other than the US. In addition to having to obtain the appropriate regulatory approvals, we are for the most part, harmonizedalso required to register our products with the good manufacturing practices and ISO quality system standards for medical devices. The FDA’s adoption of the ISO’s approach to regulation and other changes to the mannerNational Health Authority in any country in which the FDA regulates medical devices will increase the costwe expect to do business; may have our quality and manufacturing systems inspected and/or audited by representatives of compliance with those regulations. Other countries impose similar but not identicalvarious National Health Authorities; and may have to conform to additional regulations that will further increase compliance costs.

Under these regulations, we are subject to certain registration, record-keeping and medical device reporting requirements of the FDA.requirements. Our manufacturing facilities, or those of our strategic partners, may be obligated to follow the FDA’s Quality

In the US, the FD&C Act generally bars selling, advertising, promoting, or other marketing of medical devices that have not been authorized (approved or cleared) by the FDA. The promotion or sale of medical devices for non-approved or “off-label” uses is prohibited. The FDA also regulates the design and manufacture of medical devices. These regulations have been largely, but not completely, harmonized with the ISO quality system standards for medical devices that are used for similar purposes in most other countries. This incomplete harmonization requires us to maintain two separate, but equal quality systems and increases the cost of regulatory compliance. The FDA and the corresponding regulatory agencies in other countries may withdraw product clearances or approvals for failure to comply with these regulatory standards and may impose additional sanctions.

In the US most low to moderate risk medical devices that have legally marketed predicates receive “clearance” to market through a process described in Section 510(k) of the FD&C Act. In order to receive clearance under this so-called 510(k) process, a product must be shown to be “substantially equivalent” to an appropriate legally marketed “predicate device”. High risk devices and devices that do not have a predicate require “approval” via a Pre Market Approval (“PMA”) submission in which de-novo demonstration of the safety and efficacy must be established. Changes to a product, its intended use, and/or its labeling often require the submission of another 510(k) or PMA application. Obtaining approval to market via the PMA process takes substantially longer and is far more expensive than obtaining clearance to market via the 510(k) notification process.

The e² Collector, which is the predecessor to theSoftPAP collector, was cleared for marketing by the FDA on May 31, 2002 and theSoftPAP collector received FDA clearance on January 31, 2008. Although most future Company products are expected to qualify for premarket clearance via the 510(k) process, some future products may require PMA approval.

In 2010, the FDA began a major review of the 510(k) process, which has to date resulted in the announcement of a relatively small number of changes, most of which do not directly impact our products. Additional changes, some of which have the potential to substantially increase the time and cost involved in obtaining marketing clearance via the 510(k) process, are under consideration and may be announced in 2013.

In the US, we are subject to various federal and state laws pertaining to healthcare fraud and abuse, including federal and state anti-kickback laws and the federal Foreign Corrupt Practices Act, which make it illegal for an entity to solicit, offer, receive or pay remuneration or anything of value in exchange for, or to induce, the referral of business or the purchasing, leasing or ordering of any item or service paid for by Medicare, Medicaid or certain other federal healthcare programs. These statutes have been broadly defined to prohibit a wide array of practices, and our activities may subject the companyus and itsour partners to scrutiny under such laws. Violations may be punishable by criminaland/or civil sanctions, including fines, as well as the exclusion from participation in government-funded healthcare programs.

Each country has historically imposed its own unique regulations on medical products. In recent years, however, there has been a trend toward the harmonization of these regulations resulting in greater consistency between countries. This has resulted in a large and growing number of countries (over 70 as of this writing) adopting the CE Mark as a central element of their regulatory process for medical devices. The US is the only major country that has not adopted the CE Mark. In order for a product to be subjectCE Marked, the manufacturer must demonstrate to regulation in the United States under the Clinical Laboratory Improvement Act (“CLIA”). CLIA establishes quality standards for laboratories conducting testing to ensure the accuracy, reliability and timeliness of patient test results, regardless of where the test is performed. The requirements for laboratories vary depending on the complexitysatisfaction of the tests performed. Thus,regulatory authorities that the more complicated the test, the more stringent the requirement. Tests are categorized as high complexity, moderate complexity (including the category of provider-performed microscopy)product is safe and waived tests. CLIA specifies quality standards for laboratory proficiency testing, patient test management, quality control, personnel qualifications and quality assurance, as applicable.

TheSoftPAP collector and the preservative are CE Marked to the Medical Device Directive and the In-Vitro Device Directive, respectively. As our products are intended to be marketed globally, we expect that all future products will be CE Marked to the applicable Directives and standards. The CE Mark for a product must be renewed every five years and will generally also require renewal if the requirements imposed by these Directives and standards change. This renewal increases the cost of regulatory compliance. In addition, the specific quality system requirements imposed upon a product are determined by the risk category into which the product is assigned by the applicable Directives. All of our current and planned products are presently considered to be low risk devices and are assigned to Class I which imposes the lowest possible classification for the system.level of quality system requirements. If however, these products are classifieda new Company product falls within or a current is reclassified into a higher risk category, it maywe will be required to register our quality system to ISO 13485 in order to maintain the CE Mark on the affected product(s). Our quality system presently conforms to the requirements of ISO 13485, but we have not been formally registered to this standard. Registering a significant impact on our abilityquality system to marketISO 13485 and maintaining this registration will substantially increase the productscosts of regulatory compliance.

The EU is in the United States.

Several voluntary systems such as GS-1/GTIN, GMDA and EDMA for the identification of medical devices are presently in use in various parts of the world. The Global Harmonization Taskforce (GHTF), which is comprised of representatives from major medical device was completedregulatory agencies such as the FDA, is in 2008. The resultsthe process of developing a single unified medical device identification system that, when it goes into effect, will be mandatory worldwide. Current proposals combine various portions of the existing voluntary codes in order to construct the new unified identifiers which would then be required to be registered with a central repository. We are well positioned to comply with the currently proposed form of this trialnew regulation as we have been publishedboth company and product specific GS-1/GTIN codes as well as product specific GMDA and EDMA for our current products and have the mechanisms in place to obtain additional such codes in the future. The proposed regulations include user fees that will increase our cost of regulatory compliance.

We are also required to comply with certain environmental regulations with respect to products that are sold in the EU. One of these regulations is the Directive on www.clinicaltrials.gov. Clinicaltrials.gov isPackaging and Packaging Wastes that: mandates the minimization of packaging; restricts the use of certain packaging materials; and imposes requirements, including possible “take-back” provisions, with respect to the recycling of packaging materials. All of our current products comply with the requirements of this Directive. At present, we comply with the recycling portions of this Directive by ensuring that all packaging materials are compatible with recycling programs that are in place in the EU. However, in the future we may be required to take a componentmore active role in the recycling of certain types of products including possibly “taking back” and recycling laboratory instruments. Implementing a compliant take-back program will increase our operating and regulatory compliance costs.

In the FDAEU electronic products, including clinical laboratory instruments such as the AIPS Imager and Workstation, are required to comply with two environmental Directives, one of which requires that is responsible forthe manufacturer “take back” and recycle the electronic portions of these instruments and the other (the so-called RoHS Directive) of which restricts the presence of certain materials in electronic products. We comply with the RoHS Directive by requiring our suppliers to use only RoHS complaint materials in the construction of our products. Upon commencement of instrument sales in the EU, if ever, we expect that we will be required to comply with the take-back requirements by contracting with an established electronic waste recycler in the EU. Such contracts will increase our operating costs.

The “REACH” regulation, which requires the registration of all chemical products produced in or imported into the EU is presently in its implementation phase. The long term impact of this extremely complex multi-level regulation on the Company is unknown at present, but is anticipated to be minimal in the near term as our sales of chemical products (stains, preservative, etc.) are and are expected to continue to be at less than the threshold levels for registration and reporting. An increase in sales of such products above currently forecast levels and/or a reduction in the applicable thresholds could potentially result in significant costs to us.

Data from clinical trials and studies is often required in regulatory submissions and is highly desirable for use in product marketing activities. In general, at least one trial or study is necessary for each new product and additional studies or trials are needed to support new or modified indications for use and new marketing claims.

Each medical device is required to have an expiration date beyond which it may no longer be used. This expiration date is generally set very conservatively at the reportingtime of product introduction and may then be extended if warranted and supported by “real-time” data. SinceSoftPAPwas introduced, we have been collecting product life data from the field and has been conducting internal “stability tests”. In 2011 we completed a study that demonstrated that the original expiration dating specification for SoftPAP can safely be doubled and suggested that a further extension may be possible. We intend to continue performing real-time stability studies and extending the expiration dating of our products if supported by data from these trials.studies.

SoftPAP has FDA clearance and is CE Marked for the collection of samples for use in cervical cancer screening. At the time that these approvals were obtained, the accepted standard of clinical practice was to perform the initial screening by cytology and to use a HPV test to confirm and further classify any abnormal cytological results that were obtained. Recently several countries, most notably certain countries in the EU, have revised, or have begun revising their accepted practice such that the initial screening is now to be performed using a HPV test with reflex to cytological testing for confirmation and diagnosis of a positive HPV result. This change in use does not affect the approvals presently held bySoftPAP, but a new clinical study based upon this revision to clinical practice is needed for marketing purposes. The Company continuesnecessary study protocol has been prepared and discussions with potential clinical sites are in progress. It is presently anticipated that this study will be completed by no later than the fourth quarter of 2012. This same study will also provide additional validation data for the use of our preservative withSoftPAP and an independent test of one of the proprietary cytology stains that we are developing.

Several additional clinical trials and studies are planned, but will not be initiated until we can obtain sufficient additional financial and operating resources. The largest of these planned studies and trials is a formal clinical trial of SoftKit in conjunction with our preservative for the self-collection of samples for cytology and HPV testing in both the primary and reflex modes. Other planned studies and trials include, but are not limited to, refine the devicevalidation of certain stains and develop and optimize its assays andmarkers for use with the AIPS WorkstationImager, obtaining additional indications for use forSoftPAP and platform. Our overall strategy involvesSoftKit, and field validation of the continuing study of theCytoCore SolutionsSystem and its components. This research will determine whether theCytoCore SolutionsSystem is able to eliminate true negative samples from further review for cervical cancer. We believe the system could also become a primary screening device for cervical, endometrial and bladder cancer. We will also submit the data to foreign regulatory authorities that have jurisdiction over these products. Subsequently, we will continue to collect and submit data for theCytoCore SolutionsSystem point-of-care test. We plan to pursue regulatory approval of theCytoCore SolutionsSystem products through a series of submissions and, in some cases, using data from a single clinical study. This tiered approach is designed to accelerate revenue opportunities for theCytoCore SolutionsSystem in the short term and to drive adoption of our innovative products over the long term, while minimizing the expense and time involved in undertaking the appropriate study. If the submissions for the variousCytoCore SolutionsSystem products are cleared by the FDA for sale in the U.S. market or approved for sale by foreign regulatory agencies, we intend to sell the cleared products in their respective clinical markets.

In the United States, laboratory customers bill most insurers (including Medicare) for screening and diagnostic tests such as the Pap test. Insurers, such a private healthcare insurance or managed care payers, in addition to Medicare, reimburse for the testing, with a majority of these insurers using the annually-set Medicare reimbursement amounts as a benchmark in setting their reimbursement policies and rates. Other private payers do not follow

Our ability to successfully commercialize theCytoCore SolutionsSystem and future products will depend, in part, on the extent to which coverage and reimbursement for such products will be available from third-party payers in the United States such as Medicare, Medicaid, health maintenance organizations and health insurers, and other public and private payers in foreign jurisdictions. The coverage policies and reimbursement levels of these third-party payers may impact the decisions of healthcare providers and facilities regarding which medical products they purchase and the prices they are willing to pay for those products. In some countries, our ability to commercialize products will also depend upon us becoming a qualified bidder on the tender offers issued by the National Healthcare Authority. If we succeed in bringing products to the market, we cannot be assured that third-party payers will pay for such products or establish and maintain price levels sufficient for realization of an appropriate return on our investment in product development. Additionally, we expect many payers to continue to explore cost-containment strategies (e.g., competitive bidding for clinical laboratory services within the Medicare program, so-called “pay-for-performance” programs implemented by various public and private payers, etc.) that could potentially impact coverageand/or payment levels for current or future CytoCore products.

Competition

Historically, competition in the healthcare industry has been characterized by the search for technological innovations and efforts to market such innovations, and technologicalinnovations. Technological advances have accelerated the pace of change in recent years. The cost of healthcare delivery has always been a significant factor in markets outside of the United States. In recent years, the U.S. market has also become much more cost conscious. We believe technological innovations incorporated into certain of our products offer cost-effective benefits that address this particular market opportunity.

Competitors may introduce new products that compete with ours, or those that we are developing. We believe the portion of our research and development efforts devoted to continued refinement and cost reduction of our products will permit us to remain or become competitive in the markets in which we presently distribute or intend to distribute our products.

The market for our cancer screening and diagnostic product line is significant, but highly competitive. We are currently not aware of any other company that is duplicating our efforts to develop a fully-automated, objective analysis and diagnostic system for female reproductive-tract cancer screening that can be used at the point of care. Nonetheless, we compete with several large and well-established medical device companies, including companies with financial, marketing, and research and development resources substantially greater than ours. There can be no assurance that our technological innovations will provide us with a competitive advantage.

There are several companies that produce automated and quantitative microscopy instruments. In the past, the market for these instruments has been primarily limited to research applications. However, as a result of recent advances in the area of molecular diagnostics, we believe the market for such instruments and applications will increase over the next several years. We believe our instruments are the most versatile and cost-effective platforms available in the current market whether as an outright purchase or a fee-for-use application.

In general, we believe that our products must compete primarily on the basis of clinical performance, accuracy, functionality, quality, product features and effectiveness of the product in standard medical applications. We also believe that cost control and cost effectiveness are additional key factors in achieving or maintaining a competitive advantage. We focus a significant amount of product development effort on producing systems and tests that will not add to overall healthcare cost.

Specifically, there are several companies whose technologies are similar, adjunctive to, or may overlap with ours. Of these companies, our primary competitors are Rovers and Wallach in the area of cell collection devices and Cytyc and TriPath Imaging in specimen preparation and the automated morphological screening of these specimens. We believe that of CCI. These include manufacturers of liquid-based Pap tests and screening and diagnostic systems such as

We do not intend to invest capital to develop our own distribution and sales organizations, or to construct and maintain a medical-products manufacturing facility and all its related quality systems requirements. Our strategy is to utilize the operations, quality systems and facilities of a contract manufacturermanufacturers specializing in medical products manufacturing to meet our current and future needs in the United States and abroad. This strategy covers manufacturing requirements related to theCytoCore SolutionsSystem’s chemical components, plastic and silicone parts for theSoftPAP, and the instruments and other components of the AIPS workstation.

We rely on a combination of patents, licenses, trade names, trademarks, know-how, proprietary technology, trade secrets and policies and procedures to protect our intellectual property. We consider such security and protection a very important aspect of the successful development and marketing of our products in the U.S. and foreign markets.

In the United States, we follow the practice of filing a provisional patent application for an invention as soon as it has been determined that the invention meets the minimum standards for patentability. While a provisional patent application does not provide any formal rights or protections, it does establish an official priority date for the invention that carries over to any utility patent applications that are derived from the provisional application within the next 12 months. A utility patent application begins the process that can culminate in the issuance of aone or more U.S. patent.or foreign patents. We convert each outstanding provisional patent application into some number of utility patent applications within this12-month period. In most cases each provisional application results in one utility filing. However, in some cases a single provisional application has generated two independent utility filings or multiple (up to five) provisional applications have been consolidated into a single utility application. During the examination of a utility application, the U.S. Patent and Trademark Officeexamining patent office may require us to divide the application into two or more separate applications or we may file acontinuation-in-part patent application that expands upon the technology disclosed in an earlier patent application and which has the potential of superseding or improving upon the disclosure of the earlier application. For these reasons, estimating the number of patents that are likely to be issued based upon the number of provisional and utility applications filed is difficult.

Prior to filing a utility application in the United States, we review the application to determine whether obtaining patent coverage for the invention outside of the United States is necessary or desirable to support our business model. If so, a utility patent application is filed under the Patent Cooperation Treaty (“PCT”) at the same time that

As of December 2009,2012, we had filed 12 U.S.12U.S. utility patent applications. Three of the U.S. utility applications have been issued as U.S. patents, two are pending, and seven have been abandoned.abandoned as no longer being appropriate to our business. One Chinese patent had been issued and one European case has been abandoned. One U.S. and five foreign patent applications are filed and pending; in order to reduce the expenses related to patent prosecution, we are currently taking only those actions needed to keep them in effect. This group of patents and patent applications covers all aspects of theCytoCore SolutionsSystem including, but not limited to, the point of service instrument, the personal and physicians’ collectors, and the slide-based test. As a result of the acquisition of AccuMed, we acquired 33 issued U.S. patents, one U.S. patent application, and nine foreign patents, of which a combined total of 17 were transferred to a third party under a license agreement. Twenty-four additional foreign patent applications primarily covering the AcCell and AcCell Savant technology and related software were also acquired. We have recovered the 17 AcCell-related patents and patent applications from the third party.

We intend to prepare additional patent applications for processes and inventions arising from our research and development process. The protections provided by a patent are determined by the claims that are allowed by the patent office that is processing the application. During the patent prosecution process it is not unusual for the claims made in the initial application to be modified or deleted or for new claims to be added to the application. For this reason, it is not possible to know the exact extent of protection provided by a patent until it issues.

Patent applications filed prior to November 29, 2000 in the United States are maintained in secrecy until any resulting patent ispatents have issued. As there have been examples of U.S. patent applications that have remained “in prosecution” and, therefore, secret for decades, it is not possible to know with certainty that any U.S. patent that we may own, file for or have issued to us will not be pre-empted or impaired by patents filed before ours and that subsequently are issued to others. Utility patent applications filed in the United States after November 29, 2000 are published 18 months after the earliest applicable filing date. As thisThis revised standard takes full effect,reduces the chances that such a “submarine” patent will impair our intellectual property portfolio are significantly reduced.portfolio. Foreign patent applications are automatically published 18 months after filing. As the time required to prosecute a foreign utility patent application generally exceeds 18 months and the foreign patents use a “first to file” rather than a “first to invent” standard, we do not consider submarine patents to be a significant consideration in our patent protection outside of the United States.

Our products are or may be sold worldwide under trademarks that we consider to be important to our business. We own the trademarksSoftPAP, CytoCore^tm®,CytoCore^®, andCytoCore SolutionsandCocktail-CVX^tm®. We may file additional U.S. and foreign trademark applications in the future.

Our future technology acquisition efforts will be focused toward those technologies that have strong patent or trade secret protection.

We cannot be sure that patents or trademarks issued or which may be issued in the future will provide us with any significant competitive advantages. We cannot be sure any of our patent applications will be granted or that their validity or enforceability will not be successfully challenged. The cost of any patent-related litigation could be substantial even if we were to prevail. In addition, we cannot be sure that someone will not independently develop similar technologies or products, duplicate our technology or design around the patented aspects of our products. The protection provided by patents depends upon a variety of factors, which may severely limit the value of the patent protection, particularly in foreign countries. We intend to protect much of our core technology as trade secrets, either because patent protection is not possible or, in our opinion, would be less effective than maintaining secrecy. However, we cannot be sure that our efforts to maintain secrecy will be successful or that third parties will not be able to develop the technology independently.

Our research and development efforts are focused on introducing new products as well as enhancing our existing product line. We utilize both in-house and contracted research and development personnel, including in

We believe research and development is critical to the success of our business strategy. During the 2009 and 2008 fiscal years, our research and development expenditures were approximately $372,000 and $1,852,000, respectively, all of which were charged to expense in our consolidated statement of operations. Settlements to vendors related to research and development activities for less than the recorded amounts totaled $457,000 for the fiscal year 2009 and were credited to expenses.

We anticipate the need to invest a substantial amount of capital in the research and development process, including the cost of clinical trials, required to complete the development and use of theCytoCore SolutionsSystem and bring it to market.

Low-cost products are a key component of our business strategy. We designed theSoftPAPcollection device using widely available and inexpensive silicone and plastic materials. These materials are available from numerous sources and can be fabricated into finished devices by a variety of worldwide manufacturers based on our proprietary designs. Currently, we manufacture through contract manufacturers theSoftPAPcollection device in Wisconsin and China, with quality assurance occurring in our Chicago facility. These contract manufacturers are using our machinery and tooling.

The instrument components of the laboratory version of theCytoCore SolutionsSystem are also available from a number of sources. Computers, cameras, automated slide-staining instruments and automated slide-preparation instruments are currently available from several large manufacturers. We currently have an adequate supply of workstations used in theCytoCore SolutionsSystem and have contracted for the design and manufacture of the next generation of the workstation platform.

Due to certain regulatory requirements regarding the supply and manufacture of certain products, we may not be able to establish additional or replacement sources for certain components or materials. In the event we are unable to obtain sufficient quantities of raw materials or components on commercially reasonable terms or in a timely manner, we would not be able to manufacture our products on a timely and cost-competitive basis, which may have a material adverse effect on our business and financial condition.

We have financed our U.S. operations and research and development efforts by raising funds through borrowing and the sale of debt and equity securities. We will continue to use these methods to fund our operations until such time as we are able to generate adequate revenues and profits from the sale of some or all of our products.

We believe that future sales of theCytoCore SolutionsSystem or other products into foreign markets may result in collection periods that may be longer than those expected for domestic sales of these products. Our strategy will be to use down payments, letters of credit and/or other secured forms of payment, whenever possible, in sales of products in foreign markets.

Employees

As of March 31, 2010,28, 2013, we employed a total of sixfive full-time employees.and one part-time employee. None of our employees are members of a labor union. We also utilize independent consultants in the United States on an as-needed basis.

Markets outside of North America are an important factor in our business strategy. Any business that operates on a worldwide basis and conducts its business in one or more local currencies is subject to the risk of fluctuations in

During the fiscal year ended December 31, 2009, the Company2012, we did not have any foreign operations, but did have distribution agreements to sell our products in Switzerland, Italy, Spain and Portugal. As of December 31, 2009, we had product shipments to Europe, which sales accounted for 9% of our revenues for the 2009 fiscal year.

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