UNITED STATES

Amendment No. 45

Adeza Biomedical Corporation

1240 Elko Drive

Emory V. Anderson

Copies to:

    Approximate date of commencement of proposed sale to the public: As soon as practicable after this Registration Statement becomes effective.

    If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box. o

    If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. o

    If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. o

    If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. o

    If delivery of the prospectus is expected to be made pursuant to Rule 434, check the following box. o

    The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the Registration Statement shall become effective on such date as the Commission, acting pursuant to Section 8(a), may determine.

The information in this preliminary prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This preliminary prospectus is not an offer to sell these securities and is not soliciting an offer to buy these securities in any state where the offer or sale is not permitted.

3,750,000 Shares

	Adeza Biomedical Corporation

This is the initial public offering of our common stock. No public market currently exists for our common stock. We are offering all of the shares of common stock offered by this prospectus. We expect the public offering price to be between $14.00 and $16.00 per share.

Our common stock has been approved for quotation on The Nasdaq National Market under the symbol “ADZA.”

Investing in our common stock involves a high degree of risk. Before buying any shares, you should carefully read the discussion of material risks of investing in our common stock in “Risk factors” beginning on page 7 of this prospectus.

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.

The underwriters may also purchase up to an additional 562,500 shares of our common stock at the public offering price, less the underwriting discounts and commissions payable by us, to cover over-allotments, if any, within 30 days from the date of this prospectus. If the underwriters exercise this option in full, the total underwriting discounts and commissions will be $                    and our total proceeds, before expenses, will be $                    .

The underwriters are offering the common stock as set forth under “Underwriting.” Delivery of the shares will be made on or about                          , 2004.

UBS Investment Bank

SG Cowen & Co.

Through and including                     , 2004 (the 25th day after the date of this prospectus), federal securities laws may require all dealers that effect transactions in our common stock, whether or not participating in this offering, to deliver a prospectus. This is in addition to the dealers’ obligation to deliver a prospectus when acting as underwriters and with respect to their unsold allotments or subscriptions.

TABLE OF CONTENTS

Adeza Biomedical Corporation Trademarks and Registered Trademarks are trademarks of Adeza. Our trademarks and trade names include the stylized A, Adeza®, E-tegrity® Test, Full Term and TLi_IQ® System. Other service marks, trademarks and trade names referred to in this prospectus are the property of their respective owners.

The offering

The number of shares of our common stock to be outstanding immediately after this offering is based on 12,139,841 shares of common stock outstanding as of September 30, 2004 after giving effect to the conversion of all 15,409,062 shares of preferred stock outstanding as of September 30, 2004 into 11,957,322 shares of common stock, which will become effective at the closing of this offering.

The number of shares of our common stock outstanding immediately after this offering excludes:

4	2,163,582 shares of our common stock issuable upon the exercise of stock options outstanding as of September 30, 2004 under our 1995 Stock Option and Restricted Stock Plan at a weighted average exercise price of $4.70 per share;
4	196,915 shares of our common stock issuable upon the exercise of warrants outstanding as of September 30, 2004 at an exercise price of $3.50 per share;
4	17,056 shares of our common stock available for future grant under our 1995 Stock Option and Restricted Stock Plan as of September 30, 2004; and
4	1,875,000 shares of our common stock available for future grant under our 2004 Equity Incentive Plan, which will become effective upon the completion of this offering.

Unless otherwise indicated, all information in this prospectus:

4	assumes that the underwriters do not exercise their option to purchase up to 562,500 additional shares of our common stock to cover over-allotments, if any;
4	assumes a three-for-four reverse split of our common stock effected on December 6, 2004;
4	assumes the conversion, upon the closing of this offering, of all of the outstanding shares of preferred stock into common stock;
4	gives effect to the amendment and restatement of our certificate of incorporation and bylaws, which will become effective at the completion of this offering; and
4	gives effect to the adoption of our 2004 Equity Incentive Plan, which will become effective upon the completion of this offering.

Risk factors

Investing in our common stock involves a high degree of risk. You should carefully consider the risks described below with all of the other information included in this prospectus before deciding to invest in our common stock. If any of the following risks actually occur, they may materially harm our business and our financial condition and results of operations. In this event, the market price of our common stock could decline and you could lose part or all of your investment.

RISKS RELATING TO OUR BUSINESS

Because our revenues and financial results depend significantly on a limited product line, if we are unable to manufacture or sell our products in sufficient quantities and in a timely manner, our business will suffer.

To date, substantially all of our revenue has resulted from sales of our principal product line, our Fetal Fibronectin Test, the TLi_IQ System (and its predecessor, the TLi System) and related consumables. Although we have introduced new products such as the E-tegrity Test, and intend to introduce additional products, we expect sales of the Fetal Fibronectin Test to account for substantially all of our near-term revenue. Because our business is highly dependent on our Fetal Fibronectin Tests, the TLi_IQ System and the related consumables, factors adversely affecting the pricing of or demand for these products could have a material and adverse effect on our business and cause the value of our securities to decline substantially. We will lose revenue if alternative diagnostic products or technologies gain commercial acceptance or if reimbursement is limited. We cannot assure you that we will be able to continue to manufacture these products in commercial quantities at acceptable costs. Our inability to do so would adversely affect our operating results and cause our business to suffer.

If our products do not achieve and sustain market acceptance, we may fail to generate sufficient revenue to maintain our business.

Our commercial success depends in large part on our ability to achieve and sustain market acceptance of our principal product line, the Fetal Fibronectin Test and the TLi_IQ System. A key element of our business plan calls for us to expand sales of our TLi_IQ System in hospitals and clinical laboratories and increase the related sales of the Fetal Fibronectin Test and other consumables used in conjunction with the TLi_IQ System. To accomplish this, we will need to convince healthcare providers of the benefits of our products through various means, including through published papers, presentations at scientific conferences and additional clinical trials. If existing users of our products determine that these products do not satisfy their requirements, or if our competitors develop a product perceived to better satisfy their requirements, our sales of Fetal Fibronectin Tests and other consumables may decline, and our revenues may correspondingly decline.

In addition, our commercial success may depend on our ability to gain market acceptance for our other products and product candidates. Market acceptance of our product portfolio will depend on our ability to develop additional applications of our existing products and to introduce new products to additional markets, including the oncology diagnostic market, the reproductive endocrinology and infertility markets and other women’s health markets.

Other factors that might influence market acceptance of our products include the following:

4	evidence of clinical utility;
4	convenience and ease of use;
4	availability of alternative and competing diagnostic products;
4	cost-effectiveness;

4	effectiveness of marketing, distribution and pricing strategy; and
4	publicity concerning these products or competitive products.

In addition, our marketing and development efforts could require us to expend significant time and resources, and we cannot assure you that we will succeed in these efforts. If our products are unable to achieve or maintain broad market acceptance, our revenues and operating results may be negatively impacted and our business would suffer.

Our quarterly revenues and operating results are subject to significant fluctuations, and our stock price may decline if we do not meet the expectations of investors and analysts.

As of September 30, 2004, we had an accumulated deficit of $46.4 million. For the nine months ended September 30, 2004, we had net income of $7.3 million, including a one-time reduction in cost of product sales for accrued royalties of $2.7 million. However, we cannot assure you that we will sustain profitability or that losses will not occur in the future. Our quarterly revenues and operating results are difficult to predict and have in the past and may in the future fluctuate significantly from quarter to quarter due to a number of factors, many of which are outside our control. These factors include, but are not limited to:

4	our ability to increase market acceptance of women’s health diagnostics generally and of our products in particular, as discussed under “Risk factors—If our products do not achieve and sustain market acceptance, we may fail to generate sufficient revenue to maintain our business”;
4	our need and ability to generate and manage growth, as discussed under “Risk factors—If we fail to properly manage our anticipated growth in the United States or abroad, we may incur significant additional costs and expenses and our operating results may suffer”;
4	delays in, or failure of, delivery of components by our suppliers, as more fully described in “Risk factors—We rely on a limited number of suppliers, and if these suppliers fail or are unable to perform in a timely and satisfactory manner, we may be unable to manufacture our products or satisfy product demand in a timely manner, which could delay the production or sale of these products”;
4	the seasonal nature of our business and quarterly variations in demand for our products based on procurement cycles of our customers;
4	changes in the manner in which our operations are regulated;
4	increases in the length of our sales cycle;
4	fluctuations in gross margins; and
4	difficult political and economic conditions.

These and other factors make it difficult for us to predict sales for subsequent periods and future performance. If our quarterly operating results fail to meet or exceed the expectations of securities analysts or investors, our stock price could drop suddenly and significantly. We believe quarterly comparisons of our financial results are not necessarily meaningful and should not be relied upon as an indication of our future performance.

In addition, we expect to incur additional expenses to execute our business plan, and these expenses will increase as we expand our marketing efforts, research and development activities, clinical testing and manufacturing capacity. These expenses, among other things, may cause our net income and working capital to decrease. If sales do not continue to grow, we may not be able to maintain profitability. Our expansion efforts may prove more expensive than we currently anticipate, and we may not succeed in increasing our revenues sufficiently to offset these higher expenses. If we fail to do so, the market price for our common stock will likely decline.

If third-party payors do not adequately reimburse our customers, market acceptance of our products may be impaired, which may adversely affect our revenues and our operating results.

Market acceptance of our products and the majority of our sales depend, in large part, on the availability of adequate reimbursement for the use of our products from government insurance plans, including Medicare and Medicaid, managed care organizations, private insurance plans and other third-party payors in the United States and abroad. Third-party payors are often reluctant to reimburse healthcare providers for the use of medical diagnostic products incorporating new technology.

Because each third-party payor individually approves reimbursement, obtaining these approvals can be a time-consuming and costly process that requires us to provide scientific and clinical support for the use of each of these products to each third-party payor separately with no assurance that approval will be obtained. For example, while the policies of some third-party payors limit reimbursement for the use of our Fetal Fibronectin Test to women with signs and symptoms of preterm labor, other third-party payors provide reimbursement for broader use of our Fetal Fibronectin Test. This individualized process can delay the market acceptance of new products and may have a negative effect on our revenues and operating results.

Market acceptance of our products internationally may depend in part upon the availability of reimbursement within prevailing healthcare payment systems. Reimbursement and healthcare payment systems in international markets vary significantly by country and include both government sponsored healthcare and private insurance. We may not obtain international reimbursement approvals in a timely manner, if at all. Our failure to receive international reimbursement approvals may negatively impact market acceptance of our products in the international markets in which those approvals are sought.

We believe third-party payors are increasingly limiting coverage for medical diagnostic products in the United States and internationally, and in many instances are exerting pressure on medical products suppliers to reduce their prices. Consequently, third-party reimbursement may not be consistently available or adequate to cover the cost of our products. Additionally, third-party payors who have previously approved a specific level of reimbursement may reduce that level. We cannot assure you that under prospective payment systems, in which healthcare providers may be reimbursed a set amount based on the type of diagnostic procedure performed, such as those utilized by Medicare and in many privately managed care systems, the cost of our products will be justified and reimbursed. This could limit our ability to commercialize and sell new products and continue to sell our existing products, or may cause the prices of our existing products to be reduced, which may adversely affect our revenues and operating results.

If we fail to properly manage our anticipated growth in the United States or abroad, we may incur significant additional costs and expenses and our operating results may suffer.

Rapid growth of our business is likely to place a significant strain on our managerial, operational and financial resources and systems. In the United States, while we anticipate hiring additional personnel to assist in the planned expansion of sales efforts for our current products and the development of future products, we cannot assure you that we will be able to successfully increase sales of current products or introduce new products and meet our growth goals. To manage our anticipated growth, we must attract and retain qualified personnel and manage and train them effectively. We will depend on our personnel and third parties to effectively market our products to an increasing number of hospitals, physicians and other healthcare providers. We will also depend on our personnel to develop next generation technologies. Further, our anticipated growth will place additional strain on our suppliers and manufacturers, as well as our own internal manufacturing processes, resulting in an increased need for us to carefully monitor for quality assurance. In addition, we may choose or be required to relocate or expand our manufacturing facility to accommodate potential growth in our business. Any

Our plans to significantly expand our presence in international markets will cause us to incur various costs and expenses and may strain our operating and financial systems and resources in a manner that could materially and adversely affect our operating results. We will be subject to the regulatory oversight of additional authorities as we expand internationally. These authorities may impose regulations and restrictions on the sales and marketing of our products that are different and potentially more restrictive than those placed on us by regulators in the United States. We may be required to expend considerable resources to comply with these requirements. We cannot assure you that we will ultimately be able to comply with such regulations in a timely manner, if at all. If we are unable to satisfy these requirements on commercially reasonable terms, our ability to commercialize our products would be hampered and our revenues may be adversely affected.

We will need to devote considerable resources to comply with federal, state and foreign regulations and, if we are unable to fully comply, we could face substantial penalties.

We are directly or indirectly through our customers subject to extensive regulation by both the federal government and the states and foreign countries in which we conduct our business. Companies such as ours are required to expend considerable resources complying, in particular, with laws such as the following:

4	the Federal Food, Drug and Cosmetic Act, which regulates the design, testing, manufacture, labeling, marketing, distribution and sale of medical devices;
4	the Federal Anti-Kickback Law, which prohibits the illegal inducement of referrals for which payment may be made under federal healthcare programs such as the Medicare and Medicaid Programs; and
4	Medicare laws and regulations that prescribe the requirements for coverage and payment, including the amount of such payment, and laws prohibiting false claims for reimbursement under Medicare and Medicaid.

Companies such as ours are also required to comply with laws and regulations regarding the practice of medicine by non-physicians, consumer protection and Medicare and Medicaid payments. If our past or present operations are found to be in violation of any of the laws described above or the other governmental regulations to which we or our customers are subject, we may be subject to the applicable penalty associated with the violation, including civil and criminal penalties, damages, fines, exclusion from the Medicare and Medicaid programs and the curtailment or restructuring of our operations. If we are required to obtain permits or licenses under these laws that we do not already possess, we may become subject to substantial additional regulation or incur significant expense. Any penalties, damages, fines, curtailment or restructuring of our operations may adversely affect our ability to operate our business and our financial results. Because many of these laws have not been fully interpreted by the regulatory authorities or the courts, and their provisions are open to a variety of interpretations and additional legal or regulatory change, we may be at a heightened risk of being found to be in violation of these laws. Any action against us for violation of these laws, even if we successfully defend against it, could cause us to incur significant legal expenses, divert our management’s attention from the operation of our business and damage our reputation.

If we are unable to maintain our existing regulatory approvals and clearances for our existing products, or obtain new regulatory approvals and clearances for our product candidates, our ability to commercially distribute our products and our business may be significantly harmed.

The US Food and Drug Administration, or FDA, and comparable agencies of other countries generally regulate our products as medical devices. In the United States, FDA regulations govern, among other things, the activities that we perform, including product development, product testing, product labeling, product storage, manufacturing, advertising, promotion, product sales, reporting of certain product failures and distribution. Most of the new products that we plan to develop and commercialize in the United States will require either pre-market notification, also known as 510(k) clearance, or pre-market approval, from the FDA prior to marketing. The 510(k) clearance process requires us to notify the FDA of our intent to market a medical device. The overall 510(k) clearance process usually takes from three to twelve months from the time of submission to being able to sell a product in the market, but can take significantly longer. The pre-market approval process, often referred to as the PMA process, is much more costly, lengthy, uncertain and generally takes between one and three years from submission to PMA approval, but may take significantly longer and such clearance or approval may never be obtained.

All of the products that we have submitted and may submit in the future for FDA clearance or approval are or will be subject to substantial restrictions, including, among other things, restrictions on the indications for which we may market our products, which could result in reductions in or an inability to grow our revenues. Even if regulatory approval of a product is granted, the approval may be subject to limitations on the indicated uses for which the product may be marketed or certain requirements for costly post-marketing testing and surveillance to monitor the performance and clinical utility of the product. For example, any of our products that have received FDA approval, such as our Fetal Fibronectin Test or TLi_IQ System, remain subject to ongoing post-marketing regulation and oversight by the FDA. The marketing claims that we are permitted to make in labeling our diagnostic products, if cleared or approved by the FDA, are limited to those specified in any clearance or approval. Our intention to expand the use of our products into new areas such as the prediction of successful induction of labor and oncology will require us to make new submissions to the FDA.

In addition, we are subject to review, periodic inspection and marketing surveillance by the FDA to determine our compliance with regulatory requirements for any product for which we obtain marketing approval. Following approval, our manufacturing processes, subsequent clinical data and promotional activities are subject to ongoing regulatory obligations. If the FDA finds that we have failed to comply with these requirements or later discovers previously unknown problems with our products, including unanticipated adverse events of unanticipated severity or frequency, manufacturer or manufacturing processes or failure to comply with regulatory requirements, it can institute a wide variety of enforcement actions, ranging from a public warning letter to more severe sanctions, including:

4	fines, injunctions and civil penalties;
4	recall or seizure of our products;
4	restrictions on our products or manufacturing processes, including operating restrictions, partial suspension or total shutdown of production;
4	denial of requests for 510(k) clearances or PMAs of product candidates;
4	withdrawal of 510(k) clearances or PMAs already granted;
4	disgorgement of profits; and
4	criminal prosecution.

Any of these enforcement actions could affect our ability to commercially distribute our products in the United States and may also harm our ability to conduct the clinical trials necessary to support the marketing, clearance or approval of these products and could materially and adversely affect our business.

Our PMA supplement seeking approval for use of our Fetal Fibronectin Test in predicting successful induction of labor has been submitted to the FDA. The FDA has placed its review of the application on hold while a third party we have engaged conducts an audit of all of the clinical study sites because of the number of protocol deviations, in order to confirm the accuracy of the data. Upon completion of the third-party audit, we will need to submit new analyses of the data and a corrective action plan to the FDA before it will resume its review of the application. We cannot assure you that the new analyses of the data or the corrective action plan will be acceptable to us or to the FDA or that we will continue to pursue or obtain FDA approval for this application.

We rely on our CLIA-certified laboratory located at our facility in Sunnyvale, California to process E-tegrity Tests. The Centers for Medicare and Medicaid Services, or the CMS, requires that operators of CLIA-certified laboratories submit to surveillance and follow-up inspections. If we are unable to meet the CMS’s requirements for continued operation pursuant to CLIA, our laboratory may lose its CLIA certification, and we may be unable to continue to process E-tegrity Tests. As a result, our business may be harmed.

If we modify our marketed products, we may be required to obtain new 510(k) clearances or PMAs, or we may be required to cease marketing or recall the modified products until clearances are obtained.

Any modification to a 510(k)-cleared or pre-market approved diagnostic device that could significantly affect its safety or effectiveness, or that would constitute a major change in its intended use, requires a new 510(k) clearance or PMA, such as the development of our Fetal Fibronectin Test as a diagnostic test for the induction of labor. The FDA requires every manufacturer to make the determination of whether new clearance or approval is required for 510(k)-cleared devices. The FDA may review any manufacturer’s decision. The FDA may not agree with our decisions regarding whether new clearances or approvals are necessary. If the FDA requires us to seek 510(k) clearance or PMA for any modification to a previously cleared or approved product, we may be required to cease marketing or to recall the modified product until we obtain clearance or approval, and we may be subject to significant regulatory fines or penalties. Any recall or FDA requirement that we seek additional approvals or clearances could result in delays, fines, costs associated with modification of a product, loss of revenue and potential operating restrictions imposed by the FDA.

If we or any of our third-party manufacturers do not operate in accordance with Quality System Regulations, we could be subject to FDA enforcement actions, including the seizure of our products and the halt of our production.

We and any third-party manufacturers that we currently rely on or will rely on in the future, including those we rely on to produce components of our products, must continuously adhere to the current good manufacturing practices, or cGMP, set forth in the FDA’s Quality System Regulations, or QSR, and enforced by the FDA through its facilities inspection program. In complying with QSR, we and our third-party manufacturers must expend significant time, money and effort in design and development, testing, production, record keeping and quality control to assure that our products meet applicable specifications and other regulatory requirements. The failure to comply with these specifications and other requirements could result in an FDA enforcement action, including the seizure of products and shutting down of production. We or any of these third-party manufacturers may also be subject to comparable or more stringent regulations of foreign regulatory authorities. In any of these circumstances, our ability to develop, produce and sell our products could be impaired.

We have received regulatory approvals for some of the operations located at our Sunnyvale, California headquarters, including our CLIA-certified laboratory. Should we choose to relocate, or if for some reason we are required to relocate some or all of our facilities from this location, we may be required to apply for regulatory approvals for the new location. It may be difficult or impossible for us to obtain the necessary approvals to continue our business in its present form at any such new location, and our business may be harmed as a result.

If we experience delays in the development of new products or delays in planned improvements to our products, our commercial opportunities will be reduced and our future competitive position may be adversely affected.

To improve our competitive position, we believe that we will need to develop new products as well as improve our existing instruments, reagents and ancillary products. Improvements in automation and the number of tests that can be performed in a specified period of time will be important to the competitive position of our products as we market to a broader, perhaps less technically proficient, group of customers. Our ability to develop new products and make improvements in our products may face difficult technological challenges leading to delays in development. If we are unable to successfully complete development of new products or if we are unable to successfully complete the planned enhancements to our products, in each case without significant delays, our future competitive position may be adversely affected.

If other companies develop and market technologies or diagnostic products faster than we do, or if those products are more cost effective or useful than our products, our commercial opportunities will be reduced or eliminated.

The extent to which any of our technologies and products achieve and sustain market acceptance will depend on numerous competitive factors, many of which are beyond our control. Competition in the medical devices and diagnostic products industries is intense and has been accentuated by the rapid pace of technological development. While no company directly competes with us in our core markets, there are other diagnostic techniques currently in use to diagnose the likelihood of preterm birth, such as ultrasound. In addition, other companies may develop new diagnostic products or technologies that could compete with or entirely displace our products and technologies. For example, other biomarkers, including cytokines and other proteins indicative of infection, and proteomics are the subject of research that may yield new products or technologies. The effectiveness of these alternative techniques may improve with time and additional research by clinicians or manufacturers. The medical devices and diagnostic products industries include large diagnostics and life sciences companies. Most of these entities have substantially greater research and development capabilities and financial, scientific, manufacturing, marketing, sales and service resources than we do. Some of them also have more experience than we do in research and development, clinical trials, regulatory matters, manufacturing, marketing and sales. These organizations also compete with us to:

4	pursue acquisitions, joint ventures or other collaborations;
4	license proprietary technologies that are competitive with our technologies;
4	attract funding; and
4	attract and hire scientific and other talent.

If we cannot successfully compete with new products or technologies, sales of our products and our competitive position will suffer, and our stock price might be adversely affected. Because of their greater experience with commercializing technologies and larger research and development capabilities, other companies might succeed in developing and commercializing technologies or products earlier and obtaining regulatory approvals and clearances from the FDA more rapidly than we do. Other companies also might develop more effective technologies or products that are more predictive, more

We rely on a limited number of suppliers, and if these suppliers fail or are unable to perform in a timely and satisfactory manner, we may be unable to manufacture our products or satisfy product demand in a timely manner, which could delay the production or sale of these products.

We rely on a limited number of suppliers for both raw materials and components necessary for the manufacture of our products, including our Fetal Fibronectin Test and TLi_IQ System. We acquire all of these components, assemblies and raw materials on a purchase-order basis, which means that the supplier is not required to supply us with specified quantities over a certain period of time or to set aside part of its inventory for our forecasted requirements. If we need alternative sources for key components, assemblies or raw materials for any reason, such components, assemblies or raw materials may not be immediately available. If alternative suppliers are not immediately available, we will have to identify and qualify alternative suppliers, and delivery of such components, assemblies or raw materials may be delayed. Consequently, if we do not forecast properly, or if our suppliers are unable or unwilling to supply us in sufficient quantities or on commercially acceptable terms, we may not have access to sufficient quantities of these components, assemblies and raw materials on a timely basis and may not be able to satisfy product demand. We also rely upon a fulfillment provider to process orders for our products, coordinate invoicing and collections, as well as ship our products to customers in the United States. We may not be able to find an adequate alternative supplier or fulfillment provider in a reasonable time period, or on commercially acceptable terms, if at all. Our inability to obtain a supplier for the manufacture of our products may force us to curtail or cease operations, which would have a material adverse effect on our product sales and profitability.

In addition, if any of these components, assemblies or raw materials are no longer available in the marketplace, we will be forced to further develop our technologies to incorporate alternate components, assemblies and raw materials and to do so in compliance with QSR. If we incorporate new components, assemblies or raw materials into our products, we may need to seek and obtain additional approvals or clearances from the FDA or foreign regulatory agencies, which could delay the commercialization of these products.

We depend on distributors to market and sell our products in overseas markets, and if our foreign distributors fail in their efforts or are unwilling or unable to devote sufficient resources to market and sell our products, our ability to effectively market our products and our business will be harmed.

Our international sales currently depend upon the marketing efforts of and sales by certain distributors in Europe, Australia, the Pacific Rim region and South America. In most instances, our distribution arrangements are governed by short-term purchase orders. We also rely upon certain of these distributors to assist in obtaining product registration and reimbursement approvals in certain international markets, and we may not be able to engage qualified distributors in our targeted markets. The distributors that we are able to obtain may not perform their obligations. If a distributor fails to invest adequate resources and support in promoting our products and training physicians, hospitals and other healthcare providers in the proper techniques for using our products or in awareness of our products, or if a distributor ceases operations, we would likely be unable to achieve significant sales in the territory represented by the distributor. If we decide to market new products abroad, we will likely need to educate our existing or new distributors about these new products and convince them to distribute the new products. If these distributors are unwilling or unable to market and sell our products, we may experience delayed or reduced market acceptance and sales of our products outside the United States. Our failure to engage adequate distributors, or the failure of the distributors to perform their obligations as expected, may harm our ability to effectively market our products and our business.

The regulatory approval process outside the United States varies depending on foreign regulatory requirements and may limit our ability to develop, manufacture and sell our products internationally.

To market any of our products outside of the United States, we and our collaborative partners, including certain of our distributors, are subject to numerous and varying foreign regulatory requirements, implemented by foreign health authorities, governing the design and conduct of human clinical trials and marketing approval for diagnostic products. The approval procedure varies among countries and can involve additional testing, and the time required to obtain approval may differ from that required to obtain FDA approval. The foreign regulatory approval process includes all of the risks associated with obtaining FDA approval set forth above, and approval by the FDA does not ensure approval by the health authorities of any other country, nor does the approval by foreign health authorities ensure approval by the FDA.

If our products do not perform as expected, we may experience reduced revenue, delayed or reduced market acceptance of our products, increased costs and damage to our reputation.

Our success depends on the market’s confidence that we can provide reliable, high quality medical diagnostic devices. Our customers are particularly sensitive to product defects and errors because of the use of our products in medical practice. Our reputation and the public image of our products may be impaired for any of the following reasons:

4	failure of our products to perform as expected;
4	a perception that our products are difficult to use; and
4	litigation concerning the performance of our products.

Even after any underlying problems are resolved, any manufacturing defects or performance errors in our products could result in lost revenue, delay in market acceptance, damage to our reputation, increased service and warranty costs and claims against us.

If product liability suits or other claims and product field actions are initiated against us, we may be required to engage in expensive and time-consuming litigation, pay substantial damages, face increased insurance rates and sustain damage to our reputation, which would significantly impair our financial condition.

Our business exposes us to potential product liability claims and field action risks that are inherent in the testing, manufacturing, marketing and sale of diagnostic products. We may be unable to avoid product liability claims or field actions, including those based on claims that the use or failure of our products resulted in a misdiagnosis or harm to a patient. Although we believe that our liability coverage is adequate for our current needs, and while we intend to expand our product liability insurance coverage to any products for which we obtain marketing approval, insurance may be unavailable, prohibitively expensive or may not fully cover our potential liabilities. If we are unable to maintain sufficient insurance coverage on reasonable terms or to otherwise protect against potential product liability claims or field actions, we may be unable to continue to market our products and develop new markets. Defending a lawsuit could be costly and significantly divert management’s attention from conducting our business. A successful product liability claim brought against us in excess of any insurance coverage we have at that time could cause us to incur substantial liabilities, potentially in excess of our total assets, and our business to fail. In addition, we are a specialty company focused on women’s health. We have a narrow customer base that is subject to significant malpractice litigation that may place us at risk of the same. In addition, product liability claims or product field action or other regulatory proceedings may damage our reputation by raising questions about our products’ safety and efficacy, could significantly harm our reputation, interfere with our

We depend on the services of key personnel to implement our strategy, and if we lose key management or scientific personnel, scientific collaborators or other advisors or are unable to attract and retain other qualified personnel, we may be unable to execute our business plan and our operations and business would suffer.

Our success depends, in large part, on the efforts and abilities of Emory Anderson, who is our President and Chief Executive Officer, Dr. Durlin Hickok, who is our Vice President, Medical Affairs, Dr. Robert Hussa, our Vice President, Research and Development, Mark Fischer-Colbrie, who is our Vice President of Finance and Administration and Chief Financial Officer, and Marian Sacco, our Vice President, Sales and Marketing, as well as the other members of our senior management and our scientific and technical personnel. While we have executed management continuity agreements, we do not currently have employment agreements with any of these individuals. We do not currently carry key person insurance on the lives of any of these executives. Many of these people have been members of our executive team for several years, and their knowledge of our business would be difficult or time-consuming to replace. We also depend on our scientific collaborators and other advisors, particularly with respect to our research and development efforts. If we lose the services of one or more of our key officers, employees or consultants, or are unable to retain or attract the services of existing or new scientific collaborators and other advisors, our research and development and product development efforts could be delayed or curtailed, our ability to execute our business strategy would be impaired, and our stock price might be adversely affected.

Most of our operations are currently conducted at a single location that may be at risk from earthquakes and other natural or unforeseen disasters.

We currently conduct all of our manufacturing, development and management activities at a single location in Sunnyvale, California near known fault zones. In addition, our E-tegrity Tests are currently processed solely through our CLIA-certified laboratory located at our Sunnyvale facility. Despite precautions taken by us, any future natural or man-made disaster, such as a fire, earthquake or terrorist activity, could cause substantial delays in our operations, damage or destroy our equipment or inventory, and reduce our sales or cause us to incur additional expenses. In addition, the facility and some pieces of manufacturing equipment would be difficult to replace and could require substantial replacement lead-time. A disaster could seriously harm our business and results of operations. While we carry insurance for certain business interruptions, some natural and man-made disasters are excluded from our insurance policies, including those caused by terrorist acts or earthquakes. We believe that our insurance coverage is generally adequate for our current needs in the event of losses not caused by excluded events, but we may be subject to interruptions caused by excluded events or extraordinary events resulting in losses in excess of our insurance coverage or for which we have no coverage. This could impair our operating results and financial condition.

If we use biological and hazardous materials in a manner that causes injury, we could be liable for damages.

Our research and development activities sometimes involve the controlled use of potentially harmful biological materials, hazardous materials and chemicals that are dangerous to human health and safety or the environment. We are subject on an ongoing basis to federal, state and local laws and regulations governing the use, storage, handling and disposal of these materials and specified waste products. The cost of compliance with these laws and regulations might be significant and could negatively affect our profitability. We believe our safety procedures for handling and disposing of these materials comply in all material aspects with federal, state and local laws and regulations and to date, we have not been required to take any action to correct any noncompliance. However, we cannot completely eliminate the risk of accidental contamination or injury to third parties from the use, storage, handling or

Potential business combinations could require significant management attention and prove difficult to integrate with our business, which could distract our management, disrupt our business, dilute stockholder value and adversely affect our operating results.

If we become aware of potential business combination candidates that are complementary to our business, we may decide to combine with such businesses or acquire their assets in the future. We have acquired businesses or product lines in the past. For example, we acquired exclusive rights to the SalEst Test in 2003. While we have not encountered such difficulties following our prior acquisitions, business combinations generally involve a number of additional difficulties and risks to our business, including:

4	failure to integrate management information systems, personnel, research and development and marketing, operations, sales and support;
4	potential loss of key current employees or employees of the other company;
4	disruption of our ongoing business and diversion of management’s attention from other business concerns;
4	potential loss of the other company’s customers;
4	failure to develop further the other company’s technology successfully;
4	unanticipated costs and liabilities; and
4	other accounting consequences.

In addition, we may not realize benefits from any business combination we may undertake in the future. If we fail to successfully integrate such businesses, or the technologies associated with such business combinations into our company, the revenue and operating results of the combined company could be adversely affected. Any integration process would require significant time and resources, and we may not be able to manage the process successfully. If our customers are uncertain about our ability to operate on a combined basis, they could delay or cancel orders for our products. We may not successfully evaluate or utilize the acquired technology or accurately forecast the financial impact of a combination, including accounting charges or volatility in the stock price of the combined entity. If we fail to successfully integrate other companies with which we may combine in the future, our business and your investment could be harmed.

If we fail to obtain necessary funds for our operations, we will be unable to continue to develop and commercialize new products and technologies and we would need to downsize or halt our operations.

We expect capital outlays and operating expenditures to increase over the next several years as we expand our infrastructure, commercialization, manufacturing, clinical trials and research and development activities. We believe the net proceeds of this offering, together with our cash and cash equivalents, will be sufficient to meet our operating and capital requirements for at least the next two years. However, our present and future funding requirements will depend on many factors, including, among other things:

4	the level of research and development investment required to maintain and improve our technology position;
4	costs of filing, prosecuting, defending and enforcing patent claims and other intellectual property rights;
4	the success of our product sales and related collections;

4	our need or decision to acquire or license complementary businesses, products or technologies or acquire complementary businesses;
4	maintaining or expanding our manufacturing or commercialization capacity;
4	competing technological and market developments; and
4	costs relating to changes in regulatory policies or laws that affect our operations.

As a result of these factors, we may need to raise additional funds, and we cannot be certain that such funds will be available to us on acceptable terms when needed, if at all. In addition, if we raise additional funds through collaboration, licensing or other similar arrangements, it may be necessary to relinquish potentially valuable rights to our future products or proprietary technologies, or grant licenses on terms that are not favorable to us. If we cannot raise funds on acceptable terms, we may not be able to expand our operations, develop new products, take advantage of future opportunities or respond to competitive pressures or unanticipated customer requirements.

RISKS RELATING TO OUR INTELLECTUAL PROPERTY

If we are unable to protect our proprietary rights, we may not be able to compete effectively.

Our success depends significantly on our ability to protect our proprietary rights to the technologies used in our products. We rely on patent protection, as well as a combination of copyright, trade secret and trademark laws, and nondisclosure, confidentiality and other contractual restrictions, to protect our proprietary technology. However, these legal means afford only limited protection and may not adequately protect our rights or permit us to gain or keep any competitive advantage. For example, our pending US and foreign patent applications may not issue as patents at all, or if they do, they may not issue as patents in a form that will be advantageous to us or may issue and be subsequently successfully challenged by others and invalidated. Additionally, our family of issued patents and patent applications, if and when issued, relating to our Fetal Fibronectin Test and TLi_IQ System, have a range of expiration dates from 2007 to 2025. We cannot assure you that, upon the expiration of one or more patents relating to our Fetal Fibronectin Test and TLi_IQ System, we will be able to protect our proprietary rights relating to the technologies used in these products. In addition, our pending patent applications include claims to material aspects of our products and procedures that are not currently protected by issued patents. Both the patent application process and the process of managing patent disputes can be time-consuming and expensive. Competitors may be able to design around our patents or develop products that provide outcomes comparable to ours. Although we have taken steps to protect our intellectual property and proprietary technology, including entering into confidentiality agreements and intellectual property assignment agreements with our employees, consultants and advisors, such agreements may not be enforceable or may not provide meaningful protection for our trade secrets or other proprietary information in the event of unauthorized use or disclosure or other breaches of the agreements. In addition, the laws of some foreign countries may not protect our intellectual property rights to the same extent as do the laws of the United States.

Although we may initiate litigation to stop the infringement of our patent claims or to attempt to force an unauthorized user of our patented inventions or trade secrets to compensate us for the infringement or unauthorized use, patent and trade secret litigation is complex and often difficult and expensive, and would consume the time of our management and other significant resources. If the outcome of litigation is adverse to us, third parties may be able to use our technologies without payments to us. Moreover, other companies against whom we might initiate litigation may be better able to sustain the costs of litigation because they have substantially greater resources. Because of these factors relating to litigation, we may be effectively unable to prevent misappropriation of our patent and other proprietary rights.

Our rights to use technologies and patents licensed to us by third parties are not within our control, and we may not be able to commercialize our products without these technologies.

We have licensed a number of patents, including patents related to our Fetal Fibronectin Test and our E-tegrity Test from third parties, including the Fred Hutchinson Cancer Research Center, Inverness Medical and the University of Pennsylvania. Our business may significantly suffer if one or more of these licenses terminate, if we or our licensors fail to abide by the terms of the licenses or fail to prevent infringement by third parties or if the licensed patents are found to be invalid.

If we violate the terms of our licenses, or otherwise lose our rights to these patents, we may be unable to continue developing and selling our products. Our licensors or others may dispute the scope of our rights under any of these licenses. The licensors under these licenses may breach the terms of their respective agreements or fail to prevent infringement of the licensed patents by third parties. Loss of any of these licenses for any reason could materially harm our financial condition and operating results.

In addition, if we determine that our products do not incorporate the patented technology that we have licensed from third parties, or that one or more of the patents that we have licensed is not valid, we may dispute our obligation to pay royalties to our licensors.

Any dispute with a licensor could be complex, expensive and time-consuming and an outcome adverse to us could materially harm our business and impair our ability to commercialize our products, including our Fetal Fibronectin Test. As a result, our stock price might be adversely affected.

If the use of our technologies conflicts with the intellectual property rights of third parties, we may incur substantial liabilities, and we may be unable to commercialize products based on these technologies in a profitable manner, if at all.

Other companies may have or acquire patent rights that they could enforce against us. If they do so, we may be required to alter our technologies, pay licensing fees or cease activities. If our technologies conflict with patent rights of others, third parties could bring legal action against us or our licensees, suppliers, customers or collaborators, claiming damages and seeking to enjoin manufacturing and marketing of the affected products. If these legal actions are successful, in addition to any potential liability for damages, we might have to obtain a license in order to continue to manufacture or market the affected products. A required license under the related patent may not be available on acceptable terms, if at all.

Because patent applications can take many years to issue, there may be currently pending applications unknown to us or reissuance applications that may later result in issued patents upon which our technologies may infringe. There could also be existing patents of which we are unaware that our technologies may infringe. In addition, if third parties file patent applications or obtain patents claiming technology also claimed by us in pending applications, we may have to participate in interference proceedings in the US Patent and Trademark Office to determine priority of invention. If third parties file oppositions in foreign countries, we may also have to participate in opposition proceedings in foreign tribunals to defend the patentability of the filed foreign patent applications. We may have to participate in interference proceedings involving our issued patents or our pending applications.

If a third party claims that we infringe upon its proprietary rights, it could cause our business to suffer in a number of ways, including:

4	we may become involved in time-consuming and expensive litigation, even if the claim is without merit;
4	we may become liable for substantial damages for past infringement if a court decides that our technologies infringe upon a competitor’s patent;

4	a court may prohibit us from selling or licensing our product without a license from the patent holder, which may not be available on commercially acceptable terms, if at all, or which may require us to pay substantial royalties or grant cross-licenses to our patents; and
4	we may have to redesign our product so that it does not infringe upon others’ patent rights, which may not be possible or could require substantial funds or time.

If any of these events occur, our business will suffer and the market price of our common stock may decline.

If we are involved in intellectual property claims and litigation, the proceedings may divert our resources and subject us to significant liability for damages, substantial litigation expense and the loss of our proprietary rights.

In order to protect or enforce our patent rights, we may initiate patent litigation. In addition, others may initiate patent litigation against us. We may become subject to interference proceedings conducted in patent and trademark offices to determine the priority of inventions. There are numerous issued and pending patents in the medical device field. The validity and breadth of medical technology patents may involve complex legal and factual questions for which important legal principles may remain unresolved.

Litigation may be necessary to assert or defend against infringement claims, enforce our issued and licensed patents, protect our trade secrets or know-how or determine the enforceability, scope and validity of the proprietary rights of others. Our involvement in intellectual property claims and litigation could:

4	divert existing management, scientific and financial resources;
4	subject us to significant liabilities;
4	allow our competitors to market competitive products without obtaining a license from us;
4	cause product shipment delays and lost sales;
4	require us to enter into royalty or licensing agreements, which may not be available on terms acceptable to us, if at all; or
4	force us to discontinue selling or modify our products, or to develop new products.

We may be subject to damages resulting from claims that we or our employees have wrongfully used or disclosed alleged trade secrets of their former employers.

Many of our employees were previously employed at universities or other diagnostic companies, including our potential competitors. Although no claims against us are currently pending, we may be subject to claims that these employees or we have inadvertently or otherwise used or disclosed trade secrets or other proprietary information of their former employers. Litigation may be necessary to defend against these claims. Even if we are successful in defending against these claims, litigation could result in substantial costs and be a distraction to management. If we fail in defending such claims, in addition to paying monetary damages, we may lose valuable intellectual property rights or personnel. A loss of key research personnel or their work product could hamper or prevent our ability to market existing or new products, which could severely harm our business.

If we cannot obtain additional licenses to intellectual property owned by third parties that we desire to incorporate into new products we plan to develop, we may not be able to develop or commercialize these future products.

We are developing diagnostic products designed to expand the utility of fetal fibronectin in multiple applications. The technology that we ultimately may use in the development and commercialization of

RISKS RELATING TO THIS OFFERING

You will suffer immediate and substantial dilution.

We expect the initial public offering price of our shares to be substantially higher than the book value per share of our outstanding common stock. Accordingly, investors purchasing shares of common stock in this offering will:

4	pay a price per share that substantially exceeds the value of our tangible assets after subtracting liabilities; and
4	contribute approximately 46.4% of the total amount invested to date to fund us but own only approximately 23.6% of the shares of common stock outstanding after this offering.

To the extent outstanding stock options, warrants or the underwriters’ over-allotment option are exercised after this offering, there will be further dilution to new investors. See “Dilution.”

If our principal stockholders, executive officers and directors choose to act together, they may be able to control our management and operations, which may prevent us from taking actions that may be favorable to you.

Our executive officers, directors and principal stockholders, and entities affiliated with them, will beneficially own in the aggregate approximately 64.88% of our common stock following this offering. This significant concentration of share ownership may adversely affect the trading price of our common stock because investors often perceive disadvantages in owning stock in companies with controlling stockholders. These stockholders, acting together, will have the ability to exert substantial influence over all matters requiring approval by our stockholders, including the election and removal of directors and any proposed merger, consolidation or sale of all or substantially all of our assets. In addition, they could dictate the management of our business and affairs. This concentration of ownership could have the effect of delaying, deferring or preventing a change in control of us or impeding a merger or consolidation, takeover or other business combination that could be favorable to you.

The future sale of our securities could dilute your investment and negatively affect our stock price.

After this offering, we will have approximately 15,889,841 shares of common stock outstanding, or 16,452,341 shares if the underwriters exercise their over-allotment option in full. The 3,750,000 shares sold in this offering, or 4,312,500 shares if the underwriters exercise their over-allotment option in full, will be freely tradable without restriction under the federal securities laws unless purchased by our affiliates. The remaining shares of common stock outstanding after this offering will be available for public sale subject in some cases to volume and other limitations. See “Shares eligible for future sale.” We, our executive officers and directors and our existing stockholders holding an aggregate of over 97% of our shares outstanding (including securities convertible into or exchangeable or exercisable for our common stock) have entered into lock-up agreements with the underwriters that generally expire 180 days after the completion of the offering as described under “Underwriting.”

If our common stockholders sell substantial amounts of common stock in the public market, or the market perceives that such sales may occur, the market price of our common stock could fall. After this offering, the holders of approximately 12,139,841 shares of our common stock and the holders of warrants to purchase 196,915 shares of our common stock will have rights, subject to some

If we issue equity or debt securities to raise additional funds, our existing stockholders may experience dilution and the new equity or debt securities may have rights, preferences and privileges senior to those of our existing stockholders. Furthermore, we may enter into financing transactions at prices that represent a substantial discount to market price. Raising funds through the issuance of equity securities will dilute the ownership of our existing stockholders. A negative reaction by investors and securities analysts to any sale of our equity securities could result in a decline in the trading price of our common stock.

If an active, liquid trading market for our common stock does not develop, you may be unable to sell your shares quickly or at the market price.

Prior to this offering, there was no public market for our common stock. An active trading market for our common stock may not develop following this offering. You may not be able to sell your shares quickly or at the market price if trading in our stock is not active. The initial public offering price may not be indicative of prices that will prevail in the trading market. See “Underwriting” for more information regarding the factors considered in determining the initial public offering price.

If the price and volume of our common stock experience extreme fluctuations, this could lead to costly litigation for us.

Because we operate within the medical devices and diagnostic products industries, our stock price is likely to be volatile. The market price of our common stock may fluctuate substantially due to a variety of factors, including:

4	media reports and publications and announcements about women’s health and cancer diagnostic products or new cancer treatments or innovations that could compete with our products;
4	new regulatory pronouncements, changes in regulatory guidelines, such as adverse changes in reimbursement for women’s health and cancer diagnostic products, and timing of regulatory approvals concerning the products in our pipeline;
4	market conditions or trends related to the medical devices and diagnostic products industries or the market in general;
4	changes in financial estimates or recommendations by securities analysts;
4	the seasonal nature of our revenues and expenses;
4	variations in our quarterly operating results; and
4	changes in accounting principles.

The market prices of the securities of medical devices and diagnostic products companies, particularly companies like ours without consistent product sales and earnings, have been highly volatile and are likely to remain highly volatile in the future. This volatility has often been unrelated to the operating performance of particular companies. Moreover, market prices for stocks of biotechnology-related companies, particularly following an initial public offering, frequently reach levels that bear no relationship to the operating performance of these companies. These market prices generally are not sustainable and are highly volatile. In the past, companies that experience volatility in the market price of their securities have often faced securities class action litigation. Whether or not meritorious, litigation brought against us could result in substantial costs, divert our management’s attention and resources and harm our ability to grow our business.

We have reserved discretion in how we allocate our use of the net proceeds of this offering and if we do not use these proceeds effectively, we may fail to achieve our objectives and our stock price could decline.

We will have flexibility in applying the net proceeds of this offering among the categories of identified uses described in the “Use of proceeds” section of this prospectus. Although we expect to use the net proceeds in the approximate allocations described elsewhere in this prospectus, if we use the net proceeds for corporate purposes that do not yield a significant return or any return at all for our stockholders, our stock price could decline, and you may also not agree with how we allocate the net proceeds of this offering.

Anti-takeover provisions in our certificate of incorporation and bylaws and under Delaware law may inhibit a change in control or a change in management that you consider favorable.

Provisions in our certificate of incorporation and bylaws could delay or prevent a change of control or change in management that would provide you with a premium to the market price of your common stock. These provisions include those:

4	authorizing the issuance without further approval of “blank check” preferred stock that could be issued by our board of directors to increase the number of outstanding shares and thwart a takeover attempt;
4	prohibiting cumulative voting in the election of directors, which would otherwise allow less than a majority of stockholders to elect director candidates;
4	limiting the ability to remove directors;
4	limiting the ability of stockholders to call special meetings of stockholders;
4	prohibiting stockholder action by written consent, thereby requiring all stockholder actions to be taken at a meeting of stockholders; and
4	establishing advance notice requirements for nominations for election to the board of directors or for proposing matters that can be acted upon by stockholders at stockholder meetings.

In addition, Section 203 of the Delaware General Corporation Law limits business combination transactions with 15% stockholders that have not been approved by our board of directors. These provisions and others could make it difficult for a third party to acquire us, or for members of our board of directors to be replaced, even if doing so would be beneficial to our stockholders. Because our board of directors is responsible for appointing the members of our management team, these provisions could in turn affect any attempt to replace the current management team. If a change of control or change in management is delayed or prevented, you may lose an opportunity to realize a premium on your shares of common stock or the market price of our common stock could decline.

We do not expect to pay dividends in the foreseeable future. As a result, you must rely on stock appreciation for any return on your investment.

We do not anticipate paying cash dividends on our common stock in the foreseeable future. Any payment of cash dividends will also depend on our financial condition, results of operations, capital requirements and other factors and will be at the discretion of our board of directors. Accordingly, you will have to rely on capital appreciation, if any, to earn a return on your investment in our common stock. Furthermore, we may in the future become subject to contractual restrictions on, or prohibitions against, the payment of dividends.

Special note regarding forward-looking statementsEXPLANATORY NOTE

This prospectus, including the sections titled “Prospectus summary,” “Risk factors,” “Management’s discussion and analysis of financial condition and results of operations” and “Business,” contains forward-looking statements. Forward-looking statements convey our current expectations or forecasts of future events. All statements contained in this prospectus other than statements of historical fact are forward-looking statements. Forward-looking statements include statements regarding our future financial position, business strategy, budgets, projected costs, plans and objectives of management for future operations. The words “may,” “continue,” “estimate,” “intend,” “plan,” “will,” “believe,” “project,” “expect,” “could,” “would,” “anticipate” and similar expressions may identify forward-looking statements, but the absence of these words does not necessarily mean that a statement is not forward-looking. These forward-looking statements include, among other things, statements about:

4	the unpredictability of our quarterly revenues and results of operations;
4	our estimates regarding market size, future revenues, royalty costs, expenses and capital requirements and needs for additional financing;
4	the rate and degree of market acceptance of our products;
4	our marketing and manufacturing capacity and strategy;
4	our ability to develop and market new and enhanced products;
4	the timing of and our ability to obtain and maintain regulatory clearances for our products;
4	the timing of and ability to obtain reimbursement for our diagnostic products; and
4	our competitors.

Any or all of our forward-looking statements in this prospectus may turn out to be inaccurate. We have based these forward-looking statements largely on our current expectations and projections about future events and financial trends that we believe may affect our financial condition, results of operations, business strategy and financial needs. They may be affected by inaccurate assumptions we might make or by known or unknown risks and uncertainties, including the risks, uncertainties and assumptions described in “Risk factors.” In light of these risks, uncertainties and assumptions, the forward-looking events and circumstances discussed in this prospectus may not occur as contemplated, and actual results could differ materially from those anticipated or implied by the forward-looking statements.

These forward-looking statements speak only as of the date of this prospectus. Unless required by law, we undertake no obligation to publicly update or revise any forward-looking statements to reflect new information or future events or otherwise. You should, however, review the factors and risks we describe in the reports we will file from time to time with the SEC after the date of this prospectus. See “Where you can find additional information.”

Use of proceeds

We estimate that the net proceeds to us from the sale of the shares of common stock we are offering will be approximately $50.5 million, assuming an initial public offering price of $15.00 per share, after deducting underwriting discounts and commissions and the estimated offering expenses payable by us. If the underwriters exercise their over-allotment option in full, we estimate the net proceeds to us from this offering will be approximately $58.4 million.

The primary purposes of this offering are to create a public market for our common stock, raise additional equity capital and facilitate future access to public markets. We intend to use the net proceeds of this offering as follows:

4	approximately $15.0 million to expand our sales and marketing efforts in the United States and internationally;
4	approximately $8.0 million for research and development activities related to product development, clinical trials and regulatory approvals for additional indications for our Fetal Fibronectin Test in the United States and internationally. Potential additional indications include induction of labor, prediction of delivery date and bladder cancer monitoring. We believe that completing clinical programs and preparing FDA submissions required in connection with any FDA approval or clearance for the induction of labor, delivery date and bladder cancer indications would require investments of at least $0.5 million, $2.0 million and $2.0 million, respectively. In addition, we believe that completing the work related to the FDA submission that would be required to apply for FDA reapproval of the SalEst Test would require at least $0.5 million;
4	approximately $7.0 million for research and development activities for oncology-related products and other areas; and
4	the balance for working capital and other general corporate purposes, including approximately $5.0 million for investment in working capital related to expected increases in accounts receivable and inventory and approximately $2.5 million for increases in general and administrative costs, in particular those associated with being a publicly-held company, support of our information technology and communication systems and costs related to human resources. We have no specific plan for use of the remaining proceeds.

We may also use a portion of the net proceeds to acquire or in-license complementary businesses, products or technologies. Although we have no specific arrangements with respect to acquisitions, we evaluate acquisition opportunities and engage in related discussions from time to time. As of the date of this prospectus, we cannot specify with certainty all of the particular uses for the net proceeds from this offering. We reserve the right to change the allocation of the net proceeds based on the changing needs of our business, including the progress and results of our research and development activities, the results of our sales and marketing efforts, acquisition opportunities and competitive developments. Accordingly, our management will have broad discretion in the application of the net proceeds and investors will be relying on the judgment of our management regarding the application of the proceeds of this offering.

Pending use of the proceeds from this offering, we intend to invest the proceeds in a variety of capital preservation investments, including short-term, investment-grade, interest-bearing instruments.

Dividend policy

We have never declared or paid any cash dividends on our capital stock and we do not currently anticipate declaring or paying cash dividends on our capital stock in the foreseeable future. We currently intend to retain all of our future earnings, if any, to finance operations. Any future determination relating to our dividend policy will be made at the discretion of our board of directors and will depend on a number of factors, including future earnings, capital requirements, financial conditions, future prospects, contractual restrictions and covenants and other factors that our board of directors may deem relevant.

Capitalization

The following table summarizes our capitalization as of September 30, 2004:

4	on an actual basis;
4	on a pro forma basis to give effect to:

	4	the conversion of all 15,409,062 shares of our preferred stock outstanding as of September 30, 2004 into 11,957,322 shares of our common stock, which will become effective at the closing of this offering; and
	4	the filing of an amended and restated certificate of incorporation to provide for an authorized capital stock of 5,000,000 shares of preferred stock and 100,000,000 shares of common stock; and

4	on a pro forma as adjusted basis to further reflect the sale of the shares of our common stock we are offering at an assumed public offering price of $15.00 per share, after deducting underwriting discounts and commissions and estimated offering expenses payable by us.

You should read the following table in conjunction with “Management’s discussion and analysis of financial condition and results of operations” and our financial statements and related notes appearing elsewhere in this prospectus.

The number of shares of our common stock to be outstanding immediately after this offering is based on 12,139,841 shares of common stock outstanding as of September 30, 2004 after giving effect to the conversion of all 15,409,062 shares of preferred stock outstanding as of September 30, 2004 into 11,957,322 shares of common stock, which will become effective at the closing of this offering.

The number of shares of our common stock outstanding immediately after this offering excludes:

4	2,163,582 shares of our common stock issuable upon the exercise of stock options outstanding as of September 30, 2004 under our 1995 Stock Option and Restricted Stock Plan, at a weighted average exercise price of $4.70 per share;
4	196,915 shares of our common stock issuable upon the exercise of warrants outstanding as of September 30, 2004 at an exercise price of $3.50 per share;
4	17,056 shares of our common stock available for future grant under our 1995 Stock Option and Restricted Stock Plan as of September 30, 2004; and
4	1,875,000 shares of our common stock available for future grant under our 2004 Equity Incentive Plan, which will become effective upon the completion of this offering.

We effected a three-for-four reverse split of our common stock on December 6, 2004. All common stock share prices and amounts set forth in the table above have been adjusted to give effect to this stock split.

Dilution

If you invest in our common stock, your interest will be diluted immediately to the extent of the difference between the public offering price per share you will pay in this offering and the pro forma net tangible book value per share of our common stock immediately after this offering.

Our net tangible book value as of September 30, 2004 was approximately $(43.7) million, or $(239.59) per share of common stock. Net tangible book value per share is equal to our total tangible assets minus total liabilities, all divided by 182,519 shares of common stock outstanding as of September 30, 2004.

Our pro forma net tangible book value per share as of September 30, 2004 was approximately $1.46 per share. Pro forma net tangible book value per share gives effect to the conversion of all outstanding shares of our preferred stock as of September 30, 2004 into 11,957,322 shares of our common stock, which will become effective at the closing of this offering.

After giving effect to the sale of the 3,750,000 shares of common stock we are offering at an assumed initial public offering price of $15.00 per share, and after deducting underwriting discounts and commissions and our estimated offering expenses, our pro forma as adjusted net tangible book value as of September 30, 2004 would have been approximately $68.3 million, or $4.30 per share.

This represents an immediate increase in pro forma net tangible book value of $2.84 per share and an immediate dilution of $10.70 per share to new investors. The following table illustrates this calculation on a per share basis:

If the underwriters exercise their over-allotment option in full, our pro forma as adjusted book value will increase to $4.63 per share, representing an increase to existing holders of $3.17 per share, and there will be an immediate dilution of $10.37 per share to new investors.

The following table summarizes, on a pro forma as adjusted basis as of September 30, 2004, after giving effect to this offering, and the pro forma adjustments referred to above, the total number of shares of our common stock purchased from us and the total consideration and average price per share by existing stockholders and by new investors:

If the underwriters exercise their over-allotment option in full, the following will occur:

4	the pro forma as adjusted percentage of shares of our common stock held by existing stockholders will decrease to approximately 73.8% of the total number of pro forma as adjusted shares of our common stock outstanding after this offering; and
4	the pro forma as adjusted number of shares of our common stock held by new public investors will increase to 4,312,500, or approximately 26.2% of the total pro forma as adjusted number of shares of our common stock outstanding after this offering.

The tables and calculations above are based on 182,519 shares of our common stock outstanding as of September 30, 2004 and excludes:

4	2,163,582 shares of our common stock issuable upon the exercise of stock options outstanding as of September 30, 2004 under our 1995 Stock Option and Restricted Stock Plan at a weighted average exercise price of $4.70 per share;
4	196,915 shares of our common stock issuable upon the exercise of warrants outstanding as of September 30, 2004 at an exercise price of $3.50 per share;
4	17,056 shares of our common stock available for future grant under our 1995 Stock Option and Restricted Stock Plan as of September 30, 2004; and
4	1,875,000 shares of our common stock available for future grant under our 2004 Equity Incentive Plan, which will become effective upon the completion of this offering.

If all of our outstanding options and warrants as of September 30, 2004 were exercised, the pro forma as adjusted net tangible book value per share after this offering would be $4.34 per share, representing an increase to existing holders of $2.88 per share, and there will be an immediate dilution of $10.66 per share to new investors.

Selected financial data

We have derived the following statements of operations data for each of the three fiscal years ended December 31, 2001, 2002 and 2003 and the balance sheet data at December 31, 2002 and 2003 from our financial statements which have been audited by Ernst & Young LLP, independent registered public accounting firm, and which financial statements and the report thereon we include elsewhere in this prospectus. We have derived our statements of operations data for the fiscal years ended December 31, 1999 and 2000 and the balance sheet data at December 31, 1999, 2000 and 2001 from our audited financial statements that we do not include in this prospectus. The selected financial data at September 30, 2004 and for the nine months ended September 30, 2003 and 2004 have been derived from our unaudited financial statements appearing elsewhere in this prospectus. The unaudited selected financial data include, in the opinion of management, all adjustments, consisting of only normal recurring adjustments, that are necessary for a fair presentation of the financial position and the results of operations for the interim unaudited periods. Operating results for the nine months ended September 30, 2004 are not necessarily indicative of the results that may be expected for the year ending December 31, 2004. You should read the selected financial data in conjunction with our financial statements and the related notes and “Management’s discussion and analysis of financial condition and results of operations” appearing elsewhere in this prospectus.

Management’s discussion and analysis of financial condition and results of operations

The following discussion of our financial conditions and results of operations should be read in conjunction with our financial statements and the notes to those financial statements appearing elsewhere in this prospectus. This discussion contains forward-looking statements that involve significant risks and uncertainties. As a result of many factors, such as those set forth under “Risk factors” and elsewhere in this prospectus, our actual results may differ materially from those anticipated in these forward-looking statements.

OVERVIEW

We design, develop, manufacture and market innovative products for women’s health. Our initial focus is on reproductive healthcare, using our proprietary technologies to predict preterm birth and assess infertility. Our principal product is a patented diagnostic test, the Fetal Fibronectin Test, that utilizes a single-use, disposable cassette and is analyzed on our patented instrument, the TLi_IQ System. This FDA-approved product is designed to objectively determine a woman’s risk of preterm birth by detecting the presence of a specific protein, fetal fibronectin, in vaginal secretions during pregnancy. We began selling our single-use, disposable Fetal Fibronectin Test in 1999 and launched our second-generation system, the TLi_IQ System, in 2001. Sales of TLi_IQ Systems to hospital and clinical laboratories allow healthcare providers access to the Fetal Fibronectin Test, resulting in the potential for better patient care and for significant cost savings by avoiding unnecessary medical treatment. To date, we have shipped over 1,270 TLi_IQ Systems and over 1.1 million Fetal Fibronectin Test cassettes.

We believe the key factors underlying our growth since 1999 include greater healthcare provider acceptance, demonstrated cost savings, expanded reimbursement coverage by insurance companies, expansion of our sales force and increased marketing efforts. Continued growth in test volume and revenue will depend on a number of factors, including placing additional TLi_IQ Systems in hospitals and clinical laboratories, increasing utilization of existing TLi_IQ Systems and developing additional applications or products.

Product sales

Our product sales are derived primarily from the sale of our disposable Fetal Fibronectin Test cassettes. In addition, we derive a small portion of our revenues from the sale of TLi_IQ Systems and other consumables. Sales in the United States accounted for 97% of our product sales in both the nine months ended September 30, 2004 and the year ended December 31, 2003. International sales accounted for 3% of our product sales in both the nine months ended September 30, 2004 and the year ended December 31, 2003. We currently use distributors for sales outside of the United States and Canada. Our business has been in the past and may continue to be seasonal and is affected by customer ordering patterns, which may involve quarterly or semi-annual orders, as well as other factors which may cause quarterly variances in our revenue. As such, revenue may not increase in sequential quarters and our net income may fluctuate significantly.

Cost of product sales

Our cost of product sales represents the cost of materials, overhead associated with the manufacture of our products, direct labor, delivery charges, lab services, royalties and product warranty obligations.

Royalty costs were $1.4 million or 5.9% of revenue for the nine months ended September 30, 2004 as compared to $2.4 million or 12.8% of revenue for the nine months ended September 30, 2003, excluding the effect of a one-time benefit of $2.7 million recorded in the 2004 period. The ongoing reduction in royalty costs and the one-time reduction of $2.7 million in the nine months ended

Selling and marketing expenses

Selling and marketing expenses consist primarily of sales and marketing personnel compensation, sales force incentive compensation, travel, trade-shows, promotional materials and programs, advertising and healthcare provider education materials and events.

General and administrative expenses

Our general and administrative expenses consist primarily of personnel expenses for accounting, human resources, information technology and corporate administration functions. Other costs include facility costs and professional fees for legal and accounting services.

Research and development expenses

Our research and development expenses consist of costs incurred for company-sponsored and collaborative research and development activities. These expenses consist primarily of direct and research-related allocated overhead expenses such as facilities costs, salaries and benefits, and material and supply costs.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

We prepare our financial statements in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses. We base our estimates on historical experience and on various other assumptions that we believe 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. Our critical accounting policies are as follows:

Revenue recognition

Our revenue from product sales is recognized when there is persuasive evidence an arrangement exists, the price is fixed or determinable, delivery to the customer has occurred and collectibility is reasonably assured. We use contracts and customer purchase orders to determine the existence of an arrangement. We assess whether the fee is fixed or determinable based on the terms of the agreement associated with the transaction. We use shipping documents and, if necessary, third-party proof of delivery to verify delivery. In order to determine whether collection is probable, we assess a number of factors, including past transaction history with the customer and the credit-worthiness of the customer. Revenue from our laboratory services is recognized as tests are performed. Contract revenues are recorded over the life of the contract or as performance occurs and the related earnings process is completed based on the performance requirements of the contract.

With respect to sales to distributors, revenue is generally recognized upon shipment, as the title, risks and rewards of ownership of the products pass to the distributors and the selling price of our product is fixed and determinable at that point. The selling prices on sales to a certain distributor through June 30, 2002 were not fixed and determinable until the distributor shipped the products to the end user. Consequently, for this distributor, we recognized revenue only after the shipment of product to the end user. Additionally, on July 1, 2002, we entered into a services agreement with a laboratory and fulfillment company that performs diagnostic tests. Under the terms of the agreement, this company provides certain domestic product distribution and testing services for us. We recognize revenue upon the shipment of products from this company to the end user as the title, risks and rewards of ownership of the products pass from us to the end user at that time. Any advance payments received in excess of revenue recognized are classified as deferred revenue.

Valuation of inventory

Inventories are stated at the lower of standard cost (which approximates actual cost) or market. We calculate an inventory reserve for estimated obsolescence or excess inventory based upon historical demand and assumptions about future demand for our products and market conditions. If our current assumptions about future demand change and if actual market conditions are less favorable than anticipated, additional inventory reserves may be required which would negatively impact our gross profit.

Allowance for doubtful accounts

We maintain an allowance for doubtful accounts related to the estimated losses that may result from the inability of our customers to make required payments. This allowance is determined based upon historical experience and any specific customer collection issues that have been identified. Historically, we have not experienced significant credit losses related to an individual customer or groups of customers in any particular industry or geographic area. However, deterioration in our ability to collect our receivables could result in an increase in our allowance for doubtful accounts and increase our general and administrative expenses.

Stock-based compensation expense

In connection with the grant of stock options to employees and directors, we record deferred stock compensation as a component of stockholders’ equity. Deferred stock compensation for options granted to employees and directors is recorded if the estimated fair value of our common stock on the date the options are granted is greater than their exercise prices. Deferred stock compensation is amortized as a charge to operations over the vesting periods of the options using the straight-line method. Additionally, for options granted to non-employees, the fair value of the options, estimated using the Black-Scholes valuation model, is periodically re-measured with the resulting value charged to expense over the period of the related services being rendered. We recorded stock-based compensation expense related to all of our options of $0, $5,000, and $23,000 for the years ended December 31, 2001, 2002 and 2003, respectively, and $454,000 for the nine months ended September 30, 2004. As of September 30, 2004, we had $3.5 million of deferred stock compensation that will be expensed over the next four years. The amount of stock-based compensation expense to be recorded in future periods may decrease if unvested options, for which deferred stock compensation has been recorded, are subsequently canceled.

Cost of product sales

Royalty costs are included as a cost of product sales. The royalty costs are determined by applying the royalty rate in each license agreement to the specific product offerings included in that particular agreement, including any deductions to sales or royalty cost allowed under the royalty terms. The determination of royalty costs can be affected by various factors including changes in the terms of the

RESULTS OF OPERATIONS

Nine months ended September 30, 2004 as compared to the nine months ended September 30, 2003

Product sales

Product sales for the nine months ended September 30, 2004 were $24.4 million, an increase of 27.2%, or $5.2 million, from $19.2 million for the nine months ended September 30, 2003. The growth in sales was primarily due to an approximate $5.4 million increase in sales of Fetal Fibronectin Test cassettes, partially offset by slight decreases in other revenue of approximately $0.2 million.

Cost of product sales

Cost of product sales for the nine months ended September 30, 2004 was $0.9 million, a decrease of $3.7 million from $4.6 million for the nine months ended September 30, 2003. The decrease in cost of product sales was primarily the result of reduced royalty costs of $1.0 million and a one-time reduction in accrued royalties of $2.7 million that we determined were in excess of amounts actually due. The decrease and one-time reduction of $2.7 million were primarily related to significant new information received in October 2004 which allowed us to conclude that no royalties were due or are required under a license agreement. In addition, a decrease in other product costs of $0.6 million was offset by $0.6 million of costs related to increased unit volumes for the nine months ended September 2004 as compared to the nine months ended September 2003. Non-royalty related costs were unchanged for the period ended September 30, 2004 from the period ended September 30, 2003 as costs related to increased unit sales were offset by lower unit manufacturing costs. As a percent of revenue, cost of product sales was 14.9% of revenue for the nine months ended September 30, 2004, excluding the effect of the one-time reduction in accrued royalties, as compared to 24.1% for the same period in the prior year due to the reduction in royalty costs.

Gross profit

Our gross profit for the nine months ended September 30, 2004 was $23.5 million, an increase of $8.9 million from $14.6 million in the nine months ended September 30, 2003. The gross profit increase was primarily due to increased sales adding $4.6 million, a one-time reduction of accrued royalties of $2.7 million, and $1.6 million in reduced product costs. Gross margin was 85.1%,

Selling and marketing expenses

Selling and marketing expenses for the nine months ended September 30, 2004 were $11.6 million, an increase of approximately 29% from $9.0 million for the nine months ended September 30, 2003. Selling and marketing expenses as a percentage of product sales increased slightly to 47.7% in the nine months ended September 30, 2004 from 47.0% in the nine months ended September 30, 2003. The increase was largely attributable to $1.4 million related to the expansion of our direct sales force, $0.6 million in increased marketing expenses to support the growth in product sales, and $0.3 million in stock-based compensation expense.

General and administrative expenses

General and administrative expenses for the nine months ended September 30, 2004 were $2.6 million, an increase of $0.8 million or 46.9% from $1.8 million for the nine months ended September 30, 2003. General and administrative expenses as a percentage of product sales were 10.8% and 9.3% for the nine months ended September 30, 2004 and 2003, respectively. The increase was primarily attributable to patent and legal expense increases of $0.5 million and increased personnel related expenses of $0.3 million.

Research and development expenses

Research and development expenses for the nine months ended September 30, 2004 were $1.8 million, an increase of 15.5% from $1.5 million for the same period in 2003. The increase was attributable to increased clinical trial expenses related to the induction of labor indication for the Fetal Fibronectin Test and personnel and related costs. Research and development expenses as a percentage of revenue decreased to 7.2% for the nine months ended September 30, 2004 from 7.9% for the same period in 2003.

Interest income (expense)

We recognized interest income of $104,000 for the nine months ended September 30, 2004, an increase of $18,000 from the same period in 2003, primarily due to higher cash balances earning interest. There was no interest expense for the nine months ended September 30, 2004 as compared to $109,000 of interest expense in the same period of 2003. The interest expense in 2003 was primarily related to notes payable in conjunction with the conclusion of a co-promotion and distribution agreement with a major US distributor. The note was repaid by June 30, 2003.

Provision for income taxes

We recorded a provision for income taxes of $307,000 for the nine months ended September 30, 2004 related to federal alternative minimum taxes and state taxes compared to approximately $113,000 for the same period in 2003.

Our effective tax rate for the nine months ended September 30, 2004 was 4.0% compared to 5.1% for the nine months ended September 30, 2003. The effective tax rate for both periods is lower than the statutory rate due primarily to tax benefits arising from the utilization of net operating losses to the extent allowable under current law.

Year ended December 31, 2003 as compared to year ended December 31, 2002

Product sales

Product sales for the year ended December 31, 2003 were $26.5 million, an increase of 85.6%, or $12.2 million from $14.3 million in 2002. The increase was primarily attributable to growth in unit sales of $6.0 million. The increase was also attributable to the reduction in revenue sharing of

Cost of product sales

Cost of product sales for the year ended December 31, 2003 was $6.1 million, an increase of 63.8% from $3.7 million in 2002. The increase was related primarily to the conclusion of the co-promotion and distribution agreement and the resulting increase in our product sales of Fetal Fibronectin Test cassettes. As a percentage of product sales, cost of product sales in 2003 decreased to 23.0% in the year ended December 31, 2003 from 26.0% in the year ended December 31, 2002.

Gross profit

Gross profit was $20.4 million in the year ended December 31, 2003 and $10.6 million in the year ended December 31, 2002. Gross margin for the year ended December 31, 2003 was 77.0%, as compared to 74.0% in 2002. The increase in gross profit was primarily due to the conclusion of the co-promotion and distribution agreement and the resulting increase in our product sales.

Contract revenue

We had no contract revenue in the year ended December 31, 2003. Contract revenue of $1.1 million was recognized in the year ended December 31, 2002. In 1999, we entered into a co-promotion and distribution agreement with a major US distributor. Under the agreement, the distributor paid us a nonrefundable one-time payment of $2.0 million in 1999. This one-time payment was being recognized as revenue over the estimated five-year life of the agreement. At the termination of the agreement in 2002, we recognized the balance of this deferred contract revenue. The distributor was also to pay us a total of up to $2.0 million during 2001 and 2002 to fund certain portions of the research and development efforts related to the products and services covered by this agreement. During the year ended December 31, 2002, we recognized $176,000 of such research and development revenue.

Selling and marketing expenses

Selling and marketing expenses for the year ended December 31, 2003 were $12.3 million, an increase of 56.8% from $7.8 million for the same period in 2002. The increase was primarily due to $3.0 million in costs associated with the expansion of our direct sales force and $0.9 million related to marketing expenditures.

General and administrative expenses

General and administrative expenses for the year ended December 31, 2003 were $2.7 million, an increase of 31.9% from $2.1 million for the same period in 2002. The increase was primarily attributable to increased patent and other legal fees of approximately $0.4 million and increased insurance expense of $0.2 million.

Research and development expenses

Research and development expenses for the year ended December 31, 2003 were $2.0 million, unchanged from the same period in 2002. Lower clinical trial expenses in 2003 were offset by higher usage of supplies and service charges relating to FDA filing and user fees.

Interest income (expense)

We recognized interest income of $112,000 in 2003, a decrease of 47.2% from $212,000 in 2002. The decrease was primarily due to a higher average cash balance in 2002 and lower interest rates in 2003. We recognized interest expense of $131,000 in 2003, a decrease of 40.2% from $219,000 in 2002. The decrease is attributable to interest on capital lease obligations and notes payable which were fully paid in 2002, and interest from the note payable related to the terminated co-promotion and distribution agreement issued in June 2002.

Provision for income taxes

We recorded an income tax provision of $135,000 for the year ended December 31, 2003 related to federal alternative minimum taxes and state taxes. There was no tax provision recorded for the year ended December 31, 2002 due to an operating loss.

Because of our lack of earnings history, the deferred tax assets have been fully offset by a valuation allowance.

As of December 31, 2003, we had federal and state net operating loss carryforwards of approximately $40.3 million and $22.8 million, respectively. We also had federal and state research and development tax credit carryforwards of approximately $1.1 million and $0.9 million, respectively. The federal net operating loss and tax credit carryforwards will expire at various dates beginning in 2004 through 2022, if not utilized. The state net operating loss carryforwards will expire at various dates beginning in 2004 through 2013, if not utilized. The state research and development tax credits carry forward indefinitely.

Utilization of our net operating losses may be subject to substantial annual limitation due to the ownership change limitations provided by the Internal Revenue Code and similar state provisions. Such an annual limitation could result in the expiration of the net operating losses before utilization.

Year ended December 31, 2002 as compared to year ended December 31, 2001

Product sales

Product sales for the year ended December 31, 2002 were $14.3 million, an increase of 111.8% from $6.7 million for 2001. The increase was mainly attributable to an increase in unit sales of Fetal Fibronectin Test cassettes of $3.3 million and the favorable impact of $3.0 million from the conclusion of the co-promotion and distribution agreement with a major US distributor on June 30, 2002 with the addition of $1.2 million due to an increase in average selling price.

Cost of product sales

Cost of product sales for the year ended December 31, 2002 was $3.7 million, an increase of 47.4% from $2.5 million in 2001. The absolute dollar increase was primarily due to the favorable impact of the conclusion of the co-promotion and distribution agreement with a major US distributor. As a percentage of product revenue, cost of product sales in 2002 was 26.0%, significantly lower than the 37.4% in 2001.

Gross profit

Gross profit was $10.6 million in the year ended December 31, 2002 and $4.2 million in the year ended December 31, 2001. Gross margin was 74.0% in 2002 and 62.6% in 2001. The increase was primarily attributable to the conclusion of the co-promotion and distribution agreement with a major US distributor and the resulting increase in our sales.

Contract revenue

Contract revenue for the year ended December 31, 2002 was $1.1 million, an increase of 30.6% from $0.8 million for 2001. In the years ended December 31, 2002 and 2001, respectively, we recognized $176,000 and $244,000 of research and development revenue from a co-promotion and distribution agreement with a major US distributor. Additionally, the Company received a nonrefundable, one-time $2.0 million payment from the distributor in 1999 that was being recognized as revenue over the estimated five-year life of the agreement. The amount of revenue recognized for the years ended December 31, 2002 and 2001 from this one-time payment was $574,000 and $400,000, respectively. Also included in contract revenue are reimbursements for research and development expenses from National Institutes of Health, or NIH, grants. Reimbursements recognized as revenue in 2002 and 2001 were $35,000 and $167,000, respectively.

Selling and marketing expenses

Selling and marketing expenses for the year ended December 31, 2002 were $7.8 million, an increase of 21.5% from $6.4 million in 2001. The increase was primarily due to $0.9 million of expenses related to the expansion of our direct sales force.

General and administrative expenses

General and administrative expenses for the year ended December 31, 2002 were $2.1 million, relatively consistent with $2.0 million in 2001. Increases in personnel related expenses of $171,000, and legal fees of $47,000 were partially offset primarily by reduced bad debt expenses of $73,000.

Research and development expenses

Research and development expenses for the year ended December 31, 2002 were $2.0 million, a decrease of 4.6% from $2.1 million in 2001. The decrease was primarily due to lower clinical trial expenses partially offset by increased personnel expenses.

Interest income (expense)

We recognized interest income of $212,000 in the year ended December 31, 2002, a decrease of 22.1% from $272,000 in 2001. The decrease was primarily due to lower interest rates.

We recognized interest expense of $219,000 in the year ended December 31, 2002, a decrease of 38.7% from $357,000 in 2001. The decrease was attributable to declining interest expense related to capital lease obligations and notes payable.

Provision for income taxes

We recorded no income tax provision for 2002 or 2001 due to operating losses.

Because of our lack of earnings history, the deferred tax assets have been fully offset by a valuation allowance.

LIQUIDITY AND CAPITAL RESOURCES

Since our inception, our operations have been primarily financed through private equity investments, with the addition of capital leases, and research and development contracts. As of September 30, 2004 our cash and cash equivalents were $14.6 million. All of our cash equivalents have original maturities of three months or less.

During the nine months ended September 30, 2004, our operating activities provided cash of approximately $2.7 million, compared to approximately $3.7 million during the nine months ended September 30, 2003. The decrease was due primarily to an increase in net income more than offset by

Our investing activities used cash of approximately $138,000 during the nine months ended September 30, 2004 compared to $357,000 for the nine months ended September 30, 2003. Investing activities in 2004 were related to investments in equipment, while the investing activity in 2003 was primarily due to our acquisition of the SalEst Test.

No cash was used for financing activities during the nine months ended September 30, 2004 compared to $4.3 million used during the nine months ended September 30, 2003. The $4.3 million used during the nine months ended September 30, 2003 was primarily related to repayments of notes payable.

For the year ended December 31, 2003 our operating activities provided cash of approximately $5.5 million. This was an increase of $9.4 million from the cash used in operating activities of $3.9 million for the year ended December 31, 2002. This change was primarily due to a loss of $0.3 million in the year ended December 31, 2002 in comparison to net income of $3.2 million in 2003. Additionally, accounts receivable increased by $1.3 million in the year ended December 31, 2003, in comparison to an increase of $3.9 million in 2002, and deferred revenue increased by $0.2 million in 2003, in comparison to a decrease of $1.9 million in 2002. These changes in accounts receivable and deferred revenue were due primarily to the conclusion of the co-promotion and distribution agreement with a major US distributor.

For the year ended December 31, 2003 our investing activities used cash of approximately $0.4 million. This was an increase of $0.2 million from cash used in investing activities of $0.1 million for the year ended December 31, 2002. The increase was due to the purchase of intangible assets and equipment.

For the year ended December 31, 2003 our financing activities used $3.8 million. This was an increase of $1.9 million from cash used in financing activities of approximately $1.9 million for the year ended December 31, 2002. The increase was primarily attributable to payments on notes payable.

As of September 30, 2004, we had no long-term debt, capital lease obligations or long-term purchase agreements or commitments other than a facility lease which we have for a one-year term with two one-year renewal options and an operating lease for a new telephone system. Future operating lease payments under both of these leases are included in the table below. The table also reflects our expectations regarding reductions in accrued royalties.

In addition to cash generated from product sales, we believe our existing cash and cash equivalents, together with the estimated net proceeds from this offering, will be sufficient to meet our anticipated cash requirements for at least the next two years. However, future research and development, clinical trials and sales and marketing expenses, as well as administration support, may require additional capital resources. We may raise additional funds through public or private equity offerings, debt financings, capital lease transactions, corporate collaborations or other means. Due to the uncertainty of financial markets, financing may not be available to us on acceptable terms or at all. Therefore, we may raise additional capital from time to time due to favorable market conditions or strategic considerations even if we have sufficient funds for planned operations.

Our future capital requirements are difficult to forecast and will depend on many factors, including:

4	success of our product sales and related collections;
4	future expenses to expand and support our sales and marketing activities;
4	costs relating to changes in regulatory policies or laws that affect our operations;
4	maintaining and expanding our manufacturing capacity;
4	the level of investment in research and development and clinical trials required to maintain and improve our technology position;
4	costs of filing, prosecuting, defending and enforcing patent claims and other intellectual property rights; and
4	our need or decision to acquire or license complementary businesses, products or technologies.

If at any time sufficient capital is not available, either through existing capital resources or through raising additional funds, we may be required to delay, reduce the scope of, eliminate or divest one or more of our research, clinical, sales and marketing programs or our entire business.

RECENT ACCOUNTING PRONOUNCEMENTS

In January 2003, the Financial Accounting Standards Board, or FASB, issued InterpretationAmendment No. 46,Consolidation of Variable Interest Entities(FIN 46). FIN 46 requires a variable interest entity to be consolidated by a company if that company is subject to a majority of the risk of loss from the variable interest entity’s activities or entitled to receive a majority of the entity’s residual returns or both. A variable interest entity is a corporation, partnership, trust or any other legal structure used for business purposes that either (a) does not have equity investors with voting rights or (b) has equity investors that do not provide sufficient financial resources for the entity to support its activities. Our adoption of the requirements of FIN 46 did not have an impact on our financial position or results of operations.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

To date, all of our sales have been denominated in US dollars. Accordingly, we believe that there is no material exposure to risk from changes in foreign currency exchange rates.

We hold no derivative financial instruments and do not currently engage in hedging activities.

Our exposure to interest rate risk at December 31, 2003 and September 30, 2004 is related to the investment of our excess cash into highly liquid financial investments with original maturities of three months or less. We invest in marketable securities in accordance with our investment policy. The primary objectives of our investment policy are to preserve principal, maintain proper liquidity to meet operating needs and maximize yields. Our investment policy specifies credit quality standards for our investments. Due to the short term nature of our investments, we have assessed that there is no material exposure to interest rate risk arising from them.

Business

OVERVIEW

We design, develop, manufacture and market innovative products for women’s health. Our initial focus is on reproductive healthcare, using our proprietary technologies to predict preterm birth and assess infertility. Our principal product is a patented diagnostic test, the Fetal Fibronectin Test, that utilizes a single-use, disposable cassette, and is analyzed on our patented instrument, the TLi_IQ System. This test is approved by the FDA for broad use in assessing the risk of preterm birth.

Our Fetal Fibronectin Test is designed to objectively determine a woman’s risk of preterm birth by detecting the presence of a specific protein, fetal fibronectin, in vaginal secretions during pregnancy. Testing for fetal fibronectin during pregnancy provides a more accurate assessment of the likelihood of a preterm birth than traditional methods. According to the New England Journal of Medicine, preterm births have historically accounted for up to 85% of all pregnancy-related complications and deaths in the United States. The March of Dimes estimated that over $13 billion in costs were associated with the care of preterm or low birth weight infants in 2001. By correctly identifying women at risk for preterm birth, we believe our Fetal Fibronectin Test leads to improved patient care and significant cost savings and has the potential to fundamentally change how healthcare providers select the appropriate course of treatment for pregnant women.

Healthcare providers have historically had difficulty with accurately predicting when a woman is likely to give birth. Data from numerous clinical studies have demonstrated that our Fetal Fibronectin Test has a greater predictive value than traditional risk assessment methods for identifying women at risk of preterm birth. For example, a negative Fetal Fibronectin Test for a woman presenting with signs and symptoms of preterm labor indicates a 99.5% probability that she will not deliver in the next 7 days. A negative test result enables the healthcare provider to avoid unnecessary and costly hospitalization and drug treatment. Although a positive Fetal Fibronectin Test result does not have the same predictive value as a negative test result, if the Fetal Fibronectin Test result is positive, the healthcare provider may proactively prescribe various treatments to delay or manage preterm labor and birth.

The patient population for which our Fetal Fibronectin Test is approved can be divided into three patient categories. The first category consists of women who present with signs and symptoms of preterm labor and are typically directed to the hospital. The second and third categories include women designated as either “high-risk” or “low-risk” for preterm birth by their healthcare providers, and who currently exhibit no signs and symptoms of preterm labor. We believe that by using the Fetal Fibronectin Test periodically during a pregnancy, healthcare providers can more accurately assess the likelihood that women in all three categories will not deliver preterm.

As of September 30, 2004, we have shipped more than 1,270 TLi_IQ Systems and over 1.1 million Fetal Fibronectin Test cassettes for use in hospital and clinical laboratories. As of September 30, 2004, our direct sales force consisted of 67 representatives who sell to hospital and clinical laboratories, health plans and healthcare providers. Our Fetal Fibronectin Test has been assigned a reimbursement code used for insurance processing of claims for the Fetal Fibronectin Test, and we believe that reimbursement for our Fetal Fibronectin Test has been regularly available through health plan organizations and most state Medicaid programs.

We also market and sell the E-tegrity Test, an infertility-related test based on a proprietary analyte specific reagent, to assess receptivity of the uterus to embryo implantation in women with unexplained infertility. The E-tegrity Test can be particularly useful for women who are considering assisted reproductive technologies, including in vitro fertilization, or IVF. We are also seeking to expand the indications for use of our Fetal Fibronectin Test for predicting successful induction of labor, for predicting delivery at term and for diagnostic applications in oncology, including bladder cancer.

OVERVIEW OF TARGETED MARKETS

Preterm birth

There are approximately four million births in the United States annually. Births occurring before 37 weeks of pregnancy are defined as preterm, and in recent years, according to a 2003 publication by the Center for Disease Control and Prevention, or CDC, preterm births represent approximately 12% of all births. On average, this equates to over 1,300 preterm births per day, or 480,000 preterm births per year. According to the Centers for Disease Control and Prevention, the percentage of preterm births in the United States grew to 12% of all births in 2002, an increase of 29% since 1981. This increase in the preterm birth rate is a growing public health concern. In January 2003, the March of Dimes launched a five-year, $75 million campaign to reduce the number of preterm births.

According to a 1994 publication from the National Conference of State Legislators, the costs of newborn intensive care in the United States ranged between $20,000 and $400,000 per infant. According to a 2001 study from the March of Dimes, the average hospital charge for preterm/low birth weight infants was $75,000, compared to $1,300 for an uncomplicated newborn stay. Infants born preterm often receive specialized care in a neonatal intensive care unit, or NICU, with charges ranging from approximately $800 to $2,700 per day in 1998. In addition, medical costs following discharge for preterm births can be substantial as a result of ongoing physical and mental developmental complications. We believe medical costs can be reduced if women at risk of preterm birth could be identified earlier and appropriately treated.

Preterm birth market segments

Women that are evaluated and potentially treated for preterm birth fall into three categories:

4	Women with signs and symptoms of preterm labor— We believe that there are approximately 1 million episodes each year in the United States where women who were originally designated as either “high- risk” or “low-risk” for preterm birth seek urgent medical care for signs and symptoms of preterm labor. Some of these signs and symptoms include uterine contractions, cervical dilation, vaginal infection, backache, pelvic pain, abdominal fullness or discomfort, change in vaginal discharge and vaginal bleeding. However, as these signs and symptoms are common throughout pregnancy, they do not provide a sufficient basis for making an accurate diagnosis of preterm labor and impending birth. Without a reliable method to assess the risk of preterm birth, the healthcare provider may not be able to make appropriate treatment decisions, such as whether to hospitalize the woman, prescribe medications to delay the onset of labor or accelerate fetal lung development, request expensive transport to an advanced NICU facility, or instruct women to remain home on bed rest and discontinue employment. If appropriate, these interventions can significantly increase the chance of infant survival. If healthcare providers could accurately identify women at risk, they could avoid many unnecessary interventions and their associated costs.
4	Women designated as “high-risk” for preterm birth— We believe that up to 1.2 million women in the United States annually may be designated as “high-risk” for preterm birth during their pregnancy. Risk factors include previous preterm birth, multiple gestation, uterine anomalies, gestational diabetes, hypertension, low pre-pregnancy weight, use of illicit drugs, sexually transmitted diseases, vaginal infections, smoking, consumption of alcohol and demographic factors such as low socioeconomic status, certain ages and races. In addition, some women may also be designated as “high-risk” later in pregnancy when evaluated using a vaginally inserted ultrasound probe to assess cervical length. This method requires specially trained medical personnel, and its accuracy is highly dependent on specific user technique. However, healthcare providers have had limited success in accurately determining the risk of preterm birth based on these risk factors and evaluations. As a result, there is a need for an easy-to-use, objective method to identify women at multiple times during pregnancy who are truly at high risk for preterm birth.

4

Women designated as “low-risk” for preterm birth— We believe that up to 2.8 million women annually in the United States with no known risk factors are designated as “low-risk.” However, according to the March of Dimes women with no known causes of preterm birth account for approximately 50% of all preterm births. We believe the ability to accurately diagnose which of these women are truly at high risk for preterm birth is currently beyond the scope of traditional evaluation methods. Women who are inaccurately identified as “low-risk” are excluded from the potential benefits of existing interventions. If these women could be accurately identified as “high-risk” by periodic testing, their pregnancies potentially could be prolonged with appropriate medical treatment and lifestyle changes. These treatments could result in substantial medical benefits to the mother and infant, as well as significant cost savings.

Current treatments and interventions for preterm birth

Identification of women at risk for preterm birth can be critical because the use of certain interventions to delay preterm birth may improve infant survival rates and reduce the severity of complications. Interventions may include hospitalization, consultation with a highly-skilled specialist, transport to a more advanced NICU facility, drug treatments such as tocolytics, which are used to delay the onset of birth by reducing contractions, corticosteroids for acceleration of fetal lung development, administration of progesterone to reduce the likelihood of preterm birth, antibiotics, and lifestyle modifications, including bed rest and discontinuing work.

There is ongoing research into the development of medications to further slow or prevent preterm births. For example, a multi-center, randomized, controlled, clinical trial was conducted by the National Institutes of Health and published in the New England Journal of Medicine in 2003 that used a progesterone formulation to prevent preterm birth in a group of “high-risk” women with a prior preterm birth. The study showed that in women with a prior preterm birth, there was a reduction in preterm birth by more than 33% in the treatment group as compared to a group treated with a placebo.

Infertility

According to the CDC National Center for Health Statistics, approximately 6.1 million women in the United States are affected by some form of infertility. It was estimated that approximately 1.2 million women had an infertility appointment in 1995 in the United States. Based upon a 1998 publication by the American Society for Reproductive Medicine, we believe approximately 10% to 15% of infertile women are classified as suffering from unexplained infertility where extensive tests for known factors have failed to reveal a cause. Infertile women are candidates for assisted reproductive technologies, including IVF.

According to the American Society of Reproductive Medicine, the average cost of an IVF cycle is $12,400. Receptivity of the uterus to undergo implantation varies by patient, and we are unaware of any current methods by which to evaluate women on this basis. The ability to predict good candidates for IVF procedures would help prevent unnecessary and costly IVF cycles.

Induction of labor

Induction of labor is the process by which medications and other treatments are used to initiate labor and delivery. According to a 2003 publication by the CDC, in 2002, 820,000 of the estimated four million births in the United States were induced. The same publication indicated that the percentage of induced labor more than doubled from approximately 9% in 1989 to approximately 21% in 2002. Induction of labor may be required for certain maternal or fetal conditions. In addition, we believe a number of inductions are elective in nature and performed for the convenience of the patient or healthcare provider. Healthcare providers have traditionally assessed women as candidates for successful induction of labor through the presence of certain clinical characteristics such as softness, dilation and thickness of the woman’s cervix. These clinical characteristics are not always reliable

We believe the current use of subjective evaluation techniques to predict the successful induction of labor contributes to the annual cesarean section rate in the United States. Based upon a 2003 publication by the CDC, cesarean sections represented 26% of all births in the United States in 2002. This is the highest rate ever reported in the United States and has risen 26% since 1996. Delivery by cesarean section typically results in costs of approximately $2,000 more than vaginal delivery based on a 2002 article published by the American Journal of Obstetrics and Gynecology. In addition, unsuccessful induction of labor may be associated with medical complications for both the mother and infant, as well as increased hospital stays and neonatal costs. In addition, women who undergo a cesarean section are often encouraged to continue to have cesarean sections in subsequent pregnancies. An objective diagnostic test to assist healthcare providers in predicting the successful induction of labor would help improve labor success rates and reduce unnecessary cesarean sections.

Oncology — bladder cancer

According to a 2003 publication in the Journal of Clinical Ligand Assay, bladder cancer is the fifth most common cancer in the United States. The American Cancer Society estimates that there will be more than 60,000 new cases diagnosed in the United States in 2004. The National Cancer Institute found in a 1995 study that the existing patient population for bladder cancer is approximately 500,000 cases. According to a 2004 article published in Clinical Chemistry, following treatment, even patients initially diagnosed with superficial tumors must be monitored closely as two-thirds of these patients will experience a recurrence within five years and almost 90% will have a recurrence within 15 years. Current diagnostic tools and techniques include visual observation through cystoscopy, evaluation of potential cancer cells through cytology and assessment of tissue biopsies. There are several FDA-cleared tests for monitoring patients and a limited number of tests that have been approved by the FDA for use in screening for bladder cancer. However, these tests detect bladder cancer with varying degrees of success and are generally more successful in detecting more advanced cancers. We believe there is a market opportunity for a more accurate and reliable test to monitor and screen for bladder cancer at an early stage.

FETAL FIBRONECTIN OVERVIEW

Fetal fibronectin is a protein expressed in the fetal membranes and placenta at the interface between the mother and fetus. Fetal fibronectin is believed to play a role in the adhesion of the fetal membranes to the wall of the uterus. In a normal pregnancy, the level of fetal fibronectin in vaginal secretions is typically elevated through weeks 16 to 20 of gestation as the fetal membranes adhere to the uterine wall. From week 20 through week 35 of gestation, fetal fibronectin levels are typically low. As the pregnancy reaches term, the fetal fibronectin level rises significantly. Therefore, low levels of fetal fibronectin in vaginal secretions between week 20 and week 35 of gestation are highly correlated with a low risk of preterm birth, while high levels of fetal fibronectin during this time period indicate a greater risk of preterm birth. Testing for the presence or absence of fetal fibronectin enables healthcare providers to identify women at risk for preterm birth, and may also be useful in predicting the successful induction of labor.

Fetal fibronectin has also been shown to be present in certain forms of cancer. In oncology, fetal fibronectin is referred to as oncofetal fibronectin. The protein is expressed in several forms of cancer where its adhesive properties may help the cancer to attach to tissue and grow. Oncofetal fibronectin can potentially be detected in cancerous tissues or in fluids that come into contact with those tissues.

THE ADEZA SOLUTION

We believe that our proprietary, FDA-approved diagnostic test and instrument, the single-use, disposable Fetal Fibronectin Test and the TLi_IQ System have the potential to fundamentally change how healthcare providers select the appropriate course of treatment for pregnant women and to become a standard of care for use in pregnancy. The clinical efficacy of our fetal fibronectin test for preterm birth has been demonstrated in numerous peer-reviewed clinical publications, including the Peaceman et al. trial, published in the American Journal of Obstetrics and Gynecology, and the Goldenberg et al. trial, published in the American Journal of Public Health and Obstetrics & Gynecology, two multi-center clinical trials. Our Fetal Fibronectin Test was used to obtain the results described in each of these publications. In addition, cost savings resulting from the use of our test have also been confirmed in peer-reviewed publications such as articles published by Joffe et al. and Giles et al. in the American Journal of Obstetrics and Gynecology.

The Fetal Fibronectin Test and the TLi_IQ System have the following key characteristics:

4	Objective result—Instrument provides a positive or negative result;
4	Low-cost instrument—Minimal cost is incurred to acquire the instrument;
4	Rapid turnaround— Produces a result in less than 25 minutes;
4	Easy to use— Simple and convenient test procedure and instrument user interface;
4	Established reimbursement— Reimbursement provided by large US health plans; and
4	Significant cost savings opportunity—Reduces hospital admissions, eliminates unnecessary transports and avoids costly interventions.

We market the Fetal Fibronectin Test to healthcare providers for women who are seeking urgent medical care for signs and symptoms of preterm labor in the hospital. While a woman5 is being evaluated, the Fetal Fibronectin Test is run in the hospital laboratory with the result generated in less than 25 minutes. A negative Fetal Fibronectin Test for women with signs and symptoms of preterm labor effectively rules out the chance of preterm birth in the next seven days, with a 99.5% probability, as reported by Peaceman et al. in the American Journal of Obstetrics and Gynecology and incorporated in our FDA labeling. We believe this avoids unnecessary hospitalization, medications, hospital transport, or bed rest. A positive Fetal Fibronectin Test provides the healthcare provider with a more accurate assessment of who will deliver preterm in the next seven days than traditional risk factors. The probability of a preterm birth within seven days of a positive Fetal Fibronectin Test is 12.7%, according to data collected by Peaceman et al. and incorporated in our FDA labeling. By comparison, the Peaceman et al. data indicates that traditional risk factors such as genital tract infection, uterine activity, vaginal bleeding and cervical dilation have positive predictive values of only 1.7%, 6.3%, 7.6% and 8.5%, respectively. If the Fetal Fibronectin Test is positive, the healthcare provider may proactively prescribe various treatments to delay or manage preterm labor and birth.

We also market the Fetal Fibronectin Test to healthcare providers for women who have been designated as “high-risk.” These women should be carefully monitored throughout their pregnancy, and a Fetal Fibronectin Test can be used multiple times in their pregnancy during their frequent visits to their healthcare provider’s office. In those cases, fetal fibronectin samples are collected from women in healthcare providers’ offices and picked up for testing by a clinical laboratory. Results are typically returned to the healthcare provider within 24 hours. The use of the Fetal Fibronectin Test for this patient population helps to identify women who are not at risk of delivering preterm.

In addition, we believe that our product has the potential to be used in routine patient visits for women who have been designated as “low-risk” by their healthcare providers. According to a 2001 article published in the American Journal of Obstetrics and Gynecology, over 50% of all preterm births occur when no major risk factors are present. Our Fetal Fibronectin Test may provide an

In these “high-risk” and “low-risk” patient categories, a large, multi-center, peer reviewed clinical study by Goldenberg, et al. in the American Journal of Obstetrics and Gynecology comparing the most common predictors of preterm birth demonstrated that the Fetal Fibronectin Test was the single strongest predictor of preterm birth at less than 35 weeks of pregnancy.

A peer-reviewed, cost-benefit study published in 1999 by Joffe, et al. in the American Journal of Obstetrics and Gynecology addressed the potential impact of the Fetal Fibronectin Test in a hospital system. Data obtained from a year when the Fetal Fibronectin Test was utilized was compared to the prior year when the test was not available. Use of the Fetal Fibronectin Test resulted in a significant cost savings for the hospital system by reducing preterm labor hospital admissions, length of stay, and prescriptions for tocolytic agents. Preterm labor hospital admissions alone were decreased by approximately 40%.

We believe our potential aggregate market size is defined by the number of pregnant women who are potential candidates for the Fetal Fibronectin Test and the number of tests they may receive during their pregnancies. We believe that every year approximately 800,000 women with signs and symptoms of preterm labor are candidates for one Fetal Fibronectin Test per episode during their hospital visit, and that there are approximately 1.2 million women each year who are designated as “high-risk” and who are candidates to be tested three times, on average, during their regularly scheduled office visits. We estimate that these two patient populations represent a total market opportunity of approximately 4.4 million tests, or over $400 million, annually. If we are able to expand the use of the Fetal Fibronectin Test with the approximately 2.8 million women per year who we believe are designated as “low-risk” and who are candidates to be tested three times, on average, during their regularly scheduled office visits, this would represent an additional potential market opportunity of 8.4 million tests annually. We estimate that the potential aggregate annual market size for all Fetal Fibronectin Tests, including preterm and other uses, can be greater than $1 billion.

PRODUCTS

The following table summarizes information related to our principal products and certain products under development.

We also sell certain consumables related to our principal products and a fetal fibronectin test intended for certain international markets. None of these consumable or international specific products represent a material portion of our revenues.

Marketed products

Preterm birth products

Our Fetal Fibronectin Test has been approved by the FDA for assessing the risk of preterm birth. We manufacture and market the patented single-use, disposable Fetal Fibronectin Test, which is performed on our patented instrument, the TLi_IQ System. The Fetal Fibronectin Test cassette is sold directly to hospital and clinical laboratories that perform the test and provide results to healthcare providers.

TLi_IQ System.The TLi_IQ System consists of the TLi_IQ instrument and printer. The TLi_IQ instrument is small and compact, approximately eight inches long by seven inches wide by three inches high, and is composed of:

4	A keypad which is used to enter patient and user identification information;
4	A display which provides simple on-screen commands to guide the user through the testing sequence;
4	A fiber-optic scanner that is contained inside the instrument, which creates a digitized image of the test result; and
4	Sophisticated technology that analyzes each Fetal Fibronectin Test cassette.

The printer for the TLi_IQ System generates a label with the patient test result.

Fetal Fibronectin Test cassette.The Fetal Fibronectin Test cassette is a single-use, dry chemistry cassette. All the necessary reagents for one test are contained within the cassette.

Test procedure.A healthcare provider collects a sample of the patient’s vaginal secretions using our Fetal Fibronectin Specimen Collection Kit. The Fetal Fibronectin Specimen Collection Kit contains a sterile polyester swab and specimen transport tube. The swab is placed into the transport tube, which contains a proprietary buffer solution that extracts and stabilizes the fetal fibronectin sample during transport. The transport tube containing the patient sample is sent to the hospital or clinical laboratory for analysis on the TLi_IQ instrument. At the laboratory, the Fetal Fibronectin Test cassette is inserted into the chamber of the TLi_IQ instrument, and then the patient sample is dispensed into the sample well to begin the Fetal Fibronectin Test. The TLi_IQ instrument produces a positive or negative test result in less than 25 minutes and prints the test result on a label that can be affixed to the patient’s record. The Fetal Fibronectin Test can be easily run with minimal training of laboratory personnel required.

Infertility products

E-tegrity Test.The E-tegrity Test is a patented diagnostic test designed to determine receptivity of the uterus to embryo implantation. The E-tegrity Test identifies the presence or absence of a unique protein, alpha-v beta-3 integrin, important for implantation to occur. This unique protein is the basis of our proprietary analyte specific reagent, or ASR, on which the E-tegrity Test is based. If a woman is missing the alpha-v beta-3 integrin protein between days 20 to 24 of her menstrual cycle, the fertilized egg may not attach properly to the epithelial lining of the uterus. As a result, a woman’s chances of a successful pregnancy are significantly decreased.

The E-tegrity Test provides healthcare providers with a new method for potentially explaining the cause of a woman’s infertility. Women who may be helped by the E-tegrity Test include women that are having difficulty getting pregnant by natural means, women who are considering assistive reproductive technologies, and women who have already tried IVF without success. A negative test provides a potential reason for the woman’s infertility, and the healthcare provider can then initiate appropriate treatments to potentially increase the chance for successful embryo implantation. We believe the E-tegrity Test can provide significant cost savings by potentially reducing the number of failed IVF cycles. Peer-reviewed publications have shown that women missing alpha-v beta-3 integrin can benefit from drug therapy that improves uterine receptivity for embryo implantation. We perform the E-tegrity Test exclusively in our CLIA-certified laboratory, Adeza Diagnostic Services.

Products under development

Pregnancy products

Induction of labor

Preterm birth

Delivery date

Oncology products

We are exploring applications for oncofetal fibronectin in oncology and have initially focused our efforts in the area of bladder cancer. In addition, we are developing and evaluating protocols, and plan to perform preliminary feasibility studies for the use of oncofetal fibronectin for the detection of cervical and ovarian cancer.

Bladder cancer

We are developing an oncofetal fibronectin test for the detection of bladder cancer using urine samples. A third-party preliminary feasibility study conducted in Germany, published in 2001 in the peer-reviewed journal Oncology Reports, on 40 bladder cancer patients and 20 non-cancer control patients evaluated whether oncofetal fibronectin could be detected in the urine of bladder cancer patients using our test. The results of this study showed that 38 of the 40 bladder cancer patients tested positive for oncofetal fibronectin using our test (a 95% detection rate) while all 20 of the control patients tested negative. In this study, the relationship between a positive oncofetal fibronectin test and the presence of bladder cancer was statistically significant (p < .001). This preliminary feasibility study included a small number of patients, and later studies may not confirm the results from this study. We recently initiated another study in Germany to expand on the earlier study and to obtain further clinical data.

OUR STRATEGY

Our goal is to be a leader in the development and commercialization of proprietary diagnostic products for reproductive healthcare. In addition, we intend to commercialize products for diagnostic applications in oncology. We believe that our products can assist healthcare providers in making more timely and accurate diagnoses, leading to improved quality of care and significant cost savings for the healthcare system. The key elements of our strategy are to maximize the value of our commercialized products and build for future growth by continuing to develop our product pipeline. In order to effectively execute this strategy we plan to:

Leverage existing sales and marketing infrastructure to increase market penetration

As of September 30, 2004, our existing sales force consisted of 67 direct sales representatives. We intend to leverage these representatives to increase market penetration of our TLi_IQ System in hospital and clinical laboratories as well as to increase the number of Fetal Fibronectin Tests run on each TLi_IQ System within our current customer base. Our direct sales representatives call on healthcare providers in the hospital and office setting, as well as on clinical laboratories and health plans, to broaden the overall awareness of our Fetal Fibronectin Test and its associated benefits. Our sales representatives use peer-reviewed publications, cost-benefit data, case studies and other marketing materials to promote the benefits of our Fetal Fibronectin Test and drive increased utilization. In addition, our marketing organization has implemented a national speakers program where healthcare providers, such as