~~Table~~UNITED ofSTATES SECURITIES ~~Contents~~AND EXCHANGE COMMISSION

Washington, D.C. ~~UNITED STATES SECURITIES AND EXCHANGE COMMISSION~~ 20549

~~Washington,~~FORM ~~D.C. 20549~~ 10-K

~~FORM 10-K~~ (Mark One)

(Mark One)
þ		ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED MARCH 31, 2006 OR
o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM __________ TO __________

þ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED MARCH 30, 2007

~~Commission file number: 000-20198~~ OR

o TRANSITION ~~CHOLESTECH~~REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF ~~CORPORATION~~1934 FOR THE TRANSITION PERIOD FROM TO

~~(Exact~~Commission ~~name~~file ofnumber: ~~registrant as specified in its charter)~~ 000-20198

California		94-3065493
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)
3347 Investment Boulevard Hayward, California (Address of principal executive offices)		94545 (Zip Code)

CHOLESTECH CORPORATION
(Exact name of registrant as specified in its charter)

Registrant’s telephone number, including area code: (510) 732-7200

California		94-3065493
(State or other jurisdiction of		(I.R.S. Employer
incorporation or organization)		Identification No.)
3347 Investment Boulevard
Hayward, California		94545
(Address of principal executive offices)		(Zip Code)

Registrant’s telephone ~~Securities~~number, ~~registered~~including ~~pursuant~~area ~~to Section 12(b) of the Act~~code: ~~None~~

~~Securities registered pursuant to Section 12~~(g510) ~~of the Act: Common Stock, no par value Series~~ ~~A Participating Preferred Stock, no par value (Title of Class)~~ 732-7200

Securities ~~Indicate~~registered bypursuant ~~check~~to ~~mark if the registrant is a well-known seasoned issuer, as defined in Rule~~Section ~~405~~12(b) of the ~~Securities~~ Act~~. Yes o No þ~~ :

~~Indicate~~Title byof ~~check~~each ~~mark~~class ifName ~~the~~of ~~registrant~~each isexchange ~~not~~on ~~required~~which toregistered: ~~file reports~~Common ~~pursuant~~Stock, tono ~~Section 13~~par orvalue ~~Section 15(d)~~Series ofA ~~the Act. Yes o No þ~~ Participating Preferred Stock, no par value The NASDAQ Stock Market LLC (The NASDAQ-GM)

Securities ~~Indicate~~registered bypursuant ~~check mark whether the registrant (1) has filed all reports required~~ to ~~be filed by~~ Section ~~13 or 15~~12(dg) of ~~the~~ ~~Securities Exchange Act of 1934 during~~ the ~~preceding~~Act: 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o None

Indicate by check mark if ~~disclosure~~the ofregistrant ~~delinquent~~is ~~filers pursuant~~a ~~to Item 405 of Regulation S~~well-~~K is~~known ~~not~~seasoned ~~contained herein~~issuer, ~~and~~as ~~will~~defined ~~not be contained, to the best of the registrant’s knowledge,~~ in ~~definitive proxy or~~ ~~information statements incorporated by reference in Part~~Rule ~~III~~405 of ~~this Form 10-K or~~the ~~any~~Securities ~~amendment to this Form 10-K~~Act. Yes þ o No o þ

Indicate by check mark ~~whether~~if the registrant is anot ~~large accelerated~~required ~~filer,~~to anfile ~~accelerated~~reports ~~filer,~~pursuant ~~or a non-accelerated~~to ~~filer.~~Section 13 ~~See~~or ~~definition~~Section 15(d) of ~~“accelerated filer and large accelerated filer” in Rule 12b-2 of~~ the ~~Exchange~~ Act. ~~(Check one):~~ Yes o No þ

~~Large~~Indicate by ~~accelerated~~check ~~filer~~mark owhether ~~Accelerated~~the ~~filer~~registrant þ(1) has ~~Non-accelerated~~filed ~~filer~~all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o

Indicate by check mark ~~whether~~if ~~the~~disclosure ~~registrant~~of isdelinquent afilers ~~shell~~pursuant ~~company (as~~to ~~defined~~Item 405 inof ~~Rule~~Regulation ~~12b~~S-2K is not contained herein, and will not be contained, to the best of the ~~Exchange~~registrant’s knowledge, in definitive proxy or information ~~Act). Yes~~statements incorporated by reference in Part ~~o No~~III of this Form þ10-K or any amendment to this Form 10-K. o

Indicate ~~The~~by ~~aggregate~~check ~~market~~mark ~~value~~whether of the ~~voting~~registrant ~~stock~~is ~~held~~a ~~by non-affiliates~~large ofaccelerated ~~the registrant~~filer, ~~based on the closing sale~~an ~~price~~accelerated ~~of the common stock on September 23~~filer, ~~2005~~or asa ~~reported on~~non-accelerated ~~the~~filer. ~~NASDAQ~~See ~~National~~definition ~~Market, was approximately $128,071,000. Shares~~ of ~~common stock held by each executive officer and~~“accelerated ~~director~~filer and bylarge ~~each~~accelerated ~~person~~filer” ~~who~~in ~~owns~~Rule 12b-2 ~~5% or more~~ of the ~~outstanding~~ ~~common~~Exchange ~~stock have been excluded from this computation~~Act. ~~This determination of affiliate status is not~~ ~~necessarily~~(Check ~~a conclusive determination for other purposes. The registrant does not have any non-voting stock.~~ one):

AsLarge ofaccelerated ~~May~~filer ~~31, 2006, the registrant had outstanding~~o Accelerated ~~14,892,870~~filer ~~shares~~þ Non-accelerated ~~of common stock.~~ filer o

Indicate ~~DOCUMENTS INCORPORATED~~by BYcheck ~~REFERENCE~~mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ

The aggregate ~~registrant~~market ~~has~~value ~~incorporated~~of the voting stock held by ~~reference~~non-affiliates ~~into~~of ~~Part III~~the registrant, based on the closing sale price of ~~this~~the ~~Annual~~common ~~Report~~stock on ~~Form~~September ~~10-K~~29, 2006 as reported on the NASDAQ Stock Market LLC, was ~~portions~~approximately $159,656,000. Shares of ~~its~~common ~~Proxy~~stock ~~Statement~~held ~~for~~by ~~the~~each ~~2006~~executive officer ~~Annual~~and ~~Meeting~~director and by each person who owns 5% or more of the outstanding ~~Shareholders~~common tostock behave ~~held~~been ~~August 16,~~excluded ~~2006~~from this computation. This determination of affiliate status is not necessarily a conclusive determination for other purposes. The registrant does not have any non-voting stock.

As of May 31, 2007, the registrant had outstanding 15,585,369 shares of ~~CHOLESTECH CORPORATION~~ common stock.

~~ANNUAL REPORT~~DOCUMENTS ~~ON FORM 10-K~~ INCORPORATED BY REFERENCE

~~For~~ The registrant has incorporated by reference into ~~Fiscal~~Part III ~~Year~~of ~~Ended~~this ~~March~~Annual Report on Form 3110-K portions of its Proxy or Information Statement to be filed pursuant to Regulations 14A or 14C, ~~2006~~no later than 120 days after the end of the fiscal year covered by this Annual Report on Form 10-K.

CHOLESTECH CORPORATION ANNUAL REPORT ON FORM 10-K For The Fiscal Year Ended March 30, 2007 TABLE OF CONTENTS

PART I
Item 1.	~~Item 1.~~	Business	~~Business~~3	1
Item 1A.	~~Item 1A.~~	Risk Factors	~~Risk Factors~~21	16
Item 1B.	~~Item 1B.~~	Unresolved Staff Comments	~~Unresolved Staff Comments~~33	28
Item 2.	~~Item 2.~~	Properties	~~Properties~~33	28
Item 3.	~~Item 3.~~	Legal Proceedings	~~Legal Proceedings~~33	28
Item 4.	~~Item 4.~~	Submission of Matters to a Vote of Security Holders	~~Submission of Matters to a Vote of Security Holders~~34	29
PART II
Item 5.	~~Item 5.~~	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	~~Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities~~35	29
Item 6.	~~Item 6.~~	Selected Financial Data	~~Selected Financial Data~~37	29
Item 7.	~~Item 7.~~	Management’s Discussion and Analysis of Financial Condition and Results of Operations	~~Management’s Discussion and Analysis of Financial Condition and Results of Operations~~39	31
Item 7A.	~~Item 7A.~~	Quantitative and Qualitative Disclosures About Market Risk	~~Quantitative and Qualitative Disclosures About Market Risk~~49	41
Item 8.	~~Item 8.~~	Financial Statements and Supplementary Data	~~Financial Statements and Supplementary Data~~50	42
Item 9.	~~Item 9.~~	Changes in and Disagreements with Accountants on Accounting and Financial Disclosures	~~Changes in and Disagreements with Accountants on Accounting and Financial Disclosures~~50	42
Item 9A.	~~Item 9A.~~	Controls and Procedures	~~Controls and Procedures~~50	42
Item 9B.	~~Item 9B.~~	Other Information	~~Other Information~~51	43
PART III
Item 10.	~~Item 10.~~	Directors and Executive Officers and Corporate Governance	~~Directors and Executive Officers of the Registrant~~51	43
Item 11.	~~Item 11.~~	Executive Compensation	~~Executive Compensation~~51	43
Item 12.	~~Item 12.~~	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	~~Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters~~51	43
Item 13.	~~Item 13.~~	Certain Relationships and Related Transactions, and Director Independence	~~Certain Relationships and Related Transactions~~51	43
Item 14.	~~Item 14.~~	Principal Accountant Fees and Services	~~Principal Accountant Fees and Services~~51	43
PART IV
Item 15.	~~Item 15.~~	Exhibits and Financial Statement Schedules and Reports on Form 8-K	~~Exhibits and Financial Statement Schedules~~52	44
Signatures			56	48
EXHIBIT 23.1
EXHIBIT 31.1
EXHIBIT 31.2
EXHIBIT 32

~~Table~~Cholestech ofLDX ~~Contents~~and Cholestech GDX, are trademarks belonging to Cholestech Corporation and are pending or registered in the United States and other countries.

~~PART I~~ 2

~~Some of the statements contained in this Annual Report on Form~~PART 10-K are forward-looking statements about Cholestech Corporation (“we,” “us” or “Cholestech”), including but not limited to those specifically identified as such, that involve risks and uncertainties. The statements contained in this Annual Report on Form 10-K that are not purely historical are forward looking statements within the meaning of Section 27A of the Securities Act and Section 21E of the Exchange Act, including, without limitation, statements regarding our expectations, beliefs, intentions or strategies regarding the future. All forward-looking statements included in this Annual Report on Form 10-K are based on information available to us on the date hereof, and we assume no obligation to update any such forward-looking statements. These statements involve known and unknown risks, uncertainties and other factors, which may cause our actual results to differ materially from those implied by the forward-looking statements. In some cases, you can identify forward-looking statements by terminology such as “may,” “will,” “should,” “expects,” “plans,” “anticipates,” “believes,” “estimates,” “predicts,” “potential” or “continue” or the negative of these terms or other comparable terminology. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. Moreover, neither any other person nor we assume responsibility for the accuracy and completeness of such statements. Important factors that may cause actual results to differ from expectations include those discussed in Item 1A: Risk Factors beginning on page 16 in this document. I

Some of the Westatements ~~were~~contained ~~incorporated~~in ~~under~~this Annual Report on Form 10-K are forward-looking statements about Cholestech Corporation (“we,” “us,” “Cholestech,” or “the ~~laws~~Company’’), including but not limited to those specifically identified as such, that involve risks and uncertainties. The statements contained in this Annual Report on Form 10-K that are not purely historical are forward looking statements within the meaning of Section 27A of the Securities ~~State~~Act of ~~California~~1933, as amended, and Section 21E of the Exchange Act of in1934, ~~February~~as ~~1988~~amended, including, without limitation, statements regarding our expectations, beliefs, intentions or strategies regarding the future. ~~Our~~All forward-looking ~~principal~~statements ~~executive~~included ~~offices~~in ~~are~~this ~~located~~Annual atReport on Form 10-K ~~3347~~are ~~Investment~~based ~~Boulevard~~on information available to us on the date hereof, ~~Hayward~~and ~~California~~we ~~94545~~assume no obligation to update any such forward-looking statements. These statements involve known and unknown risks, uncertainties and other factors, which may cause our actual results to differ materially from those implied by the ~~telephone~~forward-looking ~~number~~statements. atIn some cases, you can identify forward-looking statements by terminology such as “may,” “will,” “should,” “expects,” “plans,” “anticipates,” “believes,” “estimates,” “predicts,” “potential” or “continue” or the negative of these terms or other comparable terminology. Although we believe that ~~location~~the expectations isreflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. Moreover, neither any other person nor we assume responsibility for the accuracy and completeness of such statements. Important factors that may cause actual results to differ from expectations include those discussed in Item 1A: Risk Factors beginning on page 20 in this document, as well as those factors identified from time to time in our periodic filings with the Securities and Exchange Commission (~~510~~“SEC”) ~~732-7200~~.

~~ITEM~~We 1were incorporated under the laws of the State of California in February 1988. ~~BUSINESS~~Our principal executive offices are located at 3347 Investment Boulevard, Hayward California 94545 and our telephone number at that location is (510) 732-7200.

~~Overview~~ ITEM 1. BUSINESS

We are a leading provider of diagnostic tools and information for immediate risk assessment and therapeutic monitoring of heart disease and diabetes. We currently manufacture the Cholestech LDX® System (the “LDX System”), which includes the LDX Analyzer and a variety of single-use test cassettes and market the LDX System in the United States, Europe, Asia, Australia and South America. The LDX System, which is waived under the Clinical Laboratory Improvement Amendments (“CLIA”), allows healthcare providers to perform individual tests or combinations of tests with a single drop of blood from a fingerstick within five minutes. Our current products measure and monitor blood cholesterol, related lipids, glucose and liver function, and are used to test patients at risk of or suffering from heart disease, diabetes and liver disease. The LDX System can also provide Coronary Heart Disease Risk Assessment from the patient’s results as measured on the lipid profile cassette. In fiscal year 2006, revenue from sales of the LDX Analyzer and single use test cassettes represented over 89% of our revenue. Overview

We ~~also~~are ~~market~~a leading provider of diagnostic tools and information ~~distribute~~for ~~the~~immediate ~~Cholestech~~risk ~~GDXTM~~assessment and therapeutic monitoring of heart disease, inflammatory disorders and diabetes. We currently manufacture the Cholestech LDX® System (the “~~GDX~~LDX System”), ~~under~~which aincludes ~~multi-year global distribution~~the ~~agreement~~LDX ~~with~~Analyzer ~~Provalis~~and ~~Diagnostics~~a ~~Ltd.~~variety Weof ~~began~~single-use ~~distributing the~~test ~~GDX~~cassettes ~~System~~and ~~under~~market ~~this~~the ~~agreement~~LDX System in ~~July~~the ~~2002.~~United ~~The~~States, ~~Cholestech GDX~~Europe, isAsia, aAustralia ~~hemoglobin~~and ~~A1c~~South ~~(“A1C”)~~America. ~~testing~~The ~~system~~LDX System, ~~that~~which is ~~also~~ waived under ~~CLIA~~the ~~and~~Clinical isLaboratory ~~used~~Improvement Amendments (“CLIA”), allows healthcare providers to ~~measure~~perform ~~A1C~~individual intests ~~less~~or ~~than~~combinations of ~~five~~tests ~~minutes~~with ~~using~~ a single drop of blood from a fingerstick within five minutes. Our ~~The~~current ~~quantitative~~products measure ofand ~~A1C~~monitor isblood ~~well-established~~cholesterol, asrelated anlipids, glucose ~~indicator~~and ofliver afunction, ~~patient’s~~and ~~long-term~~are ~~glycemic~~used ~~control.~~to ~~Unlike daily~~test ~~glucose~~patients ~~monitoring,~~at ~~which~~risk ~~provides~~of aor ~~snapshot~~suffering ~~of a~~from ~~patient’s~~heart ~~glucose~~disease, ~~level~~diabetes atand ~~the~~liver ~~time~~disease. ofThe ~~testing,~~LDX ~~A1C~~System can also provide ~~provides~~Coronary anHeart ~~average~~Disease ~~glucose~~Risk ~~level~~Assessment ~~over~~from the ~~previous~~patient’s results as measured ~~90 days~~on the lipid profile cassette. ~~A1C~~In ~~levels~~fiscal ~~indicate~~year ~~the~~2007, ~~long-term~~revenue ~~progress~~from sales of athe ~~patient’s~~LDX ~~diabetes~~Analyzer and ~~therapy~~single ~~management~~use test cassettes represented over 90% of our revenue.

~~The~~We ~~current~~also ~~healthcare~~market ~~system~~and indistribute the ~~United~~Cholestech ~~States, while~~GDX™ ~~historically~~System ~~successful~~(the in“GDX ~~treating~~System”) ~~acute~~under ~~conditions,~~a ~~is currently~~multi-year ~~not~~global ~~adequately~~distribution ~~serving~~agreement ~~the~~with with ~~growing~~Provalis ~~need~~Diagnostics ~~for~~Ltd, ~~preventive healthcare~~who ~~and~~was ~~the~~acquired ~~management~~by ofBio-Rad ~~chronic disease~~Laboratories, Inc. on ~~In addition~~September 7, it is2006. ~~estimated~~We bybegan distributing the ~~U.S. Census~~GDX ~~Bureau~~System ~~that~~under this ~~approximately~~agreement 44in July ~~million~~2002. ~~Americans~~The doCholestech ~~not~~GDX, ~~have~~a ~~health~~hemoglobin A1c (“A1C”) ~~insurance.~~testing ~~These~~system, ~~factors~~is ~~are~~FDA ~~driving~~510(k) cleared afor ~~growing~~prescription ~~trend~~home ~~towards~~use and, ~~personal~~accordingly, ~~health~~is ~~management,~~CLIA ~~which~~waived we. ~~believe~~It ~~requires~~is ~~practical, economical~~used ~~and~~to ~~efficient~~measure ~~tools~~A1C toin ~~address~~less than five minutes using a ~~widespread,~~single ~~growing need.~~drop ~~Our~~of ~~cost~~blood ~~effective~~from ~~diagnostic~~a ~~technologies~~fingerstick. ~~provide~~The quantitative ~~convenient,~~measure ~~accurate~~of ~~testing~~A1C is well-established as aan ~~part~~indicator of a ~~disease~~patient’s ~~management~~long-term ~~program~~glycemic ~~and~~control. ~~are~~Unlike ~~used~~daily ~~for~~glucose ~~screening~~monitoring, ~~for~~which ~~heart~~provides ~~disease~~a ~~and~~snapshot of ~~diabetes~~a bypatient’s ~~identifying~~glucose ~~individuals~~level ~~with~~at ~~elevated~~the ~~cholesterol and~~time ~~blood~~of ~~glucose~~testing, ~~levels~~A1C ~~and~~provides ~~monitoring~~an ~~the ongoing condition of~~average ~~people~~glucose ~~with~~level ~~heart~~over ~~disease~~the ~~and~~previous ~~diabetes~~90 days. ~~whose~~A1C ~~treatment~~levels ~~programs may~~indicate ~~involve~~the long-term, progress ~~complex~~of ~~drug~~a ~~therapies~~patient’s diabetes and therapy management.

1 3

~~Table~~The current healthcare system in the United States, while historically successful in treating acute conditions, is currently not adequately serving the growing need for preventive healthcare and the management of ~~Contents~~chronic disease. In addition, it is estimated by the U.S. Census Bureau that approximately 44 million Americans do not have health insurance. These factors are driving a growing trend towards personal health management, which we believe requires practical, economical and efficient tools to address a widespread, growing need. Our cost effective diagnostic technologies provide convenient, accurate testing as a part of a disease management program and are used for screening for heart disease and diabetes by identifying individuals with elevated cholesterol and blood glucose levels and monitoring the ongoing condition of people with heart disease and diabetes whose treatment programs may involve long-term, complex drug therapies.

We specifically target our products for markets outside of traditional hospital or clinical laboratories through our ~~worldwide~~ worldwide network of over 85 distributors. Our primary market is the physician office laboratory market, which consists of approximately ~~106~~117,000 sites operated by physicians or groups of physicians that are registered with the Centers for Medicare & Medicaid Services (“CMS”). Approximately 5354,000 of these are registered to perform only tests that have been waived under CLIA. According to CMS, the number of CLIA-waived physician office laboratories has increased 2831% since 2000.

Sales of our products to international markets represented 13% of our revenue in fiscal year ~~2006~~2007. While a majority of such sales are in Europe, we are expanding into Asia, and South America. See Note 1110 of the Financial Statements for details on our international revenue.

Providing rapid service to our customers is one of the fundamentals of our business. Generally we fulfill our customers’ orders within two business days of the placement of an order, resulting in no material backlog as of March 3130, ~~2006~~2007. Although there are certain months of the year in which testing for cholesterol typically increases, such as September which is National Cholesterol Month and February which is National Heart Month, historically we have not experienced fluctuations in sales of our products due to to seasonality.

We plan to leverage our worldwide installed base of diagnostic systems in our customers’ locations and current LDX product platform by introducing new test cassettes. In addition, we ~~plan~~ plan to leverage our distribution capabilities by adding new ~~technology~~ technology platforms, such as our recently announced market development and product distribution agreement involving a novel and proprietary system for addressing endothelial dysfunction. We believe that this strategy, combined with the enactment of Medicare coverage for cholesterol and diabetes screening ~~beginning~~ beginning January 2005, a continued effort by major pharmaceutical companies to ~~obtain~~ obtain over-the-counter status for certain statin drugs and the ongoing efforts by by pharmaceutical companies to promote awareness of both the risk factors and the importance of screening and monitoring related to heart disease and diabetes, will position our company to capitalize on attractive long-term growth opportunities.

~~Market Overview~~ Recent Developments

WeOn ~~believe~~June ~~the~~4, ~~market~~2007, ~~for~~Cholestech, ~~our~~Inverness ~~products exists where healthcare~~Medical ~~providers~~Innovations, asInc., ~~well~~a asDelaware ~~healthcare~~corporation ~~product~~(“Inverness”), and ~~service organizations,~~Iris ~~seek~~Merger ~~to identify~~Sub, ~~treat and monitor individuals~~ ~~with~~Inc., ~~chronic~~a ~~conditions~~California ~~such~~corporation ~~as heart disease~~ and ~~diabetes.~~wholly ~~High cholesterol~~owned issubsidiary aof ~~significant contributing factor to~~Inverness ~~cardiovascular~~(“Merger ~~disease~~Sub”), ~~which~~entered ~~remains~~into ~~the~~an ~~leading~~Agreement ~~cause~~and Plan of ~~death in~~Reorganization (the “Merger ~~United~~Agreement”), ~~States~~pursuant ~~and~~to ~~kills~~which ~~more~~Cholestech ~~people~~and ~~than~~Inverness ~~the~~will ~~next five~~combine ~~diseases~~their ~~combined.~~businesses ~~Heart~~through ~~disease~~a ismerger ~~also~~of ~~the~~Cholestech ~~leading~~and ~~cause~~Merger ~~of death~~Sub ~~among~~(the ~~diabetics~~“Merger”).

~~• In 2002, the estimated cost in the United States of coronary heart disease and diabetes was $244 billion. •~~ The ~~American~~completion ~~Heart Association estimates that more than 71 million people suffer from some form~~ of ~~cardiovascular disease, which is~~ the ~~leading~~Merger ~~cause of death of adults in the United States. • Heart disease~~ is ~~the~~subject ~~leading~~to ~~cause~~various closing ~~of death in people with type 2 diabetes~~conditions, ~~which~~including ~~has~~obtaining ~~a death rate from heart disease which is two to four times higher than for those who do not have diabetes. • Based on evidence from scientific studies,~~ the ~~National~~approval ~~Cholesterol~~of ~~Education~~Cholestech ~~Program (“NCEP”) expert panel~~ shareholders and ~~the~~receiving ~~National~~antitrust ~~Institutes~~approvals ~~of Health~~ (~~“NIH”)~~including ~~issued~~under ~~guidelines in May 2001 which are substantially increasing~~ the ~~number~~Hart-Scott-Rodino Antitrust ofImprovements ~~Americans being treated for high cholesterol~~Act). Numerous research studies substantiate that reducing high cholesterol levels reduces the risk of a coronary event by 31%. NIH guidelines continue to encourage the increase of cholesterol testing as the recommended LDL levels decreased from 100 to 70 for certain high risk patients in 2004. • Based on the NIH guidelines, approximately 217 million Americans should be screened or monitored for high cholesterol. Additionally, the number of Americans on therapeutic lifestyle changes, such as dietary treatment, is expected to grow to over 65 million. The ~~number~~Merger ~~of Americans prescribed a cholesterol-lowering drug~~ is ~~expected~~intended to ~~grow~~qualify toas ~~over 36 million. • Diabetes is estimated to afflict approximately 21 million people in the United States, over~~ a reorganization ~~third of whom have not yet been identified as being diabetic. Additionally, 41 million Americans require treatment~~ for ~~prevention~~federal ofincome ~~diabetes~~tax ~~and 97 million should be screened or monitored for diabetes risk based on data and~~purposes.

2 4

~~Table~~At the effective time of ~~Contents~~the Merger (the “Effective Time”), by virtue of the Merger and without any action on the part of the holder of any capital stock of Cholestech, each share of common stock of Cholestech issued and outstanding immediately prior to the Effective Time will be converted into the right to receive 0.43642 (the “Exchange Ratio”) of a share of common stock of Inverness (each full share, an “Inverness Share”).

~~recommendations~~In ~~from~~the Merger, each option to purchase shares of Cholestech common stock granted under employee and director stock plans of Cholestech that is outstanding as of immediately prior to the ~~American~~Effective ~~Diabetes~~Time, whether ~~Association~~vested or unvested, shall be converted into a right to acquire Inverness Shares on the same terms and conditions as were applicable to such option prior to the ~~U.S.~~Effective ~~Department~~Time, provided that the number of ~~Health~~Inverness Shares receivable and ~~Human~~the ~~Services~~exercise price of the option shall be adjusted to reflect the Exchange Ratio. All other Cholestech equity-based awards outstanding as of the Effective Time will remain in effect but will be denominated in Inverness Shares, with applicable adjustments to reflect the Exchange Ratio.

If the Merger Agreement is terminated under certain circumstances specified in the Merger Agreement, Cholestech will be required to ~~Our Strategy~~ pay Inverness a termination fee of $9 million.

~~Our~~The ~~strategy~~Boards isof toDirectors ~~be the leading provider~~ of ~~diagnostic~~Cholestech ~~tools~~ and ~~information for immediate risk assessment and therapeutic~~Inverness ~~monitoring~~have ofapproved ~~heart~~the ~~disease~~Merger and ~~diabetes.~~the ~~The~~Merger ~~components of this strategy include:~~ Agreement.

•The ~~Leverage~~foregoing ~~Our~~description of ~~Installed~~the ~~Base.~~Merger WeAgreement ~~intend~~is toqualified ~~leverage~~in ~~our~~its ~~installed~~entirety ~~base~~by ofreference ~~LDX~~to ~~systems~~the infull text ~~each~~of ~~customer~~the ~~location~~Merger byAgreement, ~~adding~~which ~~new~~is ~~test~~attached ~~cassettes~~ to ~~our~~this ~~current~~Annual ~~testing~~Report ~~platform~~on ~~and~~Form 10 ~~offering~~K ~~new~~as ~~products~~Exhibit ~~which~~2.1 ~~increase the amount~~ and ~~frequency~~incorporated ofherein ~~testing~~by reference. ~~Our~~The ~~current~~Merger ~~research~~Agreement has ~~and~~been ~~development~~attached ~~efforts~~to ~~include~~provide ~~the~~investors ~~planned~~with ~~introduction~~information ofregarding aits ~~new~~terms. ~~test~~It is ~~cassette~~not ~~for~~intended ~~lipid~~to ~~profile~~provide ~~/alanine~~any ~~aminotransferase~~other ~~(“ALT”).~~factual •information ~~Improve~~about ~~Cassette~~Cholestech ~~Usage~~or Inverness. WeIn ~~intend~~particular, tothe ~~increase~~assertions ~~the~~embodied ~~sale~~in ofthe ~~single-use~~representations ~~test~~and warranties ~~cassettes~~contained ~~through~~in the ~~placement~~Merger ofAgreement ~~additional~~are ~~LDX~~qualified ~~Analyzers,~~by ~~development~~information ofin confidential ~~new~~disclosure ~~diagnostic~~schedules ~~tests~~provided ~~and~~by ~~increased~~Cholestech ~~customer~~and ~~retention~~Inverness ~~activities~~to ~~through~~each other ~~marketing~~in ~~programs~~connection ~~and~~with the ~~deployment~~signing of ~~additional~~the ~~field~~Merger ~~service~~Agreement. ~~personnel~~These ~~focused~~disclosure schedules oncontain ~~our~~information ~~installed~~that ~~base.~~modifies, •qualifies ~~Increase~~and ~~Market~~creates ~~Penetration. We intend~~ exceptions to ~~further penetrate~~ the ~~physician~~representations ~~office laboratory~~ and ~~health~~warranties ~~promotion~~set ~~markets~~forth byin ~~increasing~~ the ~~number~~Merger ~~of installed LDX Analyzers both domestically and internationally through our network of over 85 distributors~~Agreement. Moreover, Wecertain ~~continue~~representations ~~to implement marketing~~ and ~~related~~warranties ~~programs~~in tothe ~~increase~~Merger ~~awareness~~Agreement ofwere used for the ~~advantages~~purpose of ~~the~~allocating ~~LDX~~risk ~~System~~between ~~among~~Cholestech ~~healthcare providers~~ and ~~third~~Inverness ~~party~~rather than ~~payors.~~establishing •matters ~~Expand~~as ~~Manufacturing Capabilities and Efficiencies~~facts. WeAccordingly, ~~continue~~you toshould ~~expand~~not ~~our~~rely ~~manufacturing~~on ~~capacity for~~ the representations ~~single-use~~and ~~cassettes.~~warranties ~~Additionally,~~in wethe ~~plan~~Merger toAgreement ~~continue~~as tocharacterizations ~~introduce~~of the ~~improvements~~actual ~~into~~state ~~our~~of ~~processes~~facts toabout ~~enhance~~Cholestech ~~our~~or ~~manufacturing operations, including quality, throughput, yields and efficiencies~~Inverness.

~~Products and~~Market ~~Products Under Development~~ Overview

We ~~manufacture,~~believe the market ~~and~~for ~~develop~~our ~~diagnostic~~products ~~testing~~exists ~~technology which~~where ~~facilitates~~healthcare ~~the~~providers, ~~performance~~as ofwell ~~diagnostic testing at~~as ~~alternative~~healthcare ~~sites~~product ~~from~~and ~~traditional~~service ~~hospital~~organizations, ~~laboratories~~seek to identify, treat and ~~assist~~monitor inindividuals ~~rapidly~~with ~~assessing~~chronic ~~the~~conditions ~~risk~~such ofas heart disease, and diabetes. ~~and~~High ~~certain~~cholesterol ~~liver~~is ~~diseases~~a ~~and~~significant incontributing ~~the~~factor ~~monitoring of therapy~~ to cardiovascular ~~treat~~disease, ~~those~~which ~~diseases.~~remains Wethe ~~primarily~~leading ~~sell~~cause ~~our~~of ~~products~~death ~~through distributors~~in atthe aUnited ~~discount,~~States ~~based on certain factors, from our~~and ~~published~~kills ~~list~~more ~~price.~~people Wethan ~~manufacture and market~~ the ~~LDX~~next ~~System, which~~five isdiseases ~~CLIA~~combined. ~~waived~~Heart ~~and~~disease ~~includes~~is also the ~~LDX~~leading ~~Analyzer~~cause ~~and a variety~~ of ~~single-use~~death ~~test~~among ~~cassettes, in the United States and internationally~~diabetics.

· In We2002, ~~also market and distribute~~ the ~~GDX~~estimated ~~System~~cost ~~under~~in ~~a multi-year global distribution agreement with Provalis Diagnostics Ltd. We began distributing~~ the ~~GDX~~United ~~System~~States ~~under~~of ~~this~~coronary ~~agreement~~heart indisease ~~July 2002. The GDX System is an A1C testing system that is CLIA waived~~ and ~~is used to measure A1C in less than five minutes by~~ ~~using a single drop of blood from a fingerstick. A1C testing monitors the average blood glucose levels of people with~~ diabetes aswas an indicator of overall blood glucose control. The quantitative measure of A1C is well-established as an indicator of a patient’s long-term glycemic control. Unlike daily glucose monitoring, which provides a snapshot of a patient’s glucose level at the time of testing, A1C provides an average glucose level over the previous 90$244 ~~days~~billion. ~~A1C levels indicate the long-term progress of a patient’s diabetes and therapy management.~~

· The ~~Our~~American ~~research~~Heart ~~and~~Association ~~development~~estimates ~~expenses~~that ~~were~~more ~~$7.6~~than 79 million, people ~~$4.3 million,~~suffer ~~and~~from ~~$3.2 million~~some ~~for~~form ~~fiscal~~of ~~year~~cardiovascular ~~2006~~disease, ~~fiscal~~ ~~year~~which ~~2005,~~is ~~and~~the ~~fiscal~~leading ~~year~~cause ~~2004,~~of death ~~respectively~~of adults in the United States.

· Based on evidence from scientific studies, the National Cholesterol Education Program ~~Overview~~(“NCEP”) expert panel and the National Institutes of Health (“NIH”) issued guidelines in May 2001 which are substantially increasing the number of Americans being treated for high cholesterol. Numerous research studies substantiate that reducing high cholesterol levels reduces the ~~Cholestech~~risk ~~LDX~~of ~~System~~a coronary event by 31%. NIH guidelines continue to encourage the increase of cholesterol testing as the

The LDX System is an easy to use, multi-analyte testing system consisting of a telephone-sized analyzer, a variety of single-use, credit card-sized test cassettes, a printer and accessories. The LDX System allows healthcare providers to perform individual tests or combinations of tests with a single drop of blood within five minutes. Minimal training is required to operate the LDX System and the sample does not need to be pre-treated. To run a test, the healthcare provider pricks the patient’s finger, transfers a drop of blood to the cassette’s sample well, inserts the cassette into the LDX Analyzer’s cassette drawer and presses the “run” button. All further steps are performed 5

recommended LDL cholesterol levels decreased from 100 to 70 mg/dL for certain high risk 3 patients in 2004.

~~Table~~· Based on the NIH guidelines, approximately 220 million Americans should be screened or monitored for high cholesterol. Additionally, the number of ~~Contents~~Americans on therapeutic lifestyle changes, such as dietary treatment, is expected to grow to over 65 million. The number of Americans prescribed a cholesterol-lowering drug is expected to grow to over 36 million.

· Diabetes byis ~~the~~estimated ~~LDX~~to ~~System,~~afflict ~~which~~approximately ~~produces~~21 million ~~results~~people ~~comparable~~ in ~~accuracy~~the United toStates, ~~results~~over ~~provided~~a bythird ~~larger~~of whom have not yet been identified as being diabetic. Additionally, ~~more~~54 million ~~expensive~~Americans ~~bench~~require ~~top~~treatment for prevention of diabetes and 97 million should be screened or monitored for diabetes risk ~~clinical~~based ~~laboratory~~on ~~instruments~~data ~~that~~and ~~are~~recommendations ~~not~~from ~~CLIA~~the ~~waived.~~American Diabetes Association and the U.S. Department of Health and Human Services.

~~The~~· Heart ~~design~~disease ofis the ~~LDX System incorporates proprietary technology~~ ~~into~~leading ~~the~~cause ~~test~~of ~~cassettes~~death ~~and~~in ~~maintains~~people ~~the~~with ~~LDX~~type ~~Analyzer~~2 ~~as a platform that can be easily adapted as new tests and other product upgrades are introduced. As healthcare providers perform different tests~~diabetes, ~~the~~which ~~encoding~~has ona ~~the~~death ~~cassette’s magnetic~~rate ~~strip~~from ~~communicates~~heart ~~test~~disease ~~specific~~which ~~and~~is ~~calibration~~two ~~information~~ to ~~the~~ ~~LDX~~four ~~Analyzer.~~times ~~Changes~~higher ~~that~~than ~~cannot~~for bethose ~~captured~~who ondo ~~the~~not ~~cassette’s~~have ~~magnetic strip can be accomplished by changes to the LDX Analyzer’s removable read only memory software pack~~diabetes. This flexible design enables healthcare providers to perform a variety of tests using the same LDX Analyzer and to take advantage of new tests and other product upgrades without having to purchase a new LDX Analyzer.

~~The~~Our LDX System includes software that performs cardiac risk assessments using risk factor parameters developed from the Framingham study, a long term study of cholesterol levels and cardiovascular disease. A risk assessment is required by the NIH guidelines. Strategy

Our objective is to be the leading provider of diagnostic tools and information for immediate risk assessment and therapeutic monitoring of heart disease and diabetes. The ~~LDX~~components ~~Analyzer~~ of this strategy include:

~~Revenue~~· Leverage ~~from~~Our ~~the~~Installed ~~LDX Analyzer represented 5%, 6%, and 8% of total revenue in fiscal year 2006, fiscal year 2005, and fiscal year 2004, respectively~~Base. ~~The LDX Analyzer is a proprietary,~~ We ~~four-channel,~~intend ~~reflectance~~to ~~photometer~~leverage ~~that~~our ~~measures~~installed ~~the~~base ~~amount~~ of ~~light~~ ~~reflected~~LDX ~~from~~systems ~~the~~by ~~reaction~~adding ~~surfaces~~new ~~of a~~ test ~~cassette~~ ~~and~~cassettes ~~incorporates~~to aour ~~microprocessor~~current ~~with~~testing ~~built-in~~platform ~~software. The LDX Analyzer contains a drawer for insertion of the cassette, three buttons for user activation~~ and aoffering ~~liquid~~new ~~crystal~~products ~~display~~which toincrease ~~present~~ the ~~test~~amount ~~results. Using the information~~ and ~~instructions~~ ~~encoded~~frequency ~~on the cassette’s magnetic strip, the LDX Analyzer’s built-in microprocessor regulates the reaction conditions, controls the optical measurements~~ of ~~analyte~~ ~~concentrations~~testing. onOur ~~the~~current ~~cassette’s~~research ~~reaction pads, executes the required calculations~~ and~~, within five minutes,~~ ~~displays~~development ~~the~~efforts ~~results~~include on the ~~liquid~~planned ~~crystal~~introduction ~~display.~~of ~~The results are displayed as~~ a ~~numerical~~new ~~value~~test ofcassette ~~the level of the analyte~~for ~~tested~~lipid ~~and~~profile ~~can~~/alanine beaminotransferase ~~transferred to a printer, computer or computer network~~(“ALT”).

~~The~~· Improve ~~built-in~~Cassette ~~software~~Usage. We ~~calculates~~intend to increase the ~~numeric~~sale ~~values~~ of ~~the~~single-use test ~~results~~ ~~and~~cassettes isthrough ~~contained in a removable read only memory software pack mounted in an access well on~~ the ~~bottom~~placement of additional ~~the~~ LDX ~~Analyzer.~~ WeAnalyzers, ~~upgrade~~development ~~the~~of ~~software as~~ new ~~products~~diagnostic ~~are~~tests ~~developed, allowing~~and ~~healthcare providers to easily replace the existing~~increased ~~read~~customer ~~only~~retention ~~memory~~activities ~~pack~~through ~~with~~marketing aprograms ~~new~~and ~~pack~~the ~~containing~~deployment ~~upgraded~~of ~~software.~~additional ~~The~~field ~~LDX~~service ~~Analyzer,~~personnel ~~along~~focused ~~with~~on aour ~~printer,~~installed ~~accessories and starter pack, comprises a LDX System and currently has a domestic list price of $2,115~~base.

· Increase Market Penetration. We intend to further penetrate the physician office laboratory and health ~~Cassette~~promotion markets by increasing the number of installed LDX Analyzers both ~~Products~~domestically and internationally through our network of over 85 distributors. We continue to implement marketing and related programs to increase awareness of the advantages of the LDX System among healthcare providers and third party payors.

~~Revenue~~· Expand ~~from~~Manufacturing ~~cassette~~Capabilities ~~products represented 84%, 83%,~~ and Efficiencies. We ~~81%~~continue ~~of total~~to ~~revenue in fiscal year 2006, fiscal year 2005, and fiscal~~expand ~~year~~our ~~2004,~~manufacturing ~~respectively.~~capacity ~~Our~~for ~~line~~the of single-use, ~~disposable test~~ cassettes. ~~for~~Additionally, ~~the~~we ~~LDX System incorporates patented and licensed~~plan ~~technology for distributing precisely measured plasma~~ to upcontinue to ~~four~~ ~~reaction~~introduce ~~pads~~improvements ~~for simultaneous testing. Each cassette has three parts: a main body that contains the sample well~~ into ~~which~~ ~~the~~our ~~blood~~processes sample is dispensed, a reaction bar where plasma is transferred for analysis and a magnetic strip encoded with test instructions and lot specific calibration information for the various chemistries on the reaction pads. Capillary action draws a drop of blood through a separation medium within the cassette, stopping the cellular components of the blood while transferring a small volume of plasma to ~~the~~enhance ~~cassette’s~~our ~~reaction~~manufacturing ~~pads. When the plasma contacts the reaction pads~~operations, ~~the dry~~including ~~chemistry reacts with the analytes in the plasma~~quality, producing color. The intensity of color developed indicates the concentration of the analytes in the plasma. The magnetic strip contains information needed by the LDX Analyzer to convert the reflected color reading into a concentration level for the accurate measurement of the analytes being tested. As a result of this automatic processthroughput, ~~the~~yields healthcare provider does not have to interpret any color reaction, relate a reading to a separate chart or input calibration information. Our available test cassettes range in current domestic list price from $4.19 to $13.00 per cassette and ~~include up to six results per~~ ~~cassette~~efficiencies.

Products and ~~Overview of~~Products ~~the~~Under ~~Cholestech GDX System~~ Development

We manufacture, market and develop diagnostic testing ~~The~~technology ~~GDX~~which ~~System~~facilitates isthe aperformance ~~patented,~~of ~~easy~~diagnostic testing at alternative sites from traditional hospital laboratories to ~~use~~assist in rapidly assessing the risk of heart disease, ~~A1C~~diabetes ~~testing~~and ~~system~~certain liver diseases and in ~~consisting~~the monitoring of therapy to treat those diseases. We primarily sell our products through distributors at a ~~small~~discount, ~~desktop~~based ~~analyzer~~on certain factors, ~~single-use~~from ~~test~~our ~~cartridges~~published ~~and~~list ~~accessories~~price. ~~The~~We ~~GDX~~manufacture and market the LDX System, ~~allows~~which ~~healthcare~~is CLIA ~~providers~~waived toand ~~perform~~includes ~~A1C~~the ~~tests~~LDX ~~with~~Analyzer and a variety of single-use test cassettes, in the United States and internationally.

We also market and distribute the GDX System under a multi-year global distribution agreement with Bio-Rad Laboratories, Inc. 4We began distributing the GDX System under this agreement in July 2002. The

~~Table of Contents~~6

~~drop~~GDX ofSystem ~~blood~~is ~~within~~an ~~five~~A1C testing ~~minutes.~~system ~~Minimal~~that ~~training~~ is ~~required to~~CLIA ~~operate~~waived ~~the GDX System~~ and ~~the~~is ~~sample~~used ~~does not need~~ to ~~be pre-treated.~~measure ToA1C ~~run~~in aless ~~test,~~than ~~the healthcare provider pricks the~~five ~~patient’s~~minutes ~~finger,~~by ~~transfers~~using a single drop of blood tofrom a ~~sample reagent~~fingerstick. ~~solution~~A1C intesting monitors the ~~test~~average ~~cartridge~~blood ~~and~~glucose ~~initiates~~levels aof ~~timing sequence.~~people ~~This~~with ~~sample~~diabetes ~~solution~~as ~~and~~an indicator ~~two~~of ~~successive~~overall ~~reagent solutions~~blood ~~are~~glucose ~~added~~control. toThe ~~the~~quantitative ~~test~~measure ~~cartridge~~of ~~when~~A1C ~~indicated~~is well-established byas ~~the GDX~~an ~~Analyzer~~indicator of a patient’s ~~user~~long-~~guiding~~term ~~icon~~glycemic ~~displays~~control. ~~All measurement~~Unlike ~~steps~~daily ~~are~~glucose ~~performed~~monitoring, bywhich ~~the~~provides ~~GDX~~a ~~System,~~snapshot ~~which~~of ~~produces~~a ~~results~~patient’s glucose ~~comparable~~level inat ~~accuracy~~the totime ~~results~~of ~~provided~~testing, byA1C ~~larger,~~provides ~~more~~an average glucose level over the ~~expensive~~previous ~~bench~~90 days. ~~top~~A1C ~~and~~levels ~~clinical~~indicate ~~laboratory~~the ~~instruments~~long-term ~~that~~progress ~~are~~of a patient’s ~~not~~diabetes ~~CLIA~~and ~~waived~~therapy management.

Our research and development expenses were $6.3 million, $7.6 million, and ~~The GDX~~$4.3 million ~~Analyzer~~for fiscal year 2007, fiscal year 2006, and fiscal year 2005, respectively.

~~The~~Overview ~~GDX Analyzer uses a photometer that measures the amount~~ of ~~light~~ ~~transmitted through~~ the ~~reaction~~Cholestech ~~solutions~~LDX and incorporates a microprocessor with built-in software. The GDX Analyzer contains a receptacle for insertion of the cartridge, three buttons for user activation and a liquid crystal display to present user-guiding icons and the test results. The GDX Analyzer’s built-in microprocessor regulates the reaction conditions, controls the optical measurements of analyte concentrations in the cartridge’s reaction solutions, executes the required calculations and, within five minutes, displays the results on the liquid crystal display. The results are displayed as a numerical value of the A1C level and can be transferred to a printer, computer or computer network. The GDX Analyzer is certified by the National Glycohemoglobin Standardization Program. The GDX Analyzer, along with accessories, comprises a GDX System ~~and currently has a domestic list price of $895.~~

The LDX System is an easy to use, multi-analyte testing system consisting of a telephone-sized analyzer, a variety of ~~Cartridge~~single-use, credit card-sized test cassettes, a printer and accessories. The ~~Product~~LDX System allows healthcare providers to perform individual tests or combinations of tests with a single drop of blood within five minutes. Minimal training is required to operate the LDX System and the sample does not need to be pre-treated. To run a test, the healthcare provider pricks the patient’s finger, transfers a drop of blood to the cassette’s sample well, inserts the cassette into the LDX Analyzer’s cassette drawer and presses the “run” button. All further steps are performed by the LDX System, which produces results comparable in accuracy to results provided by larger, more expensive bench top and clinical laboratory instruments that are not CLIA waived.

The ~~GDX~~design ~~System’s~~of ~~A1C~~the ~~single-use,~~LDX ~~disposable~~System ~~test~~incorporates ~~cartridges~~proprietary ~~use~~technology ainto ~~well-established boronate affinity chromatography technique to separate~~ the glycated hemoglobin fraction from the nonglycated fraction. Hemoglobin in red blood cells becomes glycated with prolonged exposure to high levels of glucose (blood sugar) in diabetic patients. After an A1C test ~~cartridge has~~cassettes ~~been~~and ~~placed~~maintains in the ~~GDX~~LDX Analyzer, as a ~~small sample of blood is~~platform ~~added~~that tocan ~~the~~be ~~first~~easily ~~sample~~adapted ~~solution~~as ~~tube,~~new ~~which~~tests ~~contains~~and ~~boronate affinity~~other ~~resin.~~product ~~The~~upgrades ~~red blood cells~~ are ~~instantly disrupted to~~ ~~release the hemoglobin and the boronate affinity resin binds the glycated hemoglobin~~introduced. ~~After~~As ahealthcare ~~short~~providers ~~incubation~~perform ~~step~~different tests, the ~~liquid is~~encoding ~~poured into~~ on the ~~funnel~~cassette’s ofmagnetic ~~the~~strip communicates test ~~cartridge~~specific and ~~the~~calibration ~~nonglycated~~information ~~fraction is collected in an optical chamber where the hemoglobin concentration is photometrically measured. The glycated hemoglobin remains bound~~ to the ~~boronate~~LDX ~~affinity resin, which sits at the bottom of the test cartridge funnel~~Analyzer. ~~The~~ ~~boronate~~Changes ~~affinity~~that ~~resin/glycated~~cannot ~~hemoglobin~~be iscaptured ~~then~~on ~~washed with~~ the ~~solution in the second tube. The final step separates~~ ~~the~~cassette’s ~~glycated~~magnetic ~~hemoglobin~~strip ~~from~~can ~~the~~be ~~boronate~~accomplished ~~affinity~~by ~~resin~~changes ~~using the~~to ~~solution in~~ the ~~third~~LDX ~~tube. The glycated hemoglobin concentration is then measured and the GDX~~ Analyzer ~~uses an~~’s ~~algorithm~~removable toread ~~convert~~only ~~the~~memory ~~results~~software ~~into the percentage A1C in the blood sample~~pack. AsThis aflexible ~~result~~design ~~of this automatic process, the~~enables healthcare ~~provider~~providers ~~does not have~~ to ~~interpret~~perform ~~any color reaction, relate~~ a ~~reading~~variety toof atests ~~separate~~using ~~chart~~the orsame ~~input calibration~~LDX ~~information. All three tubes used during the test~~Analyzer ~~are~~and ~~integral~~ to ~~the~~take ~~test~~advantage ~~cartridge and the GDX Analyzer displays each step~~ of ~~the~~new ~~process~~tests ~~with~~and aother ~~user-guiding~~product ~~icon.~~upgrades ~~Our~~without ~~A1C~~having ~~test~~to ~~cartridges~~purchase ~~currently have~~ a ~~domestic~~new ~~list~~LDX ~~price of $7~~Analyzer.~~95 each.~~

The LDX System includes software that performs cardiac risk assessments using risk factor parameters 5developed from the Framingham study, a long term study of cholesterol levels and cardiovascular disease. A risk assessment is required by the NIH guidelines.

~~Table~~The ofLDX ~~Contents~~Analyzer

Revenue from the LDX Analyzer represented 5%, 5%, and 6% of total revenue in fiscal year 2007, fiscal year 2006, and fiscal year 2005, respectively. The ~~following~~LDX ~~table~~Analyzer ~~summarizes~~is ~~our~~a ~~current~~proprietary, ~~products~~four-channel, reflectance photometer that measures the amount of light reflected from the reaction surfaces of a test cassette and ~~products~~incorporates a microprocessor with ~~under~~built-in ~~development:~~software. The LDX Analyzer contains a drawer for insertion of the cassette, three buttons for user activation and a liquid crystal display to present the test results. Using the information and instructions encoded on the cassette’s magnetic strip, the LDX Analyzer’s built-in microprocessor regulates the reaction conditions, controls the optical measurements of analyte concentrations on the cassette’s reaction pads, executes the required calculations and, within five minutes, displays the results on the liquid crystal display. The results are displayed as a numerical value of the level of the analyte tested and can be transferred to a printer, computer or computer network.

Product	Regulatory Status(1)
Instrument
LDX Analyzer		FDA cleared; CLIA waived
GDX Analyzer		FDA cleared; CLIA waived
Endo-Pat		FDA cleared
Cassette Products
Current
Lipid Profile (Lipid)		FDA cleared; CLIA waived
(Total cholesterol/High density lipoproteins/Glucose/Triglycerides/Estimated LDL cholesterol/and TC/HDL ratio)
Lipid Profile plus Glucose (Lipid/GLU)		FDA cleared; CLIA waived
Total Cholesterol and Glucose (TC, GLU)		FDA cleared; CLIA waived
Total Cholesterol/High Density Lipoproteins/Glucose (TC, HDL, GLU)		FDA cleared; CLIA waived
Total Cholesterol and High Density Lipoproteins (TC, HDL)		FDA cleared; CLIA waived
Total Cholesterol (TC)		FDA cleared; CLIA waived
Alanine Aminotransferase (ALT)/Aspartate Aminotransferase (AST)		FDA cleared; CLIA waived
High Sensitivity C-Reactive Protein (hs-CRP)		FDA cleared
Under Development(2)
Lipid Profile/Alanine Aminotransferase (Lipid/ALT)		No regulatory filing required
In Feasibility Studies(3)
Total Bilirubin (Tbil)		Not filed or applied
Alkaline Phosphate (ALP)		Not filed or applied
Creatine Kinase (CK)		Not filed or applied
Direct Low Density Lipoproteins (LDL)		Not filed or applied
Cartridge Product
Hemoglobin A1c (A1C)		FDA cleared; CLIA waived

The built-in software calculates the numeric values of the test results and is contained in a removable read only memory software pack mounted in an access well on the bottom of the LDX Analyzer. We upgrade the software as new products are developed, allowing healthcare providers to easily replace the existing read only memory pack with a new pack containing upgraded software. The LDX Analyzer, along

(1)	“FDA” means the United States Food and Drug Administration; “FDA cleared” means the product has received market clearance pursuant to Section 510(k) of the Food, Drug and Cosmetics Act of 1938, as amended. “CLIA waived” means the Food and Drug Administration has granted our application to classify the product as having waived status with respect to the Clinical Laboratory Improvement Amendments.
(2)	Products under development are those that have completed the feasibility phase of the commercialization process and have begun the development phase. During the development phase, manufacturing processes are developed and defined, initial lots are made using those manufacturing processes and performance against product specifications is demonstrated. The products under development are then transferred to manufacturing prior to launch.
(3)	Products in the feasibility phase of our commercialization process are studied to determine the compatibility of the reagents with the single use test cassette and preliminary data is generated to indicate if the reagents can perform to preliminary specifications.

with a ~~Current Cassette~~printer, accessories and ~~Cartridge~~starter ~~Products~~pack, comprises a LDX System and currently has a domestic list price of $2,115.

~~Our~~Cassette current test products are designed to measure and monitor blood cholesterol, related lipids, glucose, alanine and aspartate aminotransferase, C-reactive protein and A1C. Lipids travel in the blood within water-soluble particles called lipoproteins. Products

Revenue from cassette products represented 85%, 84%, and 83% of total revenue in fiscal year 2007, 6fiscal year 2006, and fiscal year 2005, respectively. Our line of single-use, disposable test cassettes for the LDX System incorporates patented and licensed technology for distributing precisely measured plasma to up to four reaction pads for simultaneous testing. Each cassette has three parts: a main body that contains the sample well into which the blood sample is dispensed, a reaction bar where plasma is transferred for analysis and a magnetic strip encoded with test instructions and lot specific calibration information for the various chemistries on the reaction pads. Capillary action draws a drop of blood through a separation medium within the cassette, stopping the cellular components of the blood while transferring a small volume of plasma to the cassette’s reaction pads. When the plasma contacts the reaction pads, the dry chemistry reacts with the analytes in the plasma, producing color. The intensity of color developed indicates the concentration of the analytes in the plasma. The magnetic strip contains information needed by the LDX Analyzer to convert the reflected color reading into a concentration level for the accurate measurement of the analytes being tested. As a result of this automatic process, the healthcare provider does not have to interpret any color reaction, relate a reading to a separate chart or input calibration information. Our available test cassettes range in current domestic list price from $4.19 to $13.00 per cassette and include up to six results per cassette.

~~Table~~Overview of ~~Contents~~the Cholestech GDX System

•The ~~Lipid~~GDX System ~~Profile.~~is ~~We offer~~ a ~~lipid profile cassette~~patented, ~~which~~easy directly measures TC, HDL and triglycerides. This cassette meets all of the screening and monitoring guidelines recommended by the NIH guidelines. In addition, the lipid profile cassette calculates estimated values for LDL and the ratio of TC to ~~HDL. The development of cardiovascular disease has been associated with three lipoprotein abnormalities: high levels of LDL~~use, ~~high~~A1C ~~levels~~testing ofsystem ~~very~~consisting ~~low density lipoproteins (“VLDL”) and low levels~~ of ~~HDL. LDL, the major carrier of cholesterol and VLDL,~~ a ~~major~~small desktop ~~carrier of triglycerides in the blood~~analyzer, ~~have~~single-use ~~been~~test ~~shown~~cartridges to be associated with deposits of plaque on the arterial wall. High levels of triglycerides can also lead to development of such plaque. Accumulation of this plaque leads to a narrowing of the arteries and ~~increases the likelihood of cardiovascular disease~~accessories. The ~~lipid~~GDX ~~profile~~System allows cassette thus performs multiple tests in the diagnostic screening and ongoing therapeutic monitoring of individuals who have high LDL levels or who exhibit two or more other cardiovascular disease risk factors. NCEP guidelines recommend that healthcare providers ~~perform two lipid profiles, one~~ to ~~four~~perform ~~weeks~~A1C ~~apart,~~tests ~~before~~with ~~initiating~~a ~~lipid~~single ~~lowering~~drop ~~drug~~of ~~therapy.~~blood within •five ~~Lipid Profile plus Glucose Panel, Total Cholesterol and Glucose Panel, and Total Cholesterol/High Density Lipoproteins/Glucose Panel~~minutes. ~~Recognizing~~Minimal ~~the~~training ~~relationship~~is ~~between~~required ~~diabetes~~to ~~and~~operate ~~abnormal lipid levels, we developed a blood glucose test for~~ the ~~LDX~~GDX System and ~~combined it with each of its three lipid related test panels. The resulting panels provide input used in~~ the ~~diagnostic~~sample ~~screening~~does ~~and therapeutic monitoring of patients with diabetes, whether or~~ not ~~they~~need ~~are~~to ~~aware they are diabetic, as well as individuals who may~~ be ~~at risk of cardiovascular disease~~pre-treated. •To ~~Total~~run ~~Cholesterol~~a ~~and High Density Lipoproteins Panel. The total cholesterol (“TC”) and high density lipoproteins (“HDL”) panel is the recommended~~ test, ~~under~~ the ~~current~~healthcare provider ~~NIH~~pricks ~~guidelines if~~ the ~~individual~~patient’s ~~being~~finger, ~~screened~~transfers ~~has~~a ~~not~~drop ~~fasted.~~of ~~HDL particles circulate in the~~ blood ~~and can pick up cholesterol from arteries and carry it~~ to ~~the~~a ~~liver~~sample reagent ~~for~~solution ~~elimination~~in ~~from~~ the ~~body.~~test ~~HDL~~cartridge isand ~~sometimes~~initiates ~~called “good cholesterol” because of this function. This panel also calculates the ratio of TC to HDL,~~ a ~~recognized~~timing ~~measure of cholesterol induced cardiac risk~~sequence. ~~• Total Cholesterol.~~ This sample ~~stand-alone~~solution ~~test for measuring TC was our first test, developed in conjunction with NCEP guidelines issued in 1988. • Alanine~~ and ~~Aspartate~~two ~~Aminotransferase.~~successive ~~Patients~~reagent ~~undergoing~~solutions ~~certain drug therapies must be monitored for increases in certain enzymes that~~ are ~~associated~~added ~~with liver damage. The alanine and aspartate aminotransferase (“ALT/AST”) test combined with our lipid profile allows healthcare providers~~ to ~~monitor both~~ the ~~impact~~test cartridge ofwhen ~~and~~indicated ~~potential adverse side effects on the liver from lipid lowering and diabetic therapies. • A1C. Hemoglobin A1c (“A1C”) is recommended~~ by the ~~American~~GDX ~~Diabetes~~Analyzer’s ~~Association for long~~user-~~term~~guiding ~~management~~icon ~~of glycemia in diabetes mellitus~~displays. ~~Patients~~All measurement ~~being~~steps ~~treated to lower their blood glucose levels~~ are ~~tested~~performed ~~from two to four times per year depending on whether their A1C levels are stable or their therapy is changing. • High Sensitivity C-Reactive Protein. The hs-CRP test measures,~~ by ~~immunoassay,~~ the ~~amount~~GDX ofSystem, ~~CRP~~which ~~present~~produces inresults comparable ~~a patient sample. Recent research has demonstrated that CRP is a systemic marker of inflammation and the measurement of CRP is useful~~ in ~~the~~accuracy ~~detection~~to ~~and~~results ~~evaluation~~provided ofby ~~infection~~larger, ~~tissue~~more ~~injury,~~expensive ~~inflammatory~~bench ~~disorders,~~ top and ~~associated~~clinical ~~diseases.~~laboratory ~~Studies~~instruments ~~have shown~~ that ~~CRP~~are isnot anCLIA independent risk factor for coronary heart disease and when used in conjunction with certain other risk factors, such as total cholesterol and HDL-cholesterol, is useful in predicting future cardiovascular eventswaived.

~~Cassette Products~~The ~~Under~~GDX ~~Development~~ Analyzer

The GDX Analyzer uses a ~~Products~~photometer ~~listed~~that ~~under~~measures ~~development~~the ~~are~~amount ~~undergoing~~of ~~optimization~~light transmitted through the reaction solutions and incorporates a microprocessor with built-in software. The GDX Analyzer contains a receptacle for insertion of the cartridge, three buttons ~~design~~for user activation and a liquid crystal display to present user-guiding icons and the test results. The GDX Analyzer’s built-in microprocessor regulates the reaction conditions, ~~performance~~controls ~~testing~~the optical measurements of analyte concentrations in the cartridge’s reaction solutions, ~~scale~~executes upthe required calculations and, ~~clinical~~within ~~trials~~five minutes, displays the results on the liquid ~~regulatory~~crystal ~~submissions~~display. The results are displayed as a numerical value of the A1C level and ~~transfer~~can be transferred to ~~production~~a printer, computer or computer network. The GDX Analyzer is certified by the National Glycohemoglobin Standardization Program. The GDX Analyzer, along with accessories, comprises a GDX System and currently has a domestic list price of $895.

•Cartridge Lipid Profile/Alanine Aminotransferase. We plan to offer a single cassette containing both our CLIA waived lipid profile and ALT tests (“Lipid/ALT”). The integration of the lipid parameters (total cholesterol, HDL cholesterol and triglycerides) and liver function parameter (ALT) will provide convenience and ease of use for our customers. We expect this product to be available in late calendar year 2006.Product

The GDX System’s A1C single-use, disposable test cartridges use a well-established boronate affinity chromatography technique to 7separate the glycated hemoglobin fraction from the nonglycated fraction. Hemoglobin in red blood cells becomes glycated with prolonged exposure to high levels of glucose (blood

~~Table of Contents~~8

sugar) in diabetic patients. After an A1C test cartridge has been placed in the GDX Analyzer, a ~~Cassette~~small sample of blood is added to the first sample solution tube, which ~~Products~~contains boronate affinity resin. The red blood cells are instantly disrupted to release the hemoglobin and the boronate affinity resin binds the glycated hemoglobin. After a short incubation step, the liquid is poured into the funnel of the test cartridge and the nonglycated fraction is collected in ~~Feasibility~~an ~~Studies~~optical chamber where the hemoglobin concentration is photometrically measured. The glycated hemoglobin remains bound to the boronate affinity resin, which sits at the bottom of the test cartridge funnel. The boronate affinity resin/glycated hemoglobin is then washed with the solution in the second tube. The final step separates the glycated hemoglobin from the boronate affinity resin using the solution in the third tube. The glycated hemoglobin concentration is then measured and the GDX Analyzer uses an algorithm to convert the results into the percentage A1C in the blood sample. As a result of this automatic process, the healthcare provider does not have to interpret any color reaction, relate a reading to a separate chart or input calibration information. All three tubes used during the test are integral to the test cartridge and the GDX Analyzer displays each step of the process with a user-guiding icon. Our A1C test cartridges currently have a domestic list price of $7.95 each.

The Wefollowing ~~are~~table insummarizes ~~various stages of feasibility studies for new cassettes that would expand~~ our ~~product~~current ~~line~~products ~~for~~and ~~diagnostic testing.~~products Weunder ~~may develop additional tests depending on the progress of our existing~~ development ~~efforts and available resources.~~ :

Liver Panel

Product				Regulatory Status(1)
Instrument
LDX Analyzer				FDA cleared; CLIA waived
GDX Analyzer				FDA cleared; CLIA waived
VasoSense				FDA cleared
Cassette Products
Current
Lipid Profile (Lipid) (Total cholesterol/High density lipoproteins/Glucose/Triglyceride/Estimated LDL cholesterol/and TC/HDL ratio)				FDA cleared; CLIA waived
Lipid Profile plus Glucose (Lipid/GLU)				FDA cleared; CLIA waived
Total Cholesterol and Glucose (TC, GLU)				FDA cleared; CLIA waived
Total Cholesterol/High Density Lipoproteins/Glucose (TC, HDL, GLU)				FDA cleared; CLIA waived
Total Cholesterol and High Density Lipoproteins (TC, HDL)				FDA cleared; CLIA waived
Total Cholesterol (TC)				FDA cleared; CLIA waived
Alanine Aminotransferase (ALT)/Aspartate Aminotransferase (AST)				FDA cleared; CLIA waived
High Sensitivity C-Reactive Protein (hs-CRP)				FDA cleared
Under Development(2)
Lipid Profile/Alanine Aminotransferase (Lipid/ALT)				FDA cleared; CLIA waived
In Feasibility Studies(3)
Total Bilirubin (Tbil)				Not filed or applied
Alkaline Phosphate (ALP)				Not filed or applied
Creatine Kinase (CK)				Not filed or applied
Direct Low Density Lipoproteins (LDL)				Not filed or applied
Cartridge Product
Hemoglobin A1c (A1C)				FDA cleared; CLIA waived

•(1) “FDA” ~~ALT/AST.~~means •the ~~Total~~United ~~Bilirubin.~~States ~~The~~Food ~~total~~and ~~bilirubin~~Drug Administration; ~~test~~“FDA iscleared” ameans ~~liver~~the ~~function~~product ~~test~~has ~~that~~received ismarket ~~helpful~~clearance pursuant into ~~the differentiation~~ Section 510(k) of the ~~cause~~Food, ofDrug ~~jaundice.~~and •Cosmetics ~~Alkaline~~Act ~~Phosphatase. Alkaline phosphatase is a group~~ of 1938, ~~enzymes~~as ~~that are active at an alkaline pH~~amended. ~~Alkaline~~“CLIA ~~phosphatase~~waived” ~~activity~~means ~~is highest in~~ the ~~liver,~~Food ~~bone, intestine~~ and ~~kidney~~Drug ~~and~~Administration ishas granted aour ~~useful~~application ~~test~~to ofclassify ~~liver~~the ~~function.~~product ~~Measurement~~as ofhaving ~~alkaline~~waived ~~phosphatase~~status inwith respect to the ~~blood~~Clinical isLaboratory ~~for~~Improvement ~~differentiating hepatobiliary disease from osteogenic bone disease~~Amendments.

(2) Products under development are those that have completed the feasibility phase of the commercialization process and have begun ~~Statin~~the development phase. During the development phase, manufacturing processes ~~Safety~~are ~~Panel~~developed and defined, initial lots are made using those manufacturing processes and performance against product specifications is demonstrated. The products under development are then transferred to manufacturing prior to launch.

• ALT/AST. • Creatine Kinase. Creatine kinase (“CK”) is an enzyme with high levels of enzyme activity in skeletal muscle. Measurement of CK in patients on statin drug therapy is useful for monitoring for damage to skeletal muscle, a rare side effect of statin therapy.9

(3) Products in the feasibility phase of our commercialization process are studied to determine the compatibility of the ~~Individual Test~~reagents ~~Cassettes~~with the single use test cassette and preliminary data is generated to indicate if the reagents can perform to preliminary specifications.

~~• Direct Low Density Lipoproteins. The direct low density lipoproteins~~ (~~“LDL”~~4) ~~cholesterol test permits the direct measurement of LDL cholesterol in a patient sample.~~ The ~~calculated~~GDX ~~LDL~~system ~~cholesterol~~ is ~~subject~~FDA ~~to a number of limitations including the need~~ 510(k) cleared for aprescription ~~fasting~~home ~~sample.~~use ~~The~~and, ~~direct LDL cholesterol test is reimbursable~~accordingly, ~~whereas the calculated test~~ is ~~not~~CLIA waived.

~~Other Platforms~~ Current Cassette and Cartridge Products

•Our ~~Vascular~~current ~~Endothelial~~test products ~~Dysfunction.~~are ~~The~~designed ~~Endo-Pat~~to ~~2000~~measure isand amonitor ~~non-invasive~~blood ~~device~~cholesterol, ~~that~~related islipids, glucose, asalanine aand ~~diagnostic~~aspartate ~~aid~~aminotransferase, inC-reactive ~~the~~protein ~~detection~~and ~~of coronary artery endothelial dysfunction~~A1C. Lipids ~~The~~travel ~~endothelium~~in is the ~~lining of all the~~ blood ~~vessels~~within ~~and~~water-soluble isparticles ~~the~~called ~~site of the development of coronary artery disease~~lipoproteins.

· Lipid Profile. We offer a lipid profile cassette, which directly measures TC, HDL and triglycerides. This ~~Strategic~~cassette meets all of the screening and monitoring guidelines recommended by ~~Relationships~~the NIH guidelines. In addition, the lipid profile cassette calculates estimated values for LDL and the ratio of TC to HDL. The development of cardiovascular disease has been associated with three lipoprotein abnormalities: high levels of LDL, high levels of very low density lipoproteins (“VLDL”) and low levels of HDL. LDL, the major carrier of cholesterol and VLDL, a major carrier of triglycerides in the blood, have been shown to be associated with deposits of plaque on the arterial wall. High levels of triglycerides can also lead to development of such plaque. Accumulation of this plaque leads to a narrowing of the arteries and increases the likelihood of cardiovascular disease. The lipid profile cassette thus performs multiple tests in the diagnostic screening and ongoing therapeutic monitoring of individuals who have high LDL levels or who exhibit two or more other cardiovascular disease risk factors. NCEP guidelines recommend that healthcare providers perform two lipid profiles, one to four weeks apart, before initiating lipid lowering drug therapy.

We· Lipid ~~have~~Profile ~~established~~plus ~~and~~Glucose ~~continually~~Panel, ~~seek~~Total toCholesterol ~~develop~~and ~~strategic~~Glucose Panel, ~~relationships~~and toTotal ~~enhance~~Cholesterol/High Density Lipoproteins/Glucose Panel. Recognizing the ~~commercialization~~relationship ofbetween ~~our~~diabetes ~~products. In~~and ~~particular~~abnormal lipid levels, we ~~intend~~developed toa blood ~~enter~~glucose ~~into~~test ~~additional~~for ~~strategic alliances~~the ~~with~~LDX ~~major~~System ~~pharmaceutical,~~and ~~health~~combined ~~promotion~~it ~~and~~with ~~other~~each of its three lipid related ~~companies~~test topanels. ~~enhance~~The ~~our~~resulting ~~business~~panels ~~strategy~~provide input used in the ~~management~~diagnostic ofscreening ~~chronic~~and ~~diseases.~~therapeutic ~~Our~~monitoring ~~current~~of ~~strategic~~patients with diabetes, ~~relationships~~whether or not they are ~~described~~aware ~~below.~~they are diabetic, as well as individuals who may be at risk of cardiovascular disease.

· Total Cholesterol and High Density Lipoproteins Panel. The total ~~Distribution~~cholesterol (“TC”) and high density lipoproteins (“HDL”) panel is the recommended test under the current NIH guidelines if the individual being screened has not fasted. HDL particles circulate in the blood and can pick up cholesterol from arteries and carry it to the liver for elimination from the body. HDL is sometimes called “good cholesterol” because of this function. This panel also calculates the ratio of TC to HDL, a recognized measure of cholesterol induced cardiac risk.

We· Total ~~have~~Cholesterol. This ~~non~~stand-~~exclusive distribution agreements to market, sell~~alone ~~and~~test ~~distribute~~for ~~our~~measuring ~~products~~TC towas ~~healthcare providers in the United States, Europe, Latin America and Asia. We believe~~ our ~~partnerships~~ ~~will~~first ~~further our access to medical~~test, ~~occupational health~~developed ~~and other health care professionals who seek effective~~ in~~-office~~ ~~diagnostic~~conjunction ~~and~~with ~~therapeutic monitoring tools for~~NCEP ~~cholesterol~~guidelines ~~and~~issued ~~diabetes~~in ~~management~~1988. Significant distributors of our products include: Physician Sales and Service, Inc., Henry Schein, Inc., McKesson Corporation, Cardinal Health, Inc., Edwards Medical Supply, and Fisher Scientific International, Inc.

· Alanine and Aspartate Aminotransferase. Patients undergoing certain drug therapies must be monitored for increases in certain 8enzymes that are associated with liver damage. The alanine and aspartate aminotransferase (“ALT/AST”) test combined with our lipid profile allows healthcare providers to monitor both the impact of and potential adverse side effects on the liver from lipid lowering and diabetic therapies.

~~Table~~· A1C. Hemoglobin A1c (“A1C”) is recommended by the American Diabetes Association for long-term management of glycemia ~~Contents~~in diabetes mellitus. Patients being treated to lower their blood glucose levels are tested from two to four times per year depending on whether their A1C levels are stable or their therapy is changing.

~~Boule Diagnostics~~ 10

In· High ~~November~~Sensitivity ~~2005,~~C-Reactive weProtein. The ~~signed~~hs-CRP ~~a definitive agreement with Boule~~test ~~Diagnostic~~measures, ~~International~~by ~~Boule~~immunoassay, anthe ~~international~~amount ~~manufacturer~~ of ~~hematology~~ ~~systems,~~CRP ~~headquartered~~present in ~~Stockholm,~~a ~~Sweden~~patient sample. ~~Under~~Recent ~~the~~research ~~terms~~has ofdemonstrated ~~the~~that ~~agreement,~~CRP weis ~~will~~a ~~collaborate~~systemic ~~with~~marker ~~Boule~~of ~~on the~~inflammation ~~development~~ and ~~commercialization~~the measurement of aCRP ~~point~~is ofuseful ~~care Complete~~in ~~Blood~~the ~~Count~~detection ~~(CBC)~~and ~~system,~~evaluation ~~designed~~of ~~for waiver under~~infection, ~~CLIA.~~tissue Weinjury, ~~will~~inflammatory ~~receive~~disorders, ~~exclusive distribution rights covering all human applications in the United States~~ and ~~Canada~~associated diseases.

~~Itamar Medical~~ Cassette Products Under Development

Products listed Inunder ~~April~~development ~~2004,~~are weundergoing ~~signed~~optimization aof ~~market~~design, ~~development~~performance ~~and product~~testing, ~~distribution~~scale ~~agreement~~up, ~~with~~clinical ~~Itamar Medical Limited~~trials, ~~involving~~regulatory ~~a novel~~submissions and ~~proprietary~~transfer ~~system~~to ~~for assessing vascular endothelial dysfunction~~production. ~~Vascular disease experts recognize endothelial dysfunction as an early stage in the development of atherosclerosis.~~

· Lipid Profile/Alanine Aminotransferase. We plan to offer a single cassette containing both our CLIA waived lipid profile and ALT ~~Marketing~~tests (“Lipid/ALT”). The integration of the lipid parameters (total ~~Programs~~cholesterol, HDL cholesterol and triglycerides) and liver function parameter (ALT) will provide convenience and ease of use for our customers. We expect this product to be available in the first quarter of fiscal year 2008.

~~Our~~Cassette ~~LDX~~Products ~~System continues to be utilized~~ in aFeasibility number of regionally based marketing programs in the United States, including healthcare industry conventions. Our international sales and marketing team continues to work with selected global pharmaceutical companies in connection with country specific marketing programs. Pharmaceutical companies utilizing our LDX System in connection with such programs include AstraZeneca PLC and Pfizer Inc. Studies

We are in various stages of feasibility studies for new cassettes that would expand our product line for ~~Sales~~diagnostic ~~and~~testing. We may develop additional tests depending on the progress ~~Marketing~~ of our existing development efforts and available resources.

~~Our~~Liver sales and marketing strategy is to expand our presence in the heart disease and diabetes screening and monitoring markets, focusing primarily on the healthcare professional, pharmaceutical and corporate wellness markets. In order to execute this strategy and create opportunities for our products, we intend to expand our professional sales force and focus our efforts on partnering, distribution and marketing activities. Panel

Our sales and marketing strategy includes increasing penetration into the physician office laboratory and health promotion markets and leveraging our installed base of LDX and GDX Analyzers· ALT/AST. We plan to dedicate a significant portion of our sales and marketing efforts to educate current and potential customers about the clinical and economic benefits of diagnostic screening and therapeutic monitoring and about new test cassettes as they become available for distribution. In order to support this effort, we have hired representatives who focus on calling our key accounts by phone. We also plan to continue to cultivate strategic relationships with development partners, pharmaceutical companies and distributors. We intend to leverage the technology, customer base, marketing power and distribution networks of these partners to accelerate market penetration and increase cassette usage. Our current marketing activities are primarily focused on:

•· Total ~~Physician Office Laboratories~~Bilirubin. The Wetotal ~~have~~bilirubin test ~~entered~~is into non-exclusive distribution agreements with five national medical products distributors, Cardinal Health, Fisher Scientific, McKesson, Physician Sales and Service and Henry Schein, which together have more than 2,500 sales professionals who focus primarily on the United States physician office laboratory (“POL”) market. We have also retained more than 35 regional distributors in the United States. In addition, we and our distributors focus sales and marketing efforts on physicians whose practices include a ~~high~~liver ~~incidence~~function ~~of the cholesterol-related diseases targeted by our~~ test cassettes, including cardiologists, lipid clinicians, internists and family practitioners. • Health Promotion. We have ongoing relationships with approximately 15 regional distributors whose primary focus are to provide equipment and supplies to customers that conduct diagnostic screening for cholesterol and related lipid levels and diabetes. Some of these distributors also sell to the POL market segment. • International. Our international distribution strategy is tohelpful ~~penetrate targeted geographical markets by selling directly to distributors~~ in ~~those~~the ~~markets.~~differentiation Weof ~~have entered into non-exclusive agreements with approximately 35 foreign distributors to distribute~~ the cause ~~LDX~~of ~~System and cassettes primarily in Europe, Asia and South America~~jaundice.

· Alkaline Phosphatase. Alkaline phosphatase is a group of enzymes that are active at an alkaline pH. Alkaline phosphatase activity is 9highest in the liver, bone, intestine and kidney and is a useful test of liver function. Measurement of alkaline phosphatase in the blood is for differentiating hepatobiliary disease from osteogenic bone disease.

~~Table~~Statin ofSafety ~~Contents~~Panel

~~Competition~~ · ALT/AST.

~~The~~· Creatine ~~diagnostic~~Kinase. Creatine ~~products~~kinase ~~markets~~(“CK”) inis ~~which~~an ~~we operate are~~enzyme ~~intensely~~with ~~competitive.~~high ~~Our~~levels ~~competition consists primarily~~ of ~~clinical~~ ~~and~~enzyme ~~hospital~~activity ~~laboratories,~~in asskeletal ~~well as manufacturers of bench top analyzers~~muscle. ~~The~~Measurement ~~substantial majority~~ of ~~diagnostic tests~~CK ~~used by physicians and other healthcare providers are~~in ~~currently~~patients ~~performed~~on bystatin ~~clinical~~drug ~~and~~therapy ~~hospital~~is ~~laboratories.~~useful ~~We expect~~for ~~that~~monitoring ~~these~~for ~~laboratories~~damage ~~will compete aggressively~~ to ~~maintain~~ ~~dominance in the market. To achieve broad market~~skeletal ~~acceptance~~muscle, wea ~~must~~rare ~~demonstrate~~side ~~that~~effect ~~the LDX System and GDX System are attractive alternatives to bench top analyzers and clinical and hospital laboratories. This will require physicians to change their established means~~ of ~~having~~statin ~~such tests performed~~therapy. ~~There can be no assurance that the LDX System and GDX System will be able to compete with these other analyzers and testing services.~~

~~Companies~~Individual ~~with~~Test a significant presence in the diagnostic products market, such as Abbott Laboratories, Bayer Diagnostics, Beckman Coulter, Inc. and Roche Diagnostics (a subsidiary of Roche Holdings Ltd.), have developed or are developing analyzers designed for point of care testing. Such competitors also offer broader product lines than us, have greater name recognition than us and offer discounts as a competitive tactic. In addition, several smaller companies are currently making or developing products that compete or will compete with ours. We believe we currently have a competitive advantage due to (i) the status of the LDX System which is waived under CLIA and can provide a complete lipid profile in accordance with the NIH guidelines in less than five minutes using a single drop of blood; (ii) our ALT test, which is the only ALT test waived under CLIA by the FDA and enables physicians to monitor the potential side effects on the liver from cholesterol lowering drugs and other medications; (iii) the improving breadth of the CLIA waived tests that we offer our installed base; and (iv) our network of over 85 distributors. We expect that our competitors will compete actively to maintain and increase market share and will seek to develop multi-analyte tests that qualify for CLIA waiver. Cassettes

~~Our~~· Direct ~~current~~Low ~~and~~Density ~~future~~Lipoproteins. The ~~products~~direct ~~must compete effectively with~~low ~~the~~density ~~existing~~lipoproteins ~~and~~(“LDL”) ~~future~~cholesterol ~~products~~test ofpermits ~~our competitors primarily on~~ the ~~basis~~direct ofmeasurement ~~ease~~ of LDL ~~use,~~cholesterol ~~breadth~~in ofa ~~tests~~patient ~~available,~~sample. ~~market presence,~~The ~~cost~~calculated ~~effectiveness,~~LDL ~~accuracy,~~cholesterol ~~immediacy~~is ~~of results and~~subject ~~the ability~~ to ~~perform~~certain ~~tests~~limitations ~~near~~including the ~~patient,~~need tofor ~~test multiple analytes from~~ a ~~single~~fasting sample ~~and to conduct tests without a skilled technician or pre-treating blood~~. ~~There~~The ~~can~~direct ~~be no~~LDL ~~assurance~~cholesterol ~~that~~test weis ~~will have the financial resources~~reimbursable, ~~technical expertise~~whereas ~~or marketing, distribution or support capabilities to compete successfully in~~ the ~~future~~calculated ~~or,~~test ifis ~~we do have such resources and capabilities, that we will employ them successfully~~not.

~~Manufacturing~~ Other Platforms

We· Vascular ~~manufacture,~~Endothelial ~~test,~~Dysfunction. The ~~perform~~VasoSense ~~quality~~is ~~assurance~~a non-invasive ~~on,~~device ~~package~~that ~~and ship~~is ~~our~~as ~~products~~a ~~from~~diagnostic ~~our~~aid ~~approximately~~in ~~69,000 square~~the ~~foot facility~~detection ~~located~~of incoronary artery ~~Hayward,~~endothelial ~~California~~dysfunction. WeThe ~~maintain~~endothelium ~~control~~is ~~of those~~the ~~portions~~lining of all the ~~manufacturing~~blood vessels ~~process~~and ~~that~~is wethe ~~believe~~site ~~are complex~~of ~~and~~the ~~provide~~development anof ~~important~~coronary ~~competitive~~artery ~~advantage~~disease.

	•	LDX Analyzer. The LDX Analyzer incorporates a variety of subassemblies and components designed or specified by us, including an optical element, microprocessors, circuit boards, a liquid crystal display and other electrical components. These components and subassemblies are manufactured by a variety of suppliers and are shipped to us for final assembly and quality assurance. Our manufacturing process for the LDX Analyzer consists primarily of assembly, testing, inspection and packaging. Testing consists of a burn-in period, functional tests and integrated system testing using specially produced test cassettes. Our manufacturing process complies with FDA Quality System Requirements, ISO 9001 and TÜV GS Mark guidelines. We believe we can expand our current LDX Analyzer manufacturing capacity as needed.
	•	Cassettes. We purchase chemicals, membranes, plastic parts and other raw materials from suppliers and convert these raw materials, using proprietary processes, into single-use test cassettes. We believe our proprietary processes and custom designed equipment are important components of our cassette manufacturing operations. We have developed core manufacturing technologies, processes and production machinery, including membrane lamination and welding, discrete membrane impregnation, on-line calibration and software control of the manufacturing process. The overall manufacturing process meets FDA Quality System Requirements and in-vitro diagnostic directive, including in process and final quality assurance testing. All our cassette production is currently on our high volume manufacturing line. We use a second manufacturing line for research and development purposes.

Strategic 10 Relationships

~~Table~~We have established and continually seek to develop strategic relationships to enhance the commercialization of ~~Contents~~our products. In particular, we intend to enter into additional strategic alliances with major pharmaceutical, health promotion and other related companies to enhance our business strategy in the management of chronic diseases. Our current strategic relationships are described below.

• Raw Materials and Quality Assurance. Suppliers provide us with the subassemblies, components and raw materials necessary for the manufacture of our products. These subassemblies, components and raw materials are inspected and tested by our quality control personnel. We expect the supply of raw materials to be adequate for our current level of business and into the foreseeable future. Our manufacturing facilities are subject to periodic inspection by regulatory authorities. Certain key components and raw materials used in the manufacturing of our products are currently provided by single source vendors and on a purchase order basis. Our quality assurance personnel also perform finished goods quality control and inspection and maintain documentation for compliance with quality systems regulations and other government manufacturing regulations.Distribution

We have non-exclusive distribution agreements to market, sell and distribute our products to ~~Patents~~healthcare providers in the United States, Europe, Latin America and Asia. We believe our partnerships will further our access to medical, occupational health and ~~Proprietary~~other ~~Technology~~health care professionals who seek effective in-office diagnostic and therapeutic monitoring tools for cholesterol and diabetes management. Significant distributors of our products include: Physician Sales and Service, Inc., Henry Schein, Inc., McKesson Corporation, Cardinal Health, Inc., Edwards Medical Supply, and Fisher Scientific International, Inc.

WeBoule have 10 patents in the United States covering various technologies, including the method for separating HDL from other lipoproteins in a dry chemistry format, the basic design of the testing cassette and the LDX Analyzer and the method of correcting for the effects of substances that can interfere with testing of a blood sample that expire between 2009 and 2022. We have filed four additional patent applications in the United States and internationally under the Patent Cooperation Treaty and individual foreign applications. We are also the licensee of United States patents relating to the measurement of Lp(a) and a portion of our cassette technology. Diagnostics

~~Our~~In ~~current~~November 2005, ~~products incorporate technologies which are the~~we ~~subject~~signed ofa ~~patents~~definitive ~~issued~~agreement towith ~~and~~Boule ~~patent~~Diagnostic ~~applications~~International ~~filed~~Boule, byan ~~others.~~international Wemanufacturer ~~have obtained licenses for certain~~ of ~~these technologies~~hematology ~~and~~systems, ~~might~~headquartered bein ~~required to obtain licenses for~~Stockholm, ~~others~~Sweden. ~~There~~Under ~~can~~the beterms noof ~~assurance~~the ~~that~~agreement, we will becollaborate ~~able~~with toBoule ~~obtain licenses for technology patented by others~~ on ~~commercially~~the ~~reasonable~~development ~~terms,~~and orcommercialization atof ~~all,~~a ~~that~~point weof ~~will~~care beComplete ~~able~~Blood toCount ~~develop~~(CBC) ~~alternative~~system, ~~approaches~~designed ~~if we are unable to obtain licenses or that our current and future licenses will be adequate~~ for ~~the operation~~waiver ofunder ~~our business~~CLIA. ~~The~~We ~~failure~~will toreceive ~~obtain~~exclusive ~~such licenses~~distribution orrights ~~identify~~covering ~~and~~all ~~implement~~human ~~alternative~~applications ~~approaches~~in ~~could~~the ~~have~~United ~~a material~~States ~~adverse effect on our business, financial condition~~ and ~~results~~ ~~of operations~~Canada.

InItamar December 2003, we and Roche Diagnostics signed a settlement agreement and a license agreement which settled and dismissed all existing patent litigation between us on a worldwide basis. As part of the settlement, we agreed to pay Roche an ongoing royalty and Roche granted an irrevocable, non-exclusive, worldwide license to us for its patents related to HDL cholesterol. In addition, the parties also agreed upon a mechanism for the resolution of future patent infringement disputes. We believe that any such dispute resolution will confirm that our HDL cholesterol test cassette, currently under development, does not infringe Roche’s patents. If however, upon the resolution of any dispute, it is ultimately determined that our new HDL cholesterol test cassette is covered by Roche’s patents, we will pay Roche the same ongoing royalty. Medical

~~There~~In ~~can be no assurance that patent infringement claims will not be asserted against us by other parties in the future~~April 2004, ~~that~~we insigned ~~such~~a ~~event~~market wedevelopment ~~will~~and ~~prevail~~product ordistribution ~~that~~agreement wewith ~~will be able to obtain~~Itamar ~~necessary~~Medical ~~licenses on reasonable terms~~Limited, orinvolving ata ~~all.~~novel ~~Adverse determinations~~and inproprietary ~~any~~system ~~litigation~~for ~~could subject us to significant~~assessing ~~liabilities and/or require~~vascular usendothelial ~~to seek licenses from third parties~~dysfunction. IfVascular wedisease ~~are~~experts ~~unable~~recognize toendothelial ~~obtain~~dysfunction ~~necessary~~as ~~licenses~~an orearly ~~are~~stage ~~unable~~in ~~to develop or implement alternative technology, we may be unable to manufacture and sell~~ the ~~affected~~development ~~products. Any~~ of ~~these outcomes could have a material adverse effect on our business, financial condition or results of operations~~atherosclerosis.

WeMarketing rely substantially on trade secrets, technical know-how and continuing invention to develop and maintain our competitive position. We work actively to foster continuing technological innovation to maintain and protect our competitive position, and we have taken security measures to protect our trade secrets and periodically explore ways to further enhance trade secret security. There can be no assurance that such measures will provide adequate protection for our trade secrets or other proprietary information. Although we have entered into proprietary information agreements with our employees, consultants and advisors, there can be no assurance that these agreements will provide adequate remedies for any breach. Programs

Our LDX System continues to be utilized in a number of regionally based marketing programs in the United 11States, including healthcare industry conventions. Our international sales and marketing team continues to work with selected global pharmaceutical companies in connection with country specific marketing programs. Pharmaceutical companies utilizing our LDX System in connection with such programs include AstraZeneca PLC and Pfizer Inc.

~~Table~~Sales ofand ~~Contents~~Marketing

Our sales and marketing strategy is to expand our presence in the heart disease and diabetes screening and monitoring markets, ~~Government~~focusing primarily on the healthcare professional, pharmaceutical and corporate ~~Regulation~~wellness markets. In order to execute this strategy and create opportunities for our products, we intend to expand our professional sales force and focus our efforts on partnering, distribution and marketing activities.

~~Food and Drug Administration and Other Regulations~~ 12

~~The~~Our ~~manufacture~~sales and marketing ~~sale~~strategy ofincludes ~~our~~increasing ~~products~~penetration ~~are~~into ~~subject~~the tophysician office ~~regulation~~laboratory byand ~~numerous~~health ~~governmental~~promotion ~~authorities,~~markets ~~principally~~and ~~the FDA~~leveraging ~~and~~our ~~corresponding~~installed ~~state~~base of LDX and ~~foreign~~GDX ~~regulatory agencies~~Analyzers. ~~Pursuant~~ toWe ~~the~~plan ~~Food,~~to ~~Drug~~dedicate ~~and~~a ~~Cosmetics~~significant ~~Act~~portion of ~~1938,~~our ~~as amended~~sales ~~(the~~and ~~“FDC~~marketing ~~Act”),~~efforts ~~the~~to ~~FDA~~educate ~~regulates~~current ~~the~~and ~~clinical testing,~~potential ~~manufacture,~~customers ~~labeling,~~about ~~distribution~~the clinical and ~~promotion~~economic benefits of ~~medical~~ ~~devices.~~diagnostic ~~Noncompliance~~screening ~~with~~and ~~applicable~~therapeutic monitoring ~~requirements~~and ~~can result~~about ~~in,~~new ~~among~~test ~~other~~cassettes ~~things,~~as ~~fines,~~they ~~injunctions,~~become ~~civil~~available for ~~penalties,~~distribution. ~~recall~~In ororder ~~seizure~~to ofsupport ~~products~~this effort, ~~total~~we orhave ~~partial~~hired representatives ~~suspension~~who offocus ~~production,~~on ~~failure~~calling ofour ~~the~~key ~~government~~accounts by phone. We also plan to ~~grant~~continue to ~~pre-market~~cultivate ~~clearance~~strategic orrelationships ~~pre-market~~with ~~approval~~development ~~for~~partners, ~~devices~~pharmaceutical companies and ~~criminal~~ ~~prosecution~~distributors. ~~The~~We ~~FDA~~intend ~~also~~to ~~has~~leverage the ~~authority~~technology, tocustomer ~~request repair~~base, marketing ~~replacement~~power orand ~~refund~~distribution networks of ~~the~~these ~~cost~~partners ofto ~~any device~~accelerate ~~manufactured~~market orpenetration ~~distributed~~and byincrease uscassette usage. Our current marketing activities are primarily focused on:

In· Physician ~~the~~Office ~~United~~Laboratories. We have ~~States,~~entered ~~medical~~into ~~devices~~non-exclusive ~~are~~distribution ~~classified~~agreements ~~into~~with ~~one~~five ofnational ~~three~~medical ~~classes~~products distributors, ~~Class I~~Cardinal Health, II ~~or III~~Inc., onFisher ~~the basis~~Scientific ofInternational, ~~the~~Inc., ~~controls~~McKesson ~~deemed~~Corporation, byPhysician ~~the~~Sales ~~FDA~~and toService, ~~be necessary to reasonably~~Inc., ~~ensure their safety~~ and ~~effectiveness.~~Henry ~~Class I~~Schein, ~~devices are subject to general controls (e~~Inc.g., ~~labeling,~~which ~~registration, listing~~together ~~and~~have ~~adherence~~more tothan ~~quality~~2,500 ~~systems~~sales ~~regulations).~~professionals ~~Class II~~who ~~devices~~focus ~~are~~primarily ~~subject~~on tothe ~~general~~United ~~controls, pre-market~~States ~~notification~~physician ~~and~~office ~~special~~laboratory ~~controls~~ (~~e.g., performance~~“POL”) ~~standards, post-~~market ~~surveillance and patient registries)~~. ~~Generally,~~ ~~Class III~~We ~~devices~~have ~~are~~also ~~those~~retained ~~that~~regional ~~must~~distributors ~~receive pre-market~~in ~~approval from~~ the ~~FDA~~United (eStates.~~g.,~~ ~~life sustaining~~In addition, ~~life supporting~~we and ~~implantable~~our ~~devices~~distributors orfocus ~~new~~sales ~~devices~~and ~~which~~marketing ~~have~~efforts ~~not~~on ~~been~~physicians ~~found~~whose ~~substantially~~practices ~~equivalent~~include toa ~~legally~~high ~~marketed~~incidence ~~devices)~~of the cholesterol-related ~~and~~diseases ~~require~~targeted ~~clinical~~by ~~testing~~our totest ~~assure~~cassettes, ~~safety~~including cardiologists, lipid clinicians, internists and ~~effectiveness~~family practitioners.

~~Before~~· Health aPromotion. We ~~new~~have ~~device can be introduced into the market, the~~ongoing ~~manufacturer~~relationships ~~must~~with ~~generally~~regional ~~obtain~~distributors ~~marketing~~whose ~~clearance~~primary ~~through~~focus a pre-market notification under Section 510(k) of the FDC Act or a pre-market approval application under Section 515 of the FDC Act or be exempt from 510(k) requirements. Most Class I devices are ~~exempt from 510(k) requirements. A 510(k) clearance typically will be granted if the submitted information establishes that the proposed device is “substantially equivalent”~~ to ~~a legally marketed~~provide ~~Class I~~equipment ~~or II~~and ~~medical~~supplies ~~device or~~ to acustomers ~~Class III medical~~that ~~device~~conduct ~~for~~diagnostic ~~which~~screening ~~the FDA has not called~~ for ~~a pre-market~~ ~~approval.~~cholesterol Aand ~~510(k)~~related ~~notification~~lipid ~~must~~levels ~~contain~~and ~~information~~diabetes. ~~to support~~Some ~~a claim~~ of ~~substantial~~these ~~equivalence, which may include~~distributors ~~laboratory~~also ~~test~~sell ~~results or the results of clinical studies of the device in humans. It generally takes from four~~ to ~~12 months~~ ~~from~~ the ~~date~~POL ~~of submission to obtain 510(k) clearance, but it may take longer. A “not substantially equivalent” determination by the FDA, or a request for additional information, could delay the~~ market ~~introduction of new products that fall into this category~~segment. For any devices that are cleared through the 510(k) process, modifications or enhancements that could significantly affect safety or effectiveness or constitute a major change in the intended use of the device will require new 510(k) submissions. We obtained 510(k) clearance before marketing the LDX Analyzer and all existing test cassettes in the United States.

~~In general, we intend to develop and market tests that will receive 510(k) clearance~~· International. Our ~~However,~~international ifdistribution ~~we cannot establish that a~~strategy ~~proposed test cassette~~ is ~~substantially equivalent~~ to apenetrate ~~legally marketed~~targeted ~~device,~~geographical wemarkets ~~will~~by beselling ~~required~~directly to ~~seek pre-market approval~~ ofdistributors ~~the~~in ~~proposed~~those ~~test~~markets. ~~cassette~~We ~~from~~have ~~the~~entered ~~FDA~~into ~~through the submission of a pre~~non-~~market~~exclusive ~~approval application. If a future~~agreements ~~product~~with ~~were~~foreign distributors to ~~require~~distribute ~~submission~~the ofLDX ~~this~~System ~~type of application, regulatory approval of such product would involve a much longer~~ and ~~more~~cassettes ~~costly process than a 510(k) clearance. We do not~~primarily ~~believe~~in ~~that our products under development will require the submission of a pre-market approval application~~Europe, ~~which~~Asia ~~can be lengthy, expensive~~ and ~~uncertain.~~South ~~A FDA review of a pre-market approval application generally takes one to three years from the date it is accepted for filing, but may take significantly longer~~America.

Any products manufactured or distributed by us pursuant to FDA clearance or approvals are subject to pervasive and continuing regulation by the FDA and certain state agencies, including record keeping requirements and reporting of adverse experience with the use of the device. Labeling and promotional activities are subject to scrutiny by the FDA and, in certain circumstances, by the Federal Trade Commission. Current FDA enforcement policy prohibits the marketing of approved medical devices for unapproved uses. Competition

The ~~FDC~~diagnostic ~~Act~~products ~~regulates~~markets ~~our~~in ~~quality~~which ~~control~~we ~~and manufacturing~~operate ~~procedures~~are byintensely ~~requiring~~competitive. usOur ~~and~~competition ~~our~~consists ~~contract~~primarily ~~manufacturers~~of toclinical and ~~demonstrate~~hospital ~~compliance~~laboratories, ~~with~~as ~~quality~~well ~~systems~~as ~~regulations~~manufacturers of bench top analyzers. The substantial ~~FDA~~majority of diagnostic tests used by physicians and other ~~monitors~~healthcare ~~compliance~~providers ~~with~~are ~~these~~currently ~~requirements~~performed by ~~requiring~~clinical and hospital ~~manufacturers~~laboratories. toWe ~~register~~expect ~~with~~that ~~the~~these ~~FDA,~~laboratories ~~which~~will ~~subjects~~compete ~~them~~aggressively to ~~periodic~~maintain ~~inspections~~dominance in the market. WeTo ~~were~~achieve ~~inspected~~broad bymarket acceptance, we must demonstrate that the ~~FDA~~LDX inSystem ~~2002~~and asGDX System are attractive alternatives to ~~part~~bench oftop aanalyzers ~~routine~~and ~~quality~~clinical ~~system~~and ~~audit~~hospital laboratories. ~~The~~This ~~State~~will require physicians to change their established means of having such tests performed. There can be no assurance that the LDX System and GDX System will be able to compete with these other analyzers and testing services.

Companies with a significant presence in the diagnostic products market, such as Abbott Laboratories, Bayer Diagnostics, 12Beckman Coulter, Inc. and Roche Diagnostics (a subsidiary of Roche Holdings Ltd.), have developed or are developing analyzers designed for point of care testing. Such competitors also offer broader product lines than us, have greater name recognition than us and offer discounts as a competitive tactic. In addition, several smaller companies are currently making or developing products that compete or will compete with ours. We believe we currently have a competitive advantage due to (i) the status of the LDX System which is waived under CLIA and can provide a complete lipid profile in accordance with the NIH guidelines in less than five minutes using a single drop of blood; (ii) our ALT test, only two other companies have a CLIA waived ALT test that enables physicians to monitor the potential side effects on the liver from cholesterol lowering drugs and other

~~Table of Contents~~13

~~California~~medications; ~~also regulates and inspects our manufacturing~~(iii) the ~~facilities.~~improving Webreadth ~~have~~of ~~been inspected twice by~~ the ~~State~~CLIA ~~of California~~waived totests ~~date~~that ~~and~~we ~~are~~offer ~~manufacturing~~our ~~under~~installed ~~an issued medical~~base; ~~device~~and ~~manufacturer’s~~(iv) our ~~facility~~network ~~license~~of ~~from~~over ~~the~~85 ~~State of California~~distributors. IfWe ~~any~~expect ~~violations~~that of our ~~applicable regulations are~~ ~~noted~~competitors ~~during~~will acompete ~~FDA,~~actively ~~European~~to ~~Notified~~maintain ~~Body~~and orincrease ~~State~~market ~~of California~~share ~~inspection of our manufacturing facilities or those~~and ofwill ~~our~~seek ~~contract~~to ~~manufacturers,~~develop ~~the~~multi-analyte ~~continued~~tests ~~marketing~~that ofqualify ~~our products~~for ~~could~~CLIA ~~be materially adversely affected~~waiver.

~~The~~Our ~~European~~current ~~Union~~and ~~(“EU”)~~future products ~~has~~must ~~promulgated~~compete ~~rules~~effectively ~~that require~~with ~~that~~the ~~devices~~existing ~~such~~and asfuture ~~ours~~products ~~receive~~of ~~the~~our competitors ~~right~~primarily toon ~~affix~~ the CE ~~mark,~~basis aof ~~symbol~~ease of ~~adherence~~use, tobreadth ~~applicable~~of EUtests ~~directives. We~~available, ~~have~~market ~~completed~~presence, ~~all~~cost ~~the~~effectiveness, ~~testing~~accuracy, ~~necessary~~immediacy toof ~~comply~~results ~~with~~and the ~~applicable~~ability ~~regulations~~ to ~~currently~~perform betests ~~eligible~~near ~~for~~the ~~self certification.~~patient, ~~While~~to wetest ~~intend~~multiple toanalytes ~~satisfy~~from ~~the~~a single ~~requisite~~sample ~~policies~~ and ~~procedures~~to ~~that~~conduct ~~will~~tests ~~permit~~without usa toskilled ~~continue~~technician toor ~~affix the CE~~pre-treating ~~mark~~blood. toThere ~~our products in the future, there~~ can be no assurance that we will behave ~~successful~~the infinancial ~~meeting EU certification~~resources, ~~requirements.~~technical ~~Failure~~expertise toor ~~receive~~marketing, ~~the~~distribution ~~right~~or tosupport ~~affix~~capabilities ~~the CE mark~~to ~~may~~compete ~~prohibit~~successfully usin ~~from~~the ~~selling~~future ~~our~~or, ~~products~~if inwe EUdo ~~member countries and could~~ have asuch ~~material~~resources ~~adverse effect on our business,~~and ~~financial~~capabilities, ~~condition~~that ~~and~~we ~~results~~will ofemploy ~~operations~~them successfully.

We and our products are also subject to a variety of state and local laws and regulations in those states or localities where our products are or will be marketed. Any applicable state or local laws or regulations may hinder our ability to market our products in those states or localities. For example, eight states have regulations that impose requirements on pharmacies and/or pharmacists that perform clinical testing, four of which have regulations that prohibit certain pharmacy-based testing. We are also subject to numerous federal, state and local laws relating to such matters as safe working conditions, manufacturing practices, environmental protection, fire hazard control and disposal of hazardous or potentially hazardous substances. There can be no assurance that we will not be required to incur significant costs to comply with such laws and regulations now or in the future or that such laws or regulations will not have a material adverse effect on us. Manufacturing

We manufacture, ~~Changes~~test, inperform ~~existing~~quality ~~requirements~~assurance oron, ~~adoption~~package ofand ~~new~~ship ~~requirements or~~our ~~policies~~products ~~could~~from ~~increase~~our approximately ~~the~~69,000 square ~~cost~~foot offacility orlocated ~~otherwise~~in ~~adversely~~Hayward, California. ~~affect~~We ~~our~~maintain ~~ability~~control toof ~~comply~~those ~~with~~portions ~~regulatory~~of ~~requirements. Failure~~the tomanufacturing ~~comply~~process ~~with~~that ~~regulatory~~we believe ~~requirements~~are ~~could~~complex ~~have~~and ~~a material~~provide ~~adverse~~an ~~effect~~important oncompetitive usadvantage.

· LDX Analyzer. The LDX Analyzer incorporates a variety of subassemblies and components designed or specified by ~~Clinical~~us, including an optical element, microprocessors, circuit boards, a liquid ~~Laboratory~~crystal ~~Improvement~~display ~~Amendments~~and other electrical components. These components and subassemblies are manufactured by a variety of suppliers and are shipped to us for final assembly and quality assurance. Our manufacturing process for the LDX Analyzer consists primarily of assembly, ~~1988~~testing, inspection and packaging. Testing consists of a burn-in period, functional tests and integrated system testing using specially produced test cassettes. Our manufacturing process complies with FDA Quality System Requirements, ISO 13485:2003, CMDCAS requirements and TÜV GS Mark guidelines. We believe we can expand our current LDX Analyzer manufacturing capacity as needed.

~~The~~· Cassettes. We ~~use~~purchase ofchemicals, membranes, ~~our~~plastic ~~products~~parts inand ~~the~~other ~~United~~raw ~~States~~materials isfrom ~~subject~~suppliers toand ~~CLIA,~~convert ~~which~~these ~~provides~~raw ~~for~~materials, ~~federal~~using ~~regulation~~proprietary ofprocesses, ~~laboratory~~into ~~testing,~~single-use antest ~~activity~~cassettes. ~~also~~We ~~regulated~~believe byour ~~most~~proprietary ~~states.~~processes ~~Laboratories~~and ~~must~~custom ~~obtain~~designed equipment ~~either~~are aimportant ~~Certificate~~components of ~~Waiver~~our orcassette amanufacturing ~~registration certificate (for moderately complex testing) from CMS~~operations. ~~Some~~We ~~states may~~have ~~require~~developed acore ~~state~~manufacturing ~~license~~technologies, ~~also.~~processes ~~The~~and ~~CLIA~~production ~~regulations seek to~~machinery, ~~ensure~~including ~~the~~membrane ~~quality~~lamination ofand ~~medical~~welding, ~~testing.~~discrete ~~The~~membrane ~~three primary~~impregnation, ~~mechanisms~~on-line tocalibration ~~accomplish~~and ~~this~~software ~~goal are daily quality~~ control ~~requirements~~ toof ~~ensure~~ the ~~accuracy~~manufacturing ofprocess. ~~laboratory devices and~~The ~~procedures,~~overall ~~proficiency~~manufacturing ~~testing~~process tomeets ~~measure~~FDA ~~testing~~Quality ~~accuracy~~System Requirements and the ~~personnel~~European ~~standards~~In-Vitro toDiagnostic ~~assure~~Directive, ~~appropriate training~~ and ~~experience~~ ~~for~~Canadian ~~laboratory~~CMDCAS ~~workers. CLIA categorizes tests as~~requirements ~~“waived,”~~including orin asprocess ~~being~~and ~~“moderately~~final ~~complex” or~~quality ~~“highly~~assurance ~~complex”~~testing. onAll ~~the basis~~ of ~~specific~~our ~~criteria.~~cassette Toproduction ~~successfully~~is ~~commercialize tests that are~~ currently ~~under development,~~on weour ~~believe~~high itvolume ~~will~~manufacturing beline. ~~critical~~We touse ~~obtain~~a ~~waived~~second ~~classification~~manufacturing line for ~~such~~research ~~tests under CLIA, because CLIA waiver allows healthcare providers to use the LDX System with fewer requirements~~ and atdevelopment ~~a lower cost~~purposes.

· Raw Materials and Quality Assurance. Suppliers provide us with the subassemblies, components and raw materials necessary for the ~~Third~~manufacture of our products. These subassemblies, components and raw materials ~~Party~~are ~~Reimbursement~~inspected and tested by our quality control personnel. We expect the supply of raw materials to be adequate for our current level of business and into the foreseeable future. Our manufacturing facilities are subject to periodic inspection by regulatory authorities. Certain key components and raw materials used in the manufacturing of our products are currently provided by single source vendors and on a purchase order basis. Our quality assurance personnel also perform finished goods quality control and inspection and maintain documentation for compliance with quality systems regulations and other government manufacturing regulations.

In the United States, healthcare providers such as hospitals and physicians that purchase products such as the LDX System and single-use test cassettes generally rely on third party payors, including private health insurance plans, federal Medicare, state Medicaid and managed care organizations, to reimburse all or part of the cost of the procedure in which the product is being used. Our ability to commercialize our products successfully in the United States will depend in part on the extent to which reimbursement for the costs of tests performed with the LDX System and related treatment will be available from government health authorities, private health insurers and other third party payors. For example, provisions for cholesterol and diabetes screening were included in the federal Prescription Drug and Medicare Improvement Act of 2003, which was implemented in January 2005. Third party payors can affect the pricing or the relative attractiveness of our products by regulating the maximum amount of reimbursement provided by such payors for testing services. Reimbursement is currently not available for certain uses of our products in particular circumstances. Pharmacists also face blocking state legislation in a number of states, which precludes them from accessing federally available reimbursement codes and practices. Third party 14

Patents and 13 Proprietary Technology

~~Table~~We have 13 patents in the United States covering various technologies, including the method for separating HDL from other lipoproteins in a dry chemistry format, the basic design of ~~Contents~~the testing cassette and the LDX Analyzer and the method of correcting for the effects of substances that can interfere with testing of a blood sample that expire between 2009 and 2024. We have filed six additional patent applications in the United States and internationally under the Patent Cooperation Treaty and individual foreign applications. We are also the licensee of United States patents relating to the measurement of Lp(a) and a portion of our cassette technology.

~~payors~~Our ~~are~~current ~~increasingly~~products ~~scrutinizing~~incorporate ~~and~~technologies ~~challenging~~which are the ~~prices charged~~subject ~~for~~of ~~medical~~patents ~~products~~issued to and ~~services.~~patent ~~Decreases~~applications infiled by others. ~~reimbursement~~We ~~amounts~~have obtained licenses for ~~tests~~certain ~~performed~~of ~~using~~these ~~our~~technologies ~~products~~and ~~may~~might be ~~decrease~~required ~~amounts~~to ~~physicians~~obtain ~~and~~licenses ~~other~~for ~~practitioners~~others. ~~are~~There can be no assurance that we will be able to ~~charge~~ ~~patients,~~obtain ~~which~~licenses infor ~~turn~~technology ~~may~~patented ~~adversely~~by ~~affect~~others ~~our~~on ~~ability~~commercially toreasonable ~~sell~~terms, ~~our~~or ~~products~~at onall, athat ~~profitable~~we ~~basis.~~will Inbe ~~addition,~~able ~~certain~~to develop alternative ~~healthcare~~approaches ~~providers~~if we are ~~moving~~unable ~~toward~~to aobtain ~~managed~~licenses ~~care~~or ~~system~~that ~~in which~~our ~~such~~current ~~providers~~and ~~contract~~future licenses towill ~~provide~~be ~~comprehensive healthcare~~adequate for athe ~~fixed~~operation ~~cost~~of ~~per~~our ~~patient~~business. ~~Managed~~The ~~care~~failure ~~providers~~to ~~are~~obtain ~~attempting~~such tolicenses ~~control~~or ~~the~~identify ~~cost~~and ofimplement ~~healthcare~~alternative byapproaches ~~authorizing~~could ~~fewer~~have ~~elective~~a ~~procedures,~~material ~~such~~adverse aseffect ~~the~~on ~~screening~~our ofbusiness, ~~blood~~financial ~~for~~condition and results ~~chronic~~of ~~diseases~~operations.

In December 2003, Roche Diagnostics and the WeCompany ~~are~~signed ~~unable~~a tosettlement ~~predict~~agreement ~~what~~and ~~changes~~a ~~will~~license beagreement ~~made~~which insettled ~~the~~and ~~reimbursement~~dismissed ~~methods~~all ~~used~~then byexisting ~~third~~patent ~~party~~litigation ~~payors.~~between ~~The~~us ~~inability~~on a worldwide basis. As part of ~~healthcare~~the ~~providers~~settlement, we agreed to ~~obtain~~pay ~~reimbursement~~Roche ~~from~~an ~~third~~ongoing ~~party~~royalty and Roche ~~payors~~granted an irrevocable, ornon-exclusive, ~~changes~~worldwide inlicense ~~third~~to ~~party~~us ~~payors’~~for ~~policies~~its ~~toward~~patents ~~reimbursement~~related ofto ~~tests~~HDL ~~using~~cholesterol. ~~our~~In ~~products~~addition, ~~could~~the ~~have~~parties aalso ~~material~~agreed upon a ~~adverse~~mechanism ~~effect~~for onthe ~~our~~resolution ~~business,~~of ~~financial~~future ~~condition~~patent ~~and~~infringement ~~results~~disputes. Under the ofRoche ~~operations.~~license ~~Given~~and settlement agreements, the ~~efforts~~Company is entitled to ~~control~~identify ~~and~~a design-around ~~reduce~~product that we believe does not require license payments to ~~healthcare~~Roche ~~costs~~— inand the ~~United~~Company ~~States~~has indone ~~recent~~so. ~~years,~~Roche ~~there~~ can request arbitration on this beissue, noand ~~assurance~~they ~~that~~have ~~currently~~taken ~~available~~the ~~levels~~first ofsteps ~~reimbursement~~to initiate such proceedings. If no agreement is reached, an arbitration will ~~continue~~be commenced to determine whether license payments must be ~~available~~made infor the ~~future~~design-around. ~~for~~If, upon the resolution of any dispute, it is ultimately determined that our ~~existing~~new HDL cholesterol test ~~products~~cassette oris ~~products~~covered by Roche’s patents, we will pay Roche the same ongoing royalty, as that agreed to under ~~development~~the Roche license and settlement agreements.

InThere ~~1991,~~can ~~the~~be ~~Health~~no ~~Care~~assurance ~~Finance~~that ~~Administration~~patent ~~adopted~~infringement ~~regulations~~claims ~~providing~~will ~~for~~not ~~the~~be ~~inclusion~~asserted ofagainst ~~capital~~us ~~related~~by ~~costs~~ other parties in the ~~prospective~~future, ~~payment~~that ~~system for hospital inpatient~~in ~~services~~such ~~under~~event ~~which~~we ~~most~~will ~~hospitals~~prevail ~~are~~or ~~reimbursed~~that bywe ~~Medicare on~~will abe ~~per~~able ~~diagnosis~~to ~~basis~~obtain atnecessary ~~fixed~~licenses on ~~rates~~reasonable ~~unrelated to actual costs~~terms, ~~based~~or onat ~~diagnostic related groups~~all. ~~Under~~Adverse ~~this~~determinations ~~system~~in ~~of reimbursement,~~any ~~equipment~~litigation ~~costs generally are not reimbursed~~could ~~separately,~~subject ~~but~~us ~~rather~~to ~~are~~significant ~~included~~liabilities inand/or arequire ~~single,~~us ~~fixed~~to ~~rate,~~seek ~~per~~licenses from ~~patient~~third ~~reimbursement~~parties. ~~Medicare~~If ~~reform~~we ~~legislation~~are ~~requires~~unable ~~CMS~~ to ~~implement~~obtain anecessary ~~prospective~~licenses ~~payment~~or ~~system~~are ~~for~~unable ~~outpatient~~to ~~hospital~~develop ~~services~~or asimplement ~~well.~~alternative ~~This~~technology, ~~system~~we may ~~also~~be ~~provide~~unable ~~for~~to amanufacture ~~per-patient~~and ~~fixed~~sell ~~rate~~the ~~reimbursement~~affected ~~for outpatient department capital costs~~products. WeAny ~~believe~~of these ~~regulations~~outcomes ~~place more pressure on hospitals’ operating margins, causing them to limit capital expenditures. These regulations~~ could have ~~an adverse effect on us if hospitals decide to defer obtaining medical equipment as~~ a ~~result of any such limitation on their capital~~material ~~expenditures. The Medicare legislation also requires CMS to adopt uniform coverage and administration policies for laboratory tests. We are unable to predict what~~ adverse ~~impact~~ effect on ~~us,~~our ~~if any~~business, ~~additional~~financial ~~government~~condition ~~regulations, legislation~~ or ~~initiatives~~ orresults ~~changes~~of ~~by other payors affecting reimbursement or other matters that may influence decisions to obtain medical equipment may have~~operations.

We ~~believe~~rely ~~the~~substantially ~~escalating~~on ~~cost~~trade ofsecrets, ~~medical care and services has~~technical ~~led~~know-how to and ~~will~~continuing ~~continue~~invention to ~~lead~~develop toand ~~increased~~maintain ~~pressures~~our ~~on the~~competitive ~~healthcare~~position. ~~industry,~~We ~~both~~work ~~foreign~~actively ~~and domestic,~~ to ~~reduce~~foster ~~the cost~~continuing oftechnological ~~care~~innovation ~~and services, including products offered by us. In~~to ~~addition,~~maintain ~~market~~and ~~acceptance~~protect of our ~~products~~competitive ~~in international markets is dependent~~position, inand ~~part,~~we onhave ~~the~~taken ~~availability~~security ofmeasures ~~reimbursement~~to ~~within~~protect ~~prevailing~~our ~~healthcare~~trade ~~payment~~secrets ~~systems. Reimbursement~~ and ~~healthcare~~periodically ~~payment~~explore ~~systems~~ways into ~~international markets~~further ~~vary significantly by country, and include both~~enhance ~~government~~trade ~~sponsored~~secret ~~healthcare and private insurance~~security. There can be no assurance inthat ~~either~~such ~~domestic~~measures ~~or foreign markets that third~~will ~~party~~provide ~~reimbursement~~adequate ~~and~~protection ~~coverage~~for ~~will~~our betrade ~~available~~secrets or ~~adequate,~~other proprietary ~~that~~information. ~~current~~Although ~~reimbursement~~we ~~amounts~~have ~~will~~entered ~~not~~into beproprietary ~~decreased~~information ~~in the~~agreements ~~future~~with orour ~~that~~employees, ~~future~~consultants ~~legislation~~and advisors, ~~regulation~~there orcan ~~reimbursement policies~~be ofno ~~third~~assurance ~~party~~that these ~~payors~~agreements will ~~not~~provide ~~otherwise~~adequate ~~adversely affect~~remedies ~~the demand~~ for ~~our~~any ~~products or our ability to sell our products on a profitable basis~~breach.

Our inability to protect our proprietary information could harm our business. Information regarding risks associated with failure to ~~Product Liability~~protect our proprietary technology and ~~Insurance~~our intellectual property rights may be found on pages 17 through 28 of this Annual Report on Form 10-K under the heading “Risk Factors.”

The sale of our products entails risk of product liability claims. The medical testing industry has historically been litigious, and we face financial exposure to product liability claims if use of our products results in personal injury. We also face the possibility that defects in the design or manufacture of our products might necessitate a product recall. There can be no assurance that we will not experience losses due to product liability claims or recalls in the future. We currently maintain product liability insurance, but there can be no assurance that the coverage limits of our insurance policies will be adequate. Such insurance is expensive, difficult to obtain and no assurance can be given that product liability insurance can be maintained in the future on acceptable terms, or in sufficient amounts to protect us against losses due to liability, or at all. An inability to maintain insurance at an acceptable cost or to otherwise protect against potential product liability could prevent or inhibit the continued commercialization of our products. In addition, a product liability claim in excess of relevant insurance coverage or a product recall could have a material adverse effect on our business, financial condition and results of operations. 15

WeFinally, ~~have~~we ~~liability~~believe ~~insurance~~that certain ~~covering~~trademarks ~~our~~of ~~property~~ours ~~and~~are ~~operations with~~valuable ~~coverage,~~assets ~~deductible~~that ~~amounts~~are ~~and~~important ~~exclusions,~~to ~~which we~~the ~~believe~~marketing ~~are~~of ~~customary~~our ~~for~~products. ~~companies~~Many of ~~our~~these ~~size~~trademarks inhave ~~our~~been ~~industry.~~registered with ~~However,~~the ~~there~~United ~~can~~States bePatent noand Trademark Office or internationally, as appropriate.

14 Government Regulation

~~Table~~Food ofand ~~Contents~~Drug Administration and Other Regulations

~~assurance~~The ~~that~~manufacture and sale of our ~~current~~products ~~insurance~~are ~~coverage~~subject to isregulation ~~adequate~~by ornumerous governmental authorities, principally the FDA and ~~that~~corresponding westate ~~will~~and beforeign ~~able~~regulatory agencies. Pursuant to ~~maintain~~the ~~insurance~~Food, atDrug and anCosmetics ~~acceptable~~Act ~~cost~~of 1938, as amended (the “FDC Act”), the FDA regulates the clinical testing, manufacture, labeling, distribution and promotion of medical devices. Noncompliance with applicable requirements can result in, among other things, fines, injunctions, civil penalties, recall including removal or correction ~~otherwise~~of products, seizure of products, total or partial suspension of production, failure of the government to ~~protect~~grant ~~against~~pre-market ~~liability.~~clearance or pre-market approval for devices and criminal prosecution.

In the United States, medical devices are classified into one of three classes, Class I, II or III, on the basis of ~~Employees~~the controls deemed by the FDA to be necessary to reasonably ensure their safety and effectiveness. Class I devices are subject to general controls (e.g., labeling, registration, listing and adherence to quality systems regulations). Class II devices are subject to general controls, pre-market notification and special controls (e.g., performance standards, post-market surveillance and patient registries). Generally, Class III devices are those that must receive pre-market approval from the FDA (e.g., life sustaining, life supporting and implantable devices or new devices which have not been found substantially equivalent to legally marketed devices) and require clinical testing to assure safety and effectiveness.

Before a new device can be introduced into the market, Asthe manufacturer must generally obtain marketing clearance through a pre-market notification under Section 510(k) of ~~March~~the FDC Act or a pre-market approval application under Section ~~31,~~515 ~~2006,~~of wethe ~~employed~~FDC ~~212~~Act or be exempt from 510(k) ~~full-time~~requirements. Most Class I devices are exempt from 510(k) requirements. ~~associates~~A 510(k) clearance typically will be granted if the submitted information establishes that the proposed device is “substantially equivalent” to a legally marketed Class I or II medical device or to a Class III medical device for which the FDA has not called for a pre-market approval. ~~There~~A ~~were~~510(k) notification 89must ~~employees~~contain information into ~~manufacturing~~support a claim of substantial equivalence, 55which may ~~employees~~include inlaboratory ~~sales~~test ~~and~~results ~~marketing,~~or 40the ~~employees~~results of clinical studies of the device in ~~administration~~humans. Depending on the type of 510(k) submission filed, it ~~and~~generally 28takes ~~employees~~from intwo ~~research~~to ~~and~~three months ~~development.~~from ~~None~~the date of ~~our~~submission to ~~associates~~obtain ~~are~~510(k) clearance, ~~covered~~but it may take longer. A “not substantially equivalent” determination by the FDA, or a ~~collective~~request ~~bargaining~~for ~~agreement~~additional information, could ~~and~~delay the market introduction of new products that fall into this ~~management~~category. ~~considers~~For ~~relations~~any ~~with~~devices ~~employees~~that toare becleared ~~excellent~~through the 510(k) process, modifications or enhancements that could significantly affect safety or effectiveness or constitute a major change in the intended use of the device will require new 510(k) submissions. We obtained 510(k) clearance before marketing the LDX Analyzer and all existing test cassettes in the United States.

In general, we intend to develop and market tests that will receive 510(k) clearance. However, if we cannot establish that a ~~Executive~~proposed test cassette is substantially equivalent to a legally marketed ~~Officers~~device, we will be required to seek pre-market approval of the proposed test cassette from the FDA through the submission of a pre-market approval application (PMA). If a future product were to require submission of this type of application, regulatory approval of such product would involve a much longer and more costly process than a 510(k) clearance. We do not believe that our products under development will require the submission of a pre-market approval application, which can be lengthy, expensive and uncertain. A FDA

~~The names, ages and positions of our current executive officers are as follows:~~ 16

Name	Age		Position
Warren E. Pinckert II		62	President, Chief Executive Officer and Director
John F. Glenn		44	Vice President of Finance, Chief Financial Officer, Treasurer and Secretary
Gregory L. Bennett		44	Vice President of Development
Barbara T. McAleer		48	Vice President of Quality Assurance and Regulatory Affairs
Kenneth F. Miller		50	Vice President of Sales and Marketing
Terry L. Wassmann		59	Vice President of Human Resources
Donald P. Wood		54	Vice President of Operations

review of a pre-market approval application generally takes six months to one year from the date it is accepted for filing, but may take significantly longer.

~~Warren~~Any E.products ~~Pinckert II~~manufactured ~~has~~or ~~served~~distributed asby ~~our President,~~us ~~Chief~~pursuant ~~Executive~~to ~~Officer~~FDA ~~and~~clearance aor ~~Director~~approvals ~~since~~are ~~June~~subject ~~1993. Mr. Pinckert~~to ~~served~~pervasive asand ~~our~~continuing regulation ~~Executive~~by ~~Vice~~the ~~President~~FDA ~~of Operations~~and ~~from~~certain ~~1991~~state ~~to June 1993~~agencies, ~~and~~including asrecord ~~our Chief Financial~~keeping ~~Officer~~requirements and ~~Vice~~reporting ~~President~~ of ~~Business~~adverse ~~Development~~experience ~~from~~with ~~1989~~the ~~to June~~use ~~1993.~~of Mrthe device. ~~Pinckert~~ Labeling ~~also~~and ~~served~~promotional asactivities ~~our~~are ~~Secretary~~subject ~~from 1989~~ to ~~January~~scrutiny ~~1997.~~by ~~Before~~the ~~joining~~FDA ~~Cholestech~~and, ~~Mr. Pinckert~~ ~~was Chief Financial Officer of Sunrise Medical~~in ~~Inc.,~~certain ~~an international durable medical products manufacturer~~circumstances, ~~from~~ ~~1983~~by ~~to 1989. Mr. Pinckert also serves on~~ the ~~Board~~Federal ~~of Advisors~~Trade ~~for the San Francisco State University School of Business~~Commission. ~~Mr. Pinckert~~Current ~~holds~~FDA ~~a Bachelor of Science degree~~enforcement inpolicy ~~Accounting~~prohibits ~~and~~the amarketing ~~Masters~~ of ~~Business~~approved ~~Administration~~medical ~~degree from~~devices ~~the~~for ~~University~~unapproved ~~of Southern California~~uses.

~~John~~The F.FDC ~~Glenn~~Act ~~has~~regulates ~~served as~~ our ~~Corporate~~quality ~~Vice~~control ~~President~~and ofmanufacturing ~~Finance,~~procedures ~~Chief~~by ~~Financial~~requiring ~~Officer,~~us ~~Treasurer~~ and ~~Secretary since~~our ~~October~~contract ~~2004.~~manufacturers ~~Before~~to demonstrate ~~joining~~compliance ~~Cholestech,~~with Mrquality systems regulations. ~~Glenn~~ The FDA monitors ~~was~~compliance ~~Vice~~with ~~President~~these ofrequirements ~~Finance~~by ~~and~~requiring ~~Chief~~manufacturers ~~Financial~~to ~~Officer~~register atwith ~~Invivo~~the ~~Corporation~~FDA, awhich ~~provider~~subjects ofthem ~~monitoring~~to ~~systems~~periodic ~~for~~inspections. We were inspected by the ~~patients~~FDA in ~~medical~~2003 ~~settings,~~as ~~from~~part ~~1990~~of toa ~~2004~~routine quality system audit. ~~Invivo~~The ~~was~~State ~~sold~~of California toalso ~~Intermagnetics~~regulates ~~General~~and ~~Corporation~~inspects inour ~~January~~manufacturing ~~2004~~facilities. We have been ~~Mr. Glenn~~inspected ~~holds~~twice aby ~~Bachelor~~the State of ~~Science~~California ~~degree~~to indate ~~Business~~and are manufacturing under ~~Administration~~an issued medical device manufacturer’s facility license from the ~~University~~State of California. ~~Nevada~~If ~~and~~any violations of our applicable regulations are noted during a FDA, ~~Masters~~European Notified Body or State of California inspection of our ~~Business~~manufacturing ~~Administration~~facilities ~~from~~or those of our contract manufacturers, the ~~University~~continued marketing of ~~Santa Clara~~our products could be materially adversely affected.

~~Mr. Gregory~~The L.European ~~Bennett~~Union (“EU”) has ~~served~~promulgated asrules that require ~~our~~that ~~Vice President,~~devices ~~Development~~such ~~since~~as ~~December~~ours ~~2005.~~receive ~~From~~the ~~November~~right ~~2003~~ to ~~December~~affix ~~2005~~the CE mark, hea symbol ~~served~~of asadherence ~~our~~to ~~Director~~applicable ofEU ~~Engineering,~~directives. Our products sold in the EU ~~charge~~have been CE Marked through Annex III of ~~Process~~98/79/EC ~~Engineering,~~of ~~Quality~~the ~~Control,~~European ~~Facilities,~~Parliament ~~Product~~and ~~Transfer~~of ~~and~~the ~~Manufacturing~~Council ~~Engineering~~on in-vitro diagnostic medical devices. ~~Prior~~While we intend to ~~joining~~satisfy ~~Cholestech,~~the ~~Mr. Bennett~~requisite ~~was~~policies ~~Director~~and ofprocedures ~~Process~~that ~~Development Engineering~~will ~~for~~permit ~~LifeScan~~us ~~Inc.,~~to acontinue ~~Johnson &~~to ~~Johnson~~affix ~~company.~~the ~~Before~~CE ~~this~~mark ~~position,~~to ~~Mr. Bennett~~our ~~held~~products ain ~~variety of~~the ~~engineering~~future, ~~leadership~~there ~~positions~~can inbe ~~both~~no ~~Operations~~assurance ~~and~~that we ~~R&D~~will atbe ~~LifeScan,~~successful ~~where~~in hemeeting ~~spent~~EU ~~12 years~~certification requirements. ~~Prior~~Failure to receive ~~LifeScan,~~the ~~Mr. Bennett~~right ~~held~~to ~~several~~affix ~~engineering~~the ~~positions with~~CE ~~Pechiney~~mark ~~where~~may heprohibit ~~worked~~us ~~for~~from ~~seven~~selling ~~years.~~our ~~Mr. Bennett~~products in EU ~~holds~~member acountries ~~Bachelor~~and ofcould ~~Science~~have ~~degree~~a ~~Mechanical~~material ~~Engineering~~adverse ~~from~~effect on our business, ~~the~~financial ~~University~~condition and results of ~~Wisconsin — Madison~~operations.

~~Barbara~~We T.and ~~McAleer~~our ~~has~~products ~~served~~are asalso ~~our~~subject ~~Vice~~to ~~President~~a variety of ~~Quality~~state ~~Assurance~~and local laws and ~~Regulatory~~regulations ~~Affairs~~in ~~since~~those ~~February~~states ~~2005.~~or localities where our ~~Before~~products ~~joining~~are ~~Cholestech,~~or Mswill be marketed. ~~McAleer~~ ~~was~~Any aapplicable ~~managing~~state or local laws or ~~partner~~regulations atmay ~~LOL~~hinder ~~Partners,~~our aability ~~consulting~~to ~~firm~~market ~~specializing~~our products in ~~the healthcare~~those ~~industry~~states or localities. ~~From~~For ~~January~~example, ~~2001~~eight tostates ~~June~~have ~~2003,~~regulations ~~she~~that ~~was~~impose requirements ~~General~~on ~~Manager~~pharmacies and/~~Vice~~or ~~President~~pharmacists ofthat ~~Operations &~~perform ~~Quality~~clinical testing, four of which ~~for~~have ~~Calypte~~regulations ~~Biomedical~~that ~~Corporation~~prohibit certain pharmacy-based testing. ~~Before~~We ~~joining~~are ~~Calypte,~~also ~~Ms. McAleer~~subject ~~spent~~to ~~1982~~numerous federal, state and local laws relating to ~~2000~~such ~~with~~matters ~~Johnson &~~as ~~Johnson~~safe inworking ~~various~~conditions, manufacturing practices, environmental protection, fire hazard control and ~~quality~~disposal ~~assurance~~of hazardous or potentially hazardous ~~positions~~substances. ~~Ms. McAleer~~There ~~holds~~can abe no assurance that we will not be required to incur significant costs to comply with such laws and regulations now or in the future or that such laws or regulations will not have a material adverse effect on us.

Changes in existing requirements or adoption of new requirements or policies could increase the 15cost of or otherwise adversely affect our ability to comply with regulatory requirements. Failure to comply with regulatory requirements could have a material adverse effect on us.

~~Table~~Clinical ofLaboratory ~~Contents~~Improvement Amendments, 1988

~~Bachelor~~The use of ~~Science~~our ~~degree~~products in the ~~Operations~~United ~~Management~~States ~~from~~is ~~Penn~~subject to CLIA, which provides for federal regulation of ~~State~~laboratory ~~University~~testing, ~~and~~an activity also regulated by most states. Laboratories must obtain either a ~~MBA~~Certificate of Waiver or a registration certificate (for moderately complex testing) from ~~Claremont~~CMS. ~~Graduate~~Some ~~School,~~states ~~Peter~~may require a state license ~~Drucker~~also. ~~Management~~The ~~Center~~CLIA regulations seek to ensure the quality of medical testing. The three primary mechanisms to accomplish this goal are daily quality control requirements to ensure the accuracy of laboratory devices and procedures, proficiency testing to measure testing accuracy and personnel

Kenneth F. Miller has served as our Vice President of Sales and Marketing since June 2004. Before joining Cholestech, Mr. Miller served as the Chief Operating Officer at R2 Technology Inc. from July 2002 to March 2004. He also served as R2 Technology’s Chief Marketing Officer from June 2000 to June 2002. Prior to joining R2 Technology, Mr. Miller served as Chief Operating Officer of LiquidBorders Inc. from October 1999 to May 2000 and Vice President of Sales of Alaris Medical Inc. from April 1997 to October 1999. Mr. Miller holds a Bachelor of Science degree in Chemistry, Zoology, and Physiology from Rutgers University and a Masters of Business Administration degree from Fairleigh Dickinson University. 17

standards ~~Terry~~to L.assure ~~Wassmann~~appropriate ~~has~~training ~~served~~and asexperience ~~our~~for ~~Vice~~laboratory ~~President~~workers. ofCLIA ~~Human~~categorizes ~~Resources~~tests ~~since~~as ~~March 2000. Before joining Cholestech~~“waived, ~~Ms. Wassmann~~” ~~served~~or as ~~Staff~~being ~~Relations~~“moderately ~~Manager~~complex” ~~with~~or ~~Robert~~“highly ~~Half~~complex” ~~International~~on ~~from~~the ~~July~~basis ~~1999~~of tospecific ~~March 2000~~criteria. ~~From~~To ~~February 1986~~successfully tocommercialize ~~December~~tests that ~~1999,~~are ~~Ms. Wassmann~~currently ~~was~~under ~~employed~~development, ~~by Boehringer~~we ~~Mannheim~~believe ~~where~~it ~~she~~will ~~held~~be ~~numerous~~critical ~~positions~~to ~~within the~~obtain ~~Human~~waived ~~Resources~~classification ~~department,~~for ~~including~~such ~~the~~tests ~~Director~~under ofCLIA, ~~Human Resources~~because ofCLIA ~~the~~waiver ~~Indiana and California based Diagnostics~~allows ~~Division.~~healthcare ~~Ms. Wassmann~~providers ~~has~~to ~~been~~use ~~awarded~~ the ~~SPHR~~LDX ~~title~~System ~~from the~~with ~~Society~~fewer ofrequirements ~~Human~~and ~~Resource~~at ~~Management.~~a lower cost.

~~Donald~~Third ~~P. Wood has served as our Vice President of~~Party Operations since April 2003. From July 2001 to March 2003, Mr. Wood served as Vice President of Bone Health, a business unit of Quidel Corporation and was responsible for Bone Health Product Operations, Device Research and Development, and Sales and Marketing. He also served as Quidel’s Vice President of Ultrasound Operations from August 1999 to July 2001. Prior to joining Quidel, Mr. Wood was the Director of Ultrasound Operations for Metra Biosystems Inc. from July 1998 to August 1999. He also served as its Director of Operations from October 1995 to July 1998. Mr. Wood also served as Senior Director of Operations for BioChem Pharma Inc. from July 1994 to October 1995 and Mr. Wood held numerous positions within operations for Serono Diagnostics Inc. from 1980 to July 1994. Mr. Wood holds a Bachelor of Science degree in Business Administration from Bloomsburg University. Reimbursement

In the United States, healthcare providers such as hospitals and physicians that purchase products such as the LDX System and ~~Available~~single-use test cassettes generally rely on third party payors, including ~~Information~~private health insurance plans, federal Medicare, state Medicaid and managed care organizations, to reimburse all or part of the cost of the procedure in which the product is being used. Our ability to commercialize our products successfully in the United States will depend in part on the extent to which reimbursement for the costs of tests performed with the LDX System and related treatment will be available from government health authorities, private health insurers and other third party payors. For example, provisions for cholesterol and diabetes screening were included in the federal Prescription Drug and Medicare Improvement Act of 2003, which was implemented in January 2005. Third party payors can affect the pricing or the relative attractiveness of our products by regulating the maximum amount of reimbursement provided by such payors for testing services. Reimbursement is currently not available for certain uses of our products in particular circumstances. Pharmacists also face blocking state legislation in a number of states, which precludes them from accessing federally available reimbursement codes and practices. Third party payors are increasingly scrutinizing and challenging the prices charged for medical products and services. Decreases in reimbursement amounts for tests performed using our products may decrease amounts physicians and other practitioners are able to charge patients, which in turn may adversely affect our ability to sell our products on a profitable basis. In addition, certain healthcare providers are moving toward a managed care system in which such providers contract to provide comprehensive healthcare for a fixed cost per patient. Managed care providers are attempting to control the cost of healthcare by authorizing fewer elective procedures, such as the screening of blood for chronic diseases.

~~Our~~We ~~website~~are isunable ~~located~~to atpredict ~~http://www.cholestech.com.~~what ~~Electronic~~changes will be made in ~~copies~~the ofreimbursement ~~our~~methods ~~annual~~used ~~report~~by ~~on Form 10-K, quarterly~~third ~~reports~~party ~~on Form 10-Q, current~~payors. ~~reports~~The oninability of ~~Form 8-K, and~~healthcare ~~amendments~~providers to ~~those~~obtain ~~reports~~reimbursement ~~filed~~from orthird ~~furnished~~party ~~pursuant~~payors, toor ~~Section 13(a)~~changes orin ~~15(d)~~third ofparty ~~the~~payors’ ~~Securities~~policies ~~Exchange~~toward ~~Act~~reimbursement of ~~1934~~ ~~are~~tests ~~available~~using our products, ~~free~~could ofhave ~~charge,~~a material adverse effect on ~~the~~our ~~“Investor”~~business, financial ~~section~~condition and results of ~~our~~operations. ~~website~~Given asthe ~~soon~~efforts asto ~~practicable~~control ~~after~~and wereduce ~~electronically~~healthcare ~~file~~costs ~~such~~in ~~material~~the ~~with~~United ~~the~~States ~~Securities~~in ~~and~~recent years, there can be no ~~Exchange~~assurance ~~Commission.~~that ~~The~~currently ~~contents~~available levels of ~~our~~reimbursement ~~website~~will ~~are~~continue ~~not~~to be ~~incorporated~~available byin ~~reference~~the infuture ~~this~~for ~~Annual~~our ~~Report~~existing onproducts or products under ~~Form 10-K~~development.

~~ITEM~~In ~~1A:~~1991, ~~RISK~~the ~~FACTORS~~Health Care Finance Administration adopted regulations providing for the inclusion of capital related costs in the prospective payment system for hospital inpatient services under which most hospitals are reimbursed by Medicare on a per diagnosis basis at fixed rates unrelated to actual costs, based on diagnostic related groups. Under this system of reimbursement, equipment costs generally are not reimbursed separately, but rather are included in a single, fixed rate, per patient reimbursement. Medicare reform legislation requires CMS to implement a prospective payment system for outpatient hospital services as well. This system may also provide for a per-patient fixed rate reimbursement for outpatient department capital costs. We believe these regulations place more pressure on hospitals’ operating margins, causing them to limit capital expenditures. These regulations could have an adverse effect on us if hospitals decide to defer obtaining medical equipment as a result of any such limitation on their capital expenditures. The Medicare legislation also requires CMS to adopt uniform coverage and administration policies for laboratory tests. We are unable to predict what adverse impact on us, if any, additional government regulations, legislation or initiatives or changes by other payors affecting reimbursement or other matters that may influence decisions to obtain medical equipment may have.

The reader should carefully consider each of the risks and uncertainties we describe below, as well as all of the other information in this report. The risks and uncertainties we describe below are not the only ones we face. Additional risks and uncertainties which we are currently unaware of or that we currently believe to be immaterial could also adversely affect our business. 18

We believe the escalating cost of medical care and services has led to and will continue to lead to Weincreased pressures on the healthcare industry, both foreign and domestic, to ~~have~~reduce athe ~~history~~cost of ~~operating~~care ~~losses~~and services, including products offered by us. In addition, market acceptance of our products in international markets is dependent, in part, on the availability of reimbursement within prevailing healthcare payment systems. Reimbursement and ~~fluctuating~~healthcare ~~operating~~payment systems in ~~results~~international markets vary significantly by country, ~~which~~and ~~may~~include ~~result~~both government sponsored healthcare and private insurance. There can be no assurance in either domestic or foreign markets that third party reimbursement and coverage will be available or adequate, that current reimbursement amounts will not be decreased in the ~~market~~future ~~price~~or that future legislation, regulation or reimbursement policies of ~~our~~third ~~common~~party payors will not otherwise adversely ~~stock~~affect ~~declining~~the demand for our products or our ability to sell our products on a profitable basis.

~~Our~~Product ~~revenue and operating results have varied significantly from~~Liability ~~quarter to quarter in the past~~ and may continue to fluctuate in the future. As of March 31, 2006, we had an accumulated deficit of $19.1 million. We recorded a net profit of $5.6 million for fiscal year 2006, a net profit of $4.1 million for fiscal year 2005, and a net profit of $8.7 million for fiscal year 2004. The following are some of the factors that could cause our revenue, operating results and margins to fluctuate significantly from quarter to quarter: Insurance

•The ~~the~~sale ~~timing~~of our products entails risk of product liability claims. The medical testing industry has historically been litigious, and ~~level~~we face financial exposure to product liability claims if use of ~~market~~our products ~~acceptance~~results in personal injury. We also face the possibility that defects in the design or manufacture of our products might necessitate a product recall. There can be no assurance that we will not experience losses due to product liability claims or recalls in the ~~LDX~~future. ~~System~~We currently maintain product liability insurance, but there can be no assurance that the coverage limits of our insurance policies will be adequate. Such insurance is expensive, difficult to obtain and no assurance can be given that product liability insurance can be maintained in the ~~GDX~~future ~~System;~~on •acceptable ~~manufacturing~~terms, ~~problems~~or in sufficient amounts to protect us against losses due to liability, ~~efficiencies~~or at all. An inability to maintain insurance at an acceptable cost or to otherwise protect against potential product liability could prevent or inhibit the continued commercialization of our products. In addition, ~~capacity~~a ~~constraints~~product liability claim in excess of relevant insurance coverage or ~~delays;~~a product recall could have a material adverse effect on our business, financial condition and results of operations.

We have liability insurance covering our property and operations with coverage, deductible 16amounts and exclusions, which we believe are customary for companies of our size in our industry. However, there can be no assurance that our current insurance coverage is adequate or that we will be able to maintain insurance at an acceptable cost or otherwise to protect against liability.

~~Table of Contents~~Employees

•As ~~the timing~~ of ~~the~~March 30, ~~introduction~~2007, we ~~availability~~employed ~~and~~216 full-time ~~market~~associates. ~~acceptance~~There ofwere ~~new~~90 ~~tests~~employees ~~and products; • changes~~ in manufacturing, ~~demand~~61 ~~for~~employees ~~our products based on changes~~ in ~~third-party~~sales ~~reimbursement~~and ~~policies~~marketing, ~~changes~~39 employees in administration ~~government regulation~~ and ~~other~~26 ~~factors;~~employees •in ~~product pricing and discounts; • the timing and level of expenditures associated with~~ research and development. ~~activities;~~None ~~• the timing, establishment and maintenance~~ of ~~strategic~~our associates ~~distribution~~are ~~arrangements~~covered ~~and~~by ~~the~~a ~~success~~collective ofbargaining ~~the activities conducted under such arrangements; • the timing of significant orders from~~agreement, and ~~shipments~~management considers ~~to,~~relations ~~customers; • competition from diagnostic companies~~ with ~~greater~~employees ~~financial~~to ~~capital~~be ~~and~~excellent. ~~resources;~~We •also ~~costs~~occasionally utilize and timing associated with business development activities, including potential licensing of technologies or intellectual property rights; • additions or departures of our key personnel; • promotional program spending by both domestic and European pharmaceutical companies; • variations in the ~~mix~~services of ~~products~~temporary ~~sold; • litigation or the threat of litigation;~~ and •contract ~~Adoption of new accounting standards, such as SFAS 123R~~employees.

~~These~~Executive and other factors are difficult to predict and could have a material adverse effect on our business, financial condition and operating results. Fluctuations in quarterly demand for our products may cause our manufacturing operations to fluctuate in volume, increase uncertainty in operational planning and/or affect cash flows from operations. We commit to many of our expenses in advance, based on our expectations of future business needs. These costs are largely fixed in the short-term. As a result, when business levels do not meet expectations, our fixed costs will not be recovered and we will experience losses. This situation is likely to result in the future because of the variability and unpredictability of our revenue. This also means that our results will likely not meet the expectations of public market security analysts or investors at one time or another, which may result in the market price of our common stock declining. Officers

The ~~Our business~~names, ~~depends~~ages onand ~~our~~positions ~~ability~~of ~~to protect~~ our ~~proprietary technology~~current ~~through~~executive ~~patents~~officers ~~and~~are ~~other~~as ~~means and to operate without infringing the proprietary rights of others~~ follows:

Our success depends in part on our ability to develop and maintain the proprietary aspects of our technology and operate without infringing the proprietary rights of others. We have ten United States patents, one German patent and have filed patent applications relating to our technology internationally under the Patent Cooperation Treaty and individual foreign patent applications. The risks of relying on the proprietary nature of our technology include:

Name	Age		Position
Warren E. Pinckert II		63	President, Chief Executive Officer and Director
John F. Glenn		45	Vice President of Finance, Chief Financial Officer, Treasurer and Secretary
Gregory L. Bennett		45	Vice President of Development
Barbara T. McAleer		49	Vice President of Quality Assurance and Regulatory Affairs
Kenneth F. Miller		51	Vice President of Sales and Marketing
Terry L. Wassmann		60	Vice President of Human Resources
Donald P. Wood		55	Vice President of Operations

• our pending patent applications may not result in the issuance of any patents, or, if issued, such patents may not offer protection against competitors with similar technology; • our patents may be challenged, invalidated or circumvented in the future, and the rights created under our patents may not provide a competitive advantage; • competitors, many of whom have substantially greater resources than us and have made substantial investments in competing technologies, may seek to apply for and obtain patents covering technologies that are more effective than ours. This could render our technologies or products obsolete or uncompetitive or could prevent, limit or interfere with our ability to make, use or sell our products either in the United States or in international markets; • the medical products industry has been characterized by extensive litigation regarding patents and other intellectual property rights; and19

Warren E. Pinckert II has served as our President, Chief 17Executive Officer and a Director since June 1993. Mr. Pinckert served as our Executive Vice President of Operations from 1991 to June 1993, and as our Chief Financial Officer and Vice President of Business Development from 1989 to June 1993. Mr. Pinckert also served as our Secretary from 1989 to January 1997. Before joining Cholestech, Mr. Pinckert was Chief Financial Officer of Sunrise Medical Inc., an international durable medical products manufacturer, from 1983 to 1989. Mr. Pinckert also serves on the Board of Advisors for the San Francisco State University School of Business. Mr. Pinckert holds a Bachelor of Science degree in Accounting and a Masters of Business Administration degree from the University of Southern California.

~~Table~~John F. Glenn has served as our Vice President of ~~Contents~~Finance, Chief Financial Officer, Treasurer and Secretary since October 2004. Before joining Cholestech, Mr. Glenn was Vice President of Finance and Chief Financial Officer at Invivo Corporation, a provider of monitoring systems for patients in medical settings, from 1990 to 2004. Invivo was sold to Intermagnetics General Corporation in January 2004. Mr. Glenn holds a Bachelor of Science degree in Business Administration from the University of Nevada and a Masters of Business Administration from the University of Santa Clara.

•Mr. Gregory L. anBennett ~~adverse~~has ~~determination~~served inas ~~litigation~~our orVice ~~interference~~President, Development ~~proceedings~~since December 2005. From November 2003 to ~~which~~December 2005, he weserved ~~may~~as ~~become~~our aDirector ~~party~~of ~~could~~Engineering, ~~subject~~in uscharge toof ~~significant~~Process ~~liabilities~~Engineering, Quality toControl, ~~third~~Facilities, ~~parties~~Product orTransfer ~~require~~and usManufacturing Engineering. Prior to ~~seek~~joining ~~licenses~~Cholestech, ~~from~~Mr. Bennett ~~third~~was ~~parties~~Director of Process Development Engineering for LifeScan Inc., ~~which~~a ~~may~~Johnson & ~~not~~Johnson company. beBefore ~~available~~this onposition, ~~commercially~~Mr. Bennett ~~reasonable~~held ~~terms~~a orvariety of engineering leadership positions in both Operations and R&D at ~~all~~LifeScan, where he spent 12 years. Prior to LifeScan, Mr. Bennett held several engineering positions with Pechiney where he worked for seven years. Mr. Bennett holds a Bachelor of Science degree in Mechanical Engineering from the University of Wisconsin—Madison.

Barbara WeT. ~~may~~McAleer inhas ~~the~~served ~~future~~as ~~become~~our ~~subject~~Vice toPresident ~~patent~~of ~~infringement~~Quality ~~claims~~Assurance and ~~litigation~~Regulatory orAffairs ~~interference~~since ~~proceedings~~February 2005. ~~conducted~~Before injoining ~~the~~Cholestech, ~~United~~Ms. McAleer ~~States~~was ~~Patent~~a ~~and~~managing ~~Trademark~~partner ~~Office~~at toLOL ~~determine~~Partners, ~~the~~a ~~priority~~consulting offirm ~~inventions.~~specializing ~~Litigation~~in ~~may~~the ~~also~~healthcare beindustry. ~~necessary~~From toJanuary 2001 ~~enforce any patents issued~~ to usJune 2003, toshe ~~protect~~was ~~our~~General ~~trade~~Manager/Vice ~~secrets or~~President ~~know-how~~of ~~or to determine the enforceability, scope and~~Operations & ~~validity~~Quality offor ~~the~~Calypte ~~proprietary~~Biomedical ~~rights of others~~Corporation. ~~The~~Before ~~defense~~joining ~~and prosecution of intellectual property suits~~Calypte, ~~patent interference~~Ms. McAleer ~~proceedings~~spent ~~and~~1982 ~~related~~to ~~legal~~2000 ~~and~~with ~~administrative~~Johnson & ~~proceedings~~Johnson ~~are both costly and time consuming and will likely result~~ in ~~substantially~~ ~~diverting~~various ~~the~~manufacturing ~~attention of technical~~ and ~~management~~quality ~~personnel~~assurance ~~from~~positions. ~~our~~Ms. McAleer ~~business~~holds ~~operations.~~a WeBachelor ~~may~~of ~~also~~Science bedegree ~~subject~~in toOperations ~~significant~~Management ~~damages~~from orPenn ~~equitable~~State ~~remedies regarding~~University ~~the development~~ and ~~sale~~a ofMBA ~~our~~from Claremont ~~products~~Graduate ~~and~~School, ~~operation of~~Peter ~~our~~Drucker ~~business~~Management Center.

Kenneth ~~For~~F. ~~example,~~Miller inhas ~~fiscal~~served ~~year~~as ~~2004,~~our weVice ~~entered~~President ~~into~~of ~~a settlement~~Sales ~~agreement~~ and ~~license~~Marketing ~~agreement~~since ~~with~~June 2004. ~~Roche,~~Before ~~which~~joining ~~settled~~Cholestech, ~~all~~Mr. Miller ~~existing~~served ~~patent~~as ~~litigation between~~ the ~~parties~~Chief onOperating aOfficer ~~worldwide basis.~~at AsR2 aTechnology ~~part~~Inc. offrom ~~the~~July 2002 to ~~settlement,~~March 2004. weHe ~~pay~~also ~~Roche~~served anas ~~ongoing royalty~~R2 ~~and~~Technology’s ~~Roche~~Chief ~~granted~~Marketing ~~an irrevocable, non-exclusive,~~Officer ~~worldwide~~from ~~license~~June 2000 to usJune 2002. ~~for~~Prior ~~its patents related~~ to ~~HDL cholesterol.~~joining InR2 ~~addition~~Technology, ~~the parties also agreed upon a~~Mr. Miller ~~mechanism~~served ~~for~~as ~~the~~Chief ~~resolution~~Operating Officer of ~~future~~LiquidBorders ~~patent infringement disputes~~Inc. Wefrom ~~believe~~October 1999 to ~~that~~May 2000 ~~any~~and ~~such~~Vice ~~dispute~~President ~~resolution~~of ~~will confirm~~Sales ~~that~~of ~~our~~Alaris ~~HDL~~Medical ~~cholesterol~~Inc. ~~test~~from ~~cassette, currently under~~April 1997 ~~development,~~to ~~does~~October 1999. ~~not infringe Roche’s patents~~Mr. Miller Ifholds ~~however, upon~~a ~~the~~Bachelor ~~resolution~~ of ~~any~~Science ~~such~~degree ~~dispute~~in Chemistry, itZoology, isand ~~ultimately determined~~Physiology ~~that~~from ~~our~~Rutgers ~~new~~University ~~HDL~~and ~~cholesterol~~a ~~test~~Masters ~~cassette is covered~~of byBusiness ~~Roche’s~~Administration ~~patents,~~degree wefrom ~~will~~Fairleigh ~~pay~~Dickinson ~~Roche the same ongoing royalty~~University.

Terry WeL. ~~rely~~Wassmann onhas ~~trade~~served ~~secrets,~~as ~~technical~~our ~~know-how~~Vice ~~and~~President ~~continuing~~of Human ~~invention~~Resources tosince ~~develop~~March 2000. ~~and~~Before ~~maintain~~joining ~~our~~Cholestech, ~~competitive position~~Ms. Wassmann ~~Others~~served ~~may~~as ~~independently~~Staff Relations ~~develop~~Manager ~~substantially equivalent~~with ~~proprietary~~Robert ~~information~~Half ~~and~~International ~~techniques~~from orJuly 1999 ~~otherwise~~to ~~gain~~March 2000. ~~access~~From February 1986 to ~~our~~December 1999, ~~trade~~Ms. Wassmann ~~secrets~~was oremployed ~~disclose~~by ~~such~~Boehringer ~~technology.~~Mannheim where Weshe ~~may~~held ~~also~~numerous ~~be unable~~positions towithin ~~adequately~~the ~~protect~~Human ~~our~~Resources ~~trade secrets~~department, including orthe beDirector ~~capable~~of Human Resources of ~~protecting~~ ~~our~~the ~~rights~~Indiana toand ~~our~~California ~~trade~~based Diagnostics ~~secrets~~Division. Ms. Wassmann has been awarded the SPHR title from the Society of Human Resource Management.

Donald P. Wood has ~~We depend~~served onas ~~technology~~our ~~that~~Vice wePresident ~~license~~of ~~from~~Operations ~~others,~~since ~~which~~April 2003. ~~may~~From ~~not~~July 2001 beto ~~available~~March 2003, toMr. Wood usserved inas ~~the~~Vice ~~future~~President of Bone Health, a business unit of Quidel Corporation and ~~would~~was ~~prevent~~responsible usfor ~~from~~Bone Health Product ~~introducing~~Operations, ~~new~~Device ~~products~~Research and ~~harm~~Development, ~~our~~and ~~business~~Sales and Marketing. He also served as Quidel’s Vice President of Ultrasound Operations from August 1999 to

Our current products incorporate technologies that are the subject of patents issued to, and patent applications filed by, others. We have obtained licenses for certain of these technologies. We may in the future be required to negotiate to obtain licenses for new products. Some of our current licenses are subject to rights of termination and may be terminated. Our licensors may not abide by their contractual obligations and, as a result, may limit the benefits we currently derive from their licenses. We may be unable to renegotiate or obtain licenses for technology patented by others on commercially reasonable terms, or at all. We also may be unable to develop alternative approaches if we are unable to obtain licenses. Our future licenses may also not be adequate for the operation of our business. Failure to obtain, maintain or enforce necessary licenses on commercially reasonable terms or to identify and implement alternative approaches could prevent us from introducing our products and severely harm our business. 20

July 2001. Prior to joining Quidel, Mr. Wood was the Director of Ultrasound ~~Our~~Operations for Metra Biosystems Inc. from July 1998 to August 1999. ~~stock~~He ~~price~~also ~~has~~served ~~been~~as ~~highly~~its ~~volatile~~Director ~~and~~of isOperations ~~likely~~from October 1995 to ~~continue~~July 1998. toMr. Wood bealso ~~volatile,~~served ~~which~~as ~~could~~Senior ~~result~~Director inof ~~substantial~~Operations ~~losses~~for BioChem Pharma Inc. from July 1994 to October 1995 and Mr. Wood held numerous positions within operations for Serono Diagnostics Inc. from 1980 to July 1994. ~~investors~~Mr. Wood holds a Bachelor of Science degree in Business Administration from Bloomsburg University.

~~The~~Available market price of our common stock has in the past been, and in the future is likely to be, highly volatile. For example, between March 26, 2005 and March 31, 2006, the price of our common stock, as reported on the NASDAQ National Market System, has ranged from a low of $7.95 to a high of $13.19. These fluctuations could result in substantial losses for investors. Our stock price may fluctuate for a number of reasons including: Information

•Our ~~quarterly~~website ~~variations~~is inlocated at http://www.cholestech.com. Electronic copies of our ~~operating~~annual ~~results;~~report •on ~~litigation~~Form 10-K, orquarterly reports ~~threat~~on ofForm 10-Q, ~~litigation;~~current •reports ~~developments~~on inForm 8-K, and amendments to those reports filed or ~~disputes~~furnished ~~regarding~~pursuant ~~patent~~to Section 13(a) or 15(d) of ~~other~~the ~~proprietary~~Securities ~~rights;~~Exchange •Act ~~announcements~~of 1934 are available, free of charge, ~~technological~~on orthe ~~competitive~~“Investor” ~~developments~~section byof usour website as soon as practicable after we electronically file such material with the Securities and Exchange Commission. The contents of our ~~competitors;~~website •are ~~regulatory~~not ~~developments~~incorporated ~~regarding~~by usreference orin this ~~our~~Annual ~~competitors;~~Report on Form 10-K.

The Company has adopted a code of ethics, which is part of our Code of Business Conduct and Ethics that 18applies to all of our directors, officers and associates of the Company. In addition, the Company has also adopted a Code of Ethics for Principal Executive and Senior Financial Officers. These Codes of Ethics are posted on the Company’s website.

~~Table~~ITEM 1A: RISK ~~of Contents~~FACTORS

•The ~~changes~~reader inshould carefully ~~the~~consider ~~current~~each ~~structure~~ of the ~~healthcare~~risks ~~financing~~ and ~~payment~~uncertainties ~~systems;~~we •describe ~~our failure to achieve~~below, oras well ~~changes~~as ~~in,~~all ~~financial~~of ~~estimates~~the byother ~~securities~~information ~~analysts~~in ~~and~~this ~~comments~~report. orThe ~~opinions~~risks ~~about us by securities analysts or major shareholders; • stock market price~~ and uncertainties ~~volume~~we ~~fluctuations,~~describe ~~which~~below ~~have~~are ~~particularly~~not ~~affected~~ the ~~market~~only ~~prices~~ones ~~for~~we ~~medical~~face. ~~products~~Additional risks and ~~high~~uncertainties ~~technology companies and~~ which we are ~~often~~currently ~~unrelated~~unaware toof ~~the~~or ~~operating~~that ~~performance~~we ofcurrently believe ~~such~~to ~~companies;~~be ~~and~~immaterial •could ~~general~~also ~~economic,~~adversely ~~political~~affect ~~and~~our ~~market conditions~~business.

~~With~~Risks ~~the~~related ~~advent of the internet, new avenues have been created~~to ~~for~~ the ~~dissemination~~pending ofmerger ~~information.~~between WeInverness ~~do not have control over the information that is distributed~~ and ~~discussed on electronic bulletin boards and investment chat rooms. The motives of~~ the ~~people or organizations that distribute such information may not be in our best interest or in the interest of our shareholders~~Company. ~~This, in addition to other forms of investment information, including newsletters and research publications, could result in a significant decline in the market price of our common stock.~~

In ~~addition~~June 2007, ~~stock~~we ~~markets~~announced ~~have~~that ~~from~~we ~~time~~had signed a definitive merger agreement with Inverness pursuant to ~~time~~which ~~experienced~~Inverness would ~~extreme~~acquire ~~price~~the ~~and~~Company, ~~volume~~in ~~fluctuations~~a stock-for-stock merger. The ~~market~~merger ~~prices~~is ~~for~~expected to ~~diagnostic~~close ~~product~~in ~~companies~~the ~~have~~fall ~~been~~of ~~affected~~2007, bysubject ~~these~~to ~~market~~the satisfaction of customary closing ~~fluctuations~~conditions, ~~and~~including ~~such~~the ~~effects~~receipt ~~have~~of ~~often~~regulatory ~~been~~and ~~unrelated~~Cholestech shareholder approvals to the ~~operating~~ ~~performance~~merger. ofThere ~~such~~can ~~companies.~~be ~~These~~no ~~broad~~assurance ~~market~~that all of these conditions ~~fluctuations~~will ~~may~~be ~~cause~~satisfied. aIf ~~decline~~these inconditions ~~the~~are ~~market~~not ~~price~~satisfied ofor ~~our~~waived, we may be ~~common~~unable ~~stock~~to complete the merger.

Upon completion of the merger, Inverness will exchange ~~Securities~~0.43642 ~~class~~shares ~~action~~of ~~litigation~~Inverness iscommon ~~often~~stock ~~brought~~for ~~against~~each aoutstanding share of the ~~company~~Company ~~after~~common astock, ~~period~~despite ofany ~~volatility~~changes in the market ~~price~~value of ~~its~~either common stock. ~~This~~Accordingly, ~~type~~the specific dollar value of ~~litigation~~Inverness ~~has~~common ~~been~~stock ~~brought~~the Company’s ~~against~~shareholders uswill inreceive upon completion of the merger will depend on the ~~past~~Inverness ~~and~~market ~~could~~value beof ~~brought~~the ~~against~~common usstock inat the ~~future,~~time ~~which~~of completion of ~~could~~the ~~result~~merger. inYou ~~substantial~~should ~~expense~~note that the Company and ~~damage~~Inverness’ ~~awards~~stock prices have historically been very volatile and ~~divert~~that the value of the Inverness common ~~management~~stock the Company’s ~~attention~~shareholders ~~from~~will ~~running~~receive ~~our~~in ~~business.~~the merger may decline prior to or after the merger.

As is typical with change of control transactions, Cholestech employees may experience uncertainty about their future role with ~~If third-party~~the ~~reimbursement~~combined ~~for~~company. ~~use~~These employees may leave the Company prior to or after the closing of ~~our~~the ~~products~~merger. isThis ~~eliminated~~may adversely affect the Company’s ability to orattract ~~reduced,~~and ~~our~~retain ~~sales~~key ~~will~~management, besales, ~~greatly~~marketing, ~~reduced~~technical and ~~our~~other personnel, ~~business~~pending the closing of the merger. Similarly, Cholestech’s customers may, ~~fail~~in response to the announcement of the merger, delay or defer purchasing decisions. Any delay or deferral in purchasing decisions by the Company’s customers could harm the business of the Company in the short-term, and the combined company in the long-term.

In the United States, healthcare providers that purchase products such as the LDX System and the GDX System generally rely on their patients’ healthcare insurers, including private health insurance plans, federal Medicare, state Medicaid and managed care organizations, to reimburse all or part of the cost of the procedure in which the product is being used. We will be unable to successfully market our products if their purchase and use is not subject to reimbursement from government health authorities, private health insurers and other third-party payors. If this reimbursement is not available or is limited, healthcare providers will be much less likely to use our products, our sales will be greatly reduced and our business may fail. 21

If the merger is not completed, the price of the ~~There~~Company ~~are~~common stock may decline to the extent that the current ~~conditions~~market inprice of the ~~healthcare~~Company ~~industry~~reflects a market assumption that ~~increase~~ the ~~possibility~~merger ~~that~~will ~~third-party~~be ~~payors~~completed. ~~may~~The management ~~reduce~~team orwould have been distracted from running the business and the ~~eliminate~~Company ~~reimbursement~~will ~~for~~incur ~~tests~~significant ~~using~~costs ~~our~~related ~~products~~to inthe ~~certain~~merger, such as legal, ~~settings.~~accounting ~~These~~and ~~conditions~~some ~~include:~~of the fees and expenses of their financial advisors, some of which costs must be paid even if the merger is not completed.

•Although ~~third-party payors are increasingly scrutinizing and challenging~~ the ~~prices~~Company ~~charged for both existing~~ and Inverness ~~new~~intend ~~medical~~that ~~products~~the ~~and~~merger ~~services;~~will •result ~~healthcare providers are moving toward a system~~ in ~~which~~benefits ~~employers are requiring participants~~ to ~~bear a greater burden of~~ the ~~cost~~combined company, ofthose ~~their healthcare~~ benefits ~~which~~may ~~could~~not ~~result~~be inrealized. ~~fewer~~The ~~elective~~integration ~~procedures,~~of ~~such as~~ the ~~use of our products for diagnostic screening; • general uncertainty regarding what changes~~ companies will be ~~made~~a incomplex, ~~the~~time ~~reimbursement~~consuming ~~methods~~and ~~used~~expensive byprocess ~~third-party payors~~ and ~~how~~may ~~that~~disrupt ~~will affect~~ the companies’ ~~use of products such as ours~~businesses, ~~which~~if ~~may~~not ~~deter~~completed ~~healthcare~~in ~~providers from adopting the use of our products; and •~~ an ~~overall~~efficient ~~escalating~~manner. Failure ~~cost~~to ofrealize ~~medical~~the ~~products~~expected benefits and/or ~~services~~disruption ~~has led~~ to ~~and~~the ~~will~~Company’s ~~continue~~business tocould ~~lead~~materially toharm ~~increased pressures on~~ the ~~healthcare industry, both domestic~~ business and ~~international,~~operating toresults ~~reduce~~of the ~~cost~~combined ~~of products and services, including products offered by us~~company.

~~Market~~We ~~acceptance~~have ofa ~~our~~history ~~products~~of influctuating ~~international~~operating ~~markets is also dependent~~results, ~~in part, on the availability of reimbursement or~~ ~~funding,~~which ~~as the case~~ may ~~be,~~result ~~within prevailing healthcare systems. Reimbursement, funding and healthcare payment systems~~ in ~~international~~the ~~markets~~market ~~vary~~price ~~significantly~~of byour ~~country~~common ~~and include~~stock ~~both government~~ declining

Our revenue and operating results have varied significantly from quarter to quarter in the past 19and may continue to fluctuate in the future. The following are some of the factors that could cause our revenue, operating results and margins to fluctuate significantly from quarter to quarter:

~~Table~~· the timing and level of ~~Contents~~market acceptance of the LDX System and the GDX System;

~~sponsored~~· manufacturing ~~healthcare and private insurance. Third-party reimbursement and coverage may not be available or adequate in either the United States or international markets~~problems, ~~and current~~ ~~reimbursement or funding amounts may be decreased in the future. Also~~efficiencies, ~~future~~capacity ~~legislation,~~constraints ~~regulation~~ or reimbursement policies of third-party payors may adversely affect demand for our products or our ability to sell our products on a profitable basis. Any of these events could materially harm our business. delays;

If · the ~~healthcare~~ ~~system~~timing inof the introduction, ~~United~~availability ~~States~~and ~~undergoes~~market ~~fundamental change,~~acceptance ~~these~~of ~~changes~~new ~~may~~tests ~~harm~~and ~~our business~~ products;

~~We believe that~~ · the ~~healthcare~~timing industry in the United States is likely to undergo fundamental changes due to current political, economic and regulatory influences. We anticipate that Congress, state legislatures and the private sector will continue to review and assess alternative healthcare delivery and payment systems. Potential alternatives include mandated basic healthcare benefits, controls on healthcare spending through limitations on the growth of ~~private health insurance premiums~~significant ~~and~~orders ~~Medicare and Medicaid spending~~from, ~~the creation of large insurance purchasing groups, price controls~~ and ~~other fundamental~~shipments ~~changes~~ to the healthcare delivery system. We expect legislative debate to continue in the future and for market forces to demand reduced costs. We cannot predict what impact the adoption of any federal or state healthcare reform measures, ~~future~~ ~~private sector reform or market forces may have on our business. Any changes in the healthcare system could potentially have extremely negative effects on our business.~~ customers;

~~We depend~~· variations onin ~~distributors~~the tomix ~~sell our~~ of products ~~and failure to successfully maintain these relationships could adversely affect our ability to generate revenue~~ sold;

To· promotional ~~increase revenue and achieve sustained profitability, we will~~program ~~have~~spending to successfully maintain our existing distribution relationships and develop new distribution relationships. We depend on our distributors to assist us in promoting market acceptance of the LDX System and the GDX System. However, we may be unable to enter into and maintain new arrangements on a timely basis, or at all. Even if we do enter into additional distributor relationships, those distributors may not devote the resources necessary to provide effective sales and marketing support to our products. In addition, our distributors sell products offered by ~~our~~both ~~competitors.~~domestic If our competitors offer our distributors more favorable terms or have more products available to meet their needs or utilize the leverage of broader product lines sold through the distributor, those distributors may de-emphasize or decline to carry our products. In addition, our distributors’ order decision-making process is complex and ~~involves~~European ~~several~~pharmaceutical factors, including end-user demand, warehouse allocation and marketing resources, which can make it difficult to accurately predict total sales for the quarter until late in the quarter. In order to keep our products included in distributors’ marketing programs, in the past we have provided promotional goods or made short-term pricing concessions. The discontinuation of promotional goods or pricing concessions could have a negative effect on our business. Our distributors could also modify their business practices, such as payment terms, inventory levels or order patterns. If we are unable to maintain successful relationships with distributors or expand our distribution channels or we experience unexpected changes in payment terms, inventory levels or other practices by our distributors, our business will suffer. companies;

We· changes ~~may be~~in ~~unable~~demand tofor ~~accurately predict future sales through~~ our ~~distributors,~~products ~~which~~based ~~could~~on ~~harm~~changes ~~our~~in ~~ability~~third-party toreimbursement ~~efficiently~~policies, ~~manage~~changes in ~~our~~government ~~internal~~regulation ~~resources~~and toother ~~match market demand~~ factors;

~~Our~~ · product ~~sales~~pricing ~~are primarily made through our network of over 85 domestic~~ and ~~international distributors. As a result, our~~ financial results, quarterly product sales, trends and comparisons are affected by fluctuations in the buying patterns of end-user customers and our distributors, and by the changes in inventory levels of our products held by these distributors. We have only limited visibility over the inventory levels of our products held by our domestic and international distributors. While we attempt to assist our distributors in maintaining targeted stocking level of our products, we may not consistently be accurate or successful. This process involves the exercise of judgment and use of assumptions as to future uncertainties including end-user customer demand, and the reaction of our distributors to our new quarterly pricing policy. Consequently, actual results could differ from our estimates. Inventory levels of our products held by our distributors may exceed or fall below the levels we consider desirable on a going-forward basis, which may harm our financial results due to unexpected buying patterns of our discounts;

· the timing and level of expenditures 20 associated with research and development activities;

~~Table~~· the timing, establishment and maintenance of ~~Contents~~strategic distribution arrangements and the success of the activities conducted under such arrangements;

~~distributors~~· competition orfrom ~~our ability to efficiently manage or invest in~~diagnostic ~~internal~~companies ~~resources,~~with ~~such~~greater asfinancial ~~manufacturing~~capital and ~~shipping capacity, to meet the actual demand for our products.~~ resources;

We· costs ~~may be~~and ~~unable~~timing toassociated with ~~effectively~~business ~~compete~~development ~~against~~activities, ~~other~~including ~~providers~~potential licensing of ~~diagnostic~~technologies ~~products,~~or ~~which~~intellectual ~~could~~property ~~cause our sales to decline~~ rights;

~~The~~· additions ~~market~~or ~~for~~departures ~~diagnostic products in which we operate is intensely competitive. Our business is based on the sale~~ of ~~diagnostic products that physicians and other healthcare providers can administer in their own facilities without sending samples to laboratories. Thus,~~ our ~~competition~~key consists primarily of clinical reference laboratories and hospital-based laboratories that use automated testing systems, as well as manufacturers of other rapid diagnostic tests. To achieve and maintain market acceptance for the LDX System and the GDX System, we must demonstrate that the LDX System and the GDX System are cost effective and time saving alternatives to other rapid diagnostic tests as well as to clinical and hospital laboratories. Even if we can demonstrate that our products are more cost effective and save time, physicians and other healthcare providers may resist changing their established source of such tests. The LDX System and the GDX System may be unable to compete with these other testing services and analyzers. In addition, companies with a significant presence in the market for clinical diagnostics, such as Abbott Laboratories, Bayer Diagnostics, Beckman Coulter, Inc. and Roche Diagnostics (a subsidiary of Roche Holdings, Ltd.) have developed or are developing analyzers designed for point of care testing. These competitors have substantially greater financial, technical, research and other resources and larger, more established marketing, sales, distribution and service organizations than us. These competitors also offer broader product lines than us, have greater name recognition than us and offer discounts as a competitive tactic. In addition, several smaller companies are currently making or developing products that compete or will compete with ours. We may not have the financial resources, technical expertise or marketing, distribution or support capabilities to compete successfully in the future. Even if we do have such resources and capabilities, we may not employ them successfully. personnel;

~~Our~~· litigation ~~LDX~~or ~~System, including~~ the ~~LDX~~threat ~~Analyzer and single use test cassettes, currently accounts for substantially all~~ of ~~the~~ ~~revenue~~litigation; ~~of our business. If this revenue does not grow, our overall business will be severely harmed. For us to increase revenue, sustain profitability~~ and maintain positive cash flows from operations, the LDX System and the GDX System must continue to and begin to gain market acceptance among healthcare providers, particularly physician office laboratories. We have made only limited sales of the LDX System to physician office laboratories to date relative to the size of the available market. Factors that could prevent broad market acceptance of the LDX System and the GDX System include:

•· adoption ~~low levels~~ of ~~awareness~~new of the availability of our technology in both the physician and other customer groups; • the availability and pricing of other testing alternatives; • a decrease in the amount of reimbursement for performing tests on the LDX System and the GDX System. • many managed care organizations have contracts with laboratoriesaccounting standards, ~~which~~such ~~require~~as ~~participating~~SFAS or employed physicians to send patient specimens to contracted laboratories; and • physicians are under growing pressure by Medicare and other third-party payors to limit their testing to “medically necessary” tests123R.

IfThese ~~our~~and ~~LDX~~other ~~System~~factors are ~~does~~difficult ~~not~~to ~~achieve~~predict ~~broader market acceptance~~ and ~~our~~ ~~GDX~~could ~~System~~have ~~does~~a ~~not~~material ~~achieve~~adverse ~~favorable~~effect ~~market~~on ~~acceptance,~~ our business, ~~will~~financial ~~not~~condition ~~grow.~~and ~~Even~~operating ifresults. weFluctuations ~~are successful~~ in ~~continuing~~quarterly todemand ~~place~~for our ~~LDX~~products ~~Analyzer~~may atcause ~~physician~~our ~~office~~manufacturing ~~laboratories~~operations ~~and~~to fluctuate in ~~other~~volume, ~~near-patient~~increase ~~testing~~uncertainty ~~sites~~in ~~and~~operational ~~marketing~~planning ~~our~~and/or ~~GDX~~affect ~~System,~~cash flows ~~there~~from ~~can~~operations. beWe nocommit ~~assurance~~to ~~that~~many ~~placement~~ of ~~these~~our ~~products~~expenses ~~will result~~ in ~~sustained~~advance, ~~demand~~based ~~for~~on our expectations ~~single~~of ~~use~~future ~~test~~business ~~cassettes~~needs. ~~and single~~These ~~use~~costs ~~test~~are ~~cartridges.~~largely fixed in the short-term. As a result, when

In addition, we must leverage our installed base of systems in order to increase the sales of our single use test cassettes and single use test cartridges. If we are unable to increase the usage of cassettes on our current installed base, we will have to identify new customers and induce them to purchase an analyzer, which requires more time and effort and has a significantly larger purchase price than the single use test cassettes. 22

business levels do not meet expectations, our fixed costs will not be recovered and we 21will experience losses. This situation is likely to result in the future because of the variability and unpredictability of our revenue. This also means that our results will likely not meet the expectations of public market security analysts or investors at one time or another, which may result in the market price of our common stock declining.

~~Table~~Our business depends on our ability to protect our proprietary technology through patents and other means and to operate without infringing the proprietary rights of ~~Contents~~others

AsOur asuccess ~~result~~depends in ofpart ~~these~~on ~~many~~our ~~hurdles~~ability to ~~achieving~~develop ~~broad~~and ~~market acceptance~~maintain ~~for~~ the ~~LDX~~proprietary ~~System~~aspects ~~and~~of ~~the GDX System, demand may not~~our betechnology ~~sufficient to sustain revenue~~ and ~~profits~~operate ~~from~~without ~~operations. Because~~infringing the ~~LDX~~proprietary ~~System~~rights ~~currently~~of ~~contributes~~others. ~~the~~We have ~~vast~~thirteen ~~majority of~~United ~~our~~States ~~revenue~~patents, ~~and~~one weGerman ~~expect~~patent ~~the~~and ~~GDX~~have ~~System~~filed ~~to contribute a~~patent ~~portion~~applications ofrelating to our ~~revenue~~technology ininternationally under the ~~future, we could be required to~~Patent ~~cease~~Cooperation ~~operations~~Treaty ifand ~~the~~individual ~~LDX~~foreign ~~System~~patent ~~and~~applications. ~~the~~The ~~GDX~~risks ~~System do not~~of ~~achieve~~relying ~~and~~on ~~maintain~~the aproprietary ~~significant~~nature ~~level~~ of ~~market~~our ~~acceptance.~~ technology include:

· our Ifpending ~~we do~~patent applications may not ~~successfully~~result ~~develop,~~in ~~acquire~~the orissuance ~~form~~of ~~alliances~~any topatents, or, ~~introduce~~if ~~and~~issued, ~~market~~such ~~new~~patents ~~tests~~may ~~and~~not ~~products,~~offer ~~our~~protection ~~future~~against ~~business will~~competitors ~~be harmed~~with similar technology;

· our Wepatents ~~believe~~may ~~our~~be ~~business will not grow significantly if we do not develop~~challenged, ~~acquire~~invalidated or ~~form~~circumvented ~~alliances for new tests and products to use~~ in ~~conjunction with~~ the ~~LDX~~future, ~~System~~ and the ~~GDX System. If we~~ dorights ~~not~~created ~~develop~~under ~~market and introduce new tests and products to the market,~~ our ~~business~~patents ~~will~~may not ~~grow~~provide ~~significantly~~a ~~and~~competitive ~~will be harmed. Developing new tests involves many significant problems and risks, including:~~ advantage;

•· competitors, many ~~research~~of ~~and~~whom ~~development~~have issubstantially agreater ~~very~~resources ~~expensive~~than ~~process;~~us ~~• research~~ and ~~development~~have ~~takes~~made substantial ainvestments ~~very long time to result~~ in acompeting ~~marketable~~technologies, ~~product; • significant costs (including diversion of resources)~~ may beseek ~~incurred~~to inapply ~~development~~for ~~before~~and obtain ~~knowing~~patents ifcovering ~~the~~technologies ~~development~~that ~~will~~are ~~result~~more ineffective athan ~~test~~ours. ~~that~~This could isrender ~~commercially~~our ~~viable;~~technologies •or aproducts ~~new~~obsolete ~~test~~or ~~will~~uncompetitive ~~not~~or becould prevent, ~~successful~~limit ~~unless~~or itinterfere iswith ~~effectively~~our ~~marketed~~ability to ~~its target market; • the manufacturing process for a new test must be reliable~~make, ~~cost~~use ~~efficient~~or ~~and~~sell ~~high~~our ~~volume~~products either ~~and must be developed and implemented~~ in ~~a timely manner to produce~~ the ~~test~~United ~~for~~States ~~sale;~~or •in ~~new~~international ~~tests must meet a significant market need to be successful~~markets; ~~and • new tests must obtain proper regulatory approvals to be marketed.~~

~~We could experience difficulties that delay or prevent~~ · the ~~successful~~medical ~~development, introduction and marketing of new tests and~~ products. ~~For~~industry ~~example,~~has ~~regulatory~~been ~~clearance~~characterized or approval of any new tests or products may not be granted on a timely basis, or at all. We have experienced difficulties obtaining regulatory approval for tests in the past. Because the evaluation of applications by ~~the~~extensive ~~FDA for CLIA waived status is not based on~~litigation ~~precisely~~regarding ~~defined,~~patents objectively measurable criteria, we cannot predict the likelihood of obtaining CLIA waived status for future products. In addition, our business strategy includes entering into agreements with clinical and ~~commercial collaborators and~~ other ~~third~~intellectual ~~parties~~property ~~for the development, clinical evaluation and marketing of existing products and products under development. These agreements may be subject to~~ rights ~~of termination~~ ; and may be terminated without our consent. The parties to these agreements also may not abide by their contractual obligations to us and may discontinue or sell their current lines of business. Research performed under a collaboration for which we receive or provide funding may not lead to the development of products in the timeframe expected, or at all. If these agreements are terminated earlier than expected, or if third parties do not perform their obligations to us properly and on a timely basis, we may not be able to successfully develop new products as planned, or at all.

· an adverse determination in litigation or interference proceedings to which we may Webecome a party could subject us to significant liabilities to third parties or ~~face~~require ~~risks~~us to seek licenses from ~~failures~~third inparties, ~~our~~which ~~manufacturing~~may not be available on ~~processes~~ commercially reasonable terms or at all.

We ~~manufacture~~may ~~all~~in of the ~~single~~future ~~use~~become ~~test~~subject ~~cassettes~~to ~~that are~~patent ~~used~~infringement ~~with~~claims ~~the~~and ~~LDX~~litigation ~~Analyzer.~~or ~~The~~interference ~~manufacture~~proceedings ofconducted ~~single~~in ~~use test~~the ~~cassettes~~United isStates aPatent ~~highly complex~~ and ~~precise~~Trademark ~~process~~Office ~~that is sensitive~~ to adetermine ~~wide~~the ~~variety~~priority of ~~factors~~ inventions. ~~Significant~~Litigation ~~additional resources,~~may ~~implementation~~also ofbe ~~additional~~necessary ~~manufacturing~~to ~~equipment or~~enforce ~~changes~~any inpatents ~~our~~issued ~~manufacturing processes have been~~to us, ~~and~~to ~~may continue~~protect toour ~~be,~~trade ~~required~~secrets ~~for~~or ~~the scaling~~know-~~up of~~how ~~each~~or ~~new product prior~~ to ~~commercialization~~determine ~~or in order to~~the ~~meet~~enforceability, ~~increasing~~scope ~~customer demand once commercialization begins,~~ and ~~this~~validity ~~work~~of ~~may~~the ~~not~~proprietary berights ~~completed~~of ~~successfully or efficiently~~others. The Indefense ~~the~~and ~~past,~~prosecution weof ~~have~~intellectual ~~experienced~~property ~~lower~~suits, ~~than~~patent ~~expected~~interference ~~manufacturing~~proceedings ~~yields~~and ~~that~~related ~~have~~legal ~~adversely~~and ~~affected~~administrative ~~gross~~proceedings ~~margins~~are both costly and ~~delayed~~time ~~product~~consuming ~~shipments.~~and Ifwill welikely doresult ~~not~~in ~~maintain~~substantially ~~acceptable~~diverting the ~~manufacturing~~attention ~~yields~~ of ~~test~~technical ~~cassettes~~and ormanagement ~~experience~~personnel ~~product shipment~~from ~~delays,~~ our business, ~~financial condition and operating~~operations. ~~results~~We ~~could~~may also be ~~materially~~subject ~~adversely~~to ~~affected.~~significant Wedamages ~~may reject~~ or be ~~unable~~equitable toremedies ~~sell~~regarding the adevelopment ~~substantial~~and ~~percentage~~sale of ~~test~~our ~~cassettes because~~products and operation of: our business.

•For ~~raw~~example, ~~materials~~in ~~variations~~December or2003, ~~impurities;~~we entered into a settlement agreement and license agreement with Roche, which settled all existing patent litigation between the parties on a worldwide basis. As a part of the settlement, we pay Roche an ongoing royalty and Roche granted an irrevocable, non-exclusive, worldwide license to us for its patents related to HDL cholesterol. In addition, the parties also agreed upon a mechanism for the resolution of future patent infringement disputes. Under the Roche license and settlement agreements, Cholestech is entitled to identify a design-around product that we believe does not require payment to Roche, and we have done so. Roche can request arbitration on this issue, and they have taken the first steps to initiate such proceedings. If no agreement is reached, an arbitration will be commended to determine whether license payments must be made for the design-around. If, upon the resolution of any such dispute, it is ultimately determined that our new HDL cholesterol test cassette is

22 23

~~Table~~covered ofby ~~Contents~~Roche’s patents, we will pay Roche the same ongoing royalty, as that agreed to under the Roche license and settlement agreements.

•We ~~human~~rely ~~error;~~on •trade ~~manufacturing~~secrets, technical ~~process~~know-how ~~variances~~and continuing invention to develop and ~~impurities;~~maintain our competitive position. Others may independently develop substantially equivalent proprietary information and •techniques ~~decreased~~or ~~manufacturing~~otherwise ~~equipment~~gain ~~performance~~access to our trade secrets or disclose such technology. We may also be unable to adequately protect our trade secrets, or be capable of protecting our rights to our trade secrets.

~~Our~~We ~~LDX~~depend ~~manufacturing~~on ~~equipment~~technology ~~and~~that ~~cassette~~we ~~manufacturing~~license ~~lines~~from others, ~~would~~which bemay ~~costly~~not ~~and~~be ~~time~~available ~~consuming~~ to ~~repair~~us orin ~~replace~~the iffuture ~~their operation~~and ~~were~~would ~~interrupted.~~prevent ~~The~~us ~~interruption of our~~from ~~manufacturing~~introducing ~~operations~~new orproducts ~~the~~and ~~loss of associates dedicated to the manufacturing facility could severely~~ harm our business~~. The risks involving our manufacturing lines include:~~

•Our ascurrent ~~our~~products incorporate ~~production~~technologies ~~levels~~that ~~increase,~~are wethe ~~could~~subject beof ~~required~~patents issued to, ~~use~~and ~~our~~patent applications ~~machinery~~filed ~~more~~by, ~~hours~~others. ~~per~~We ~~day~~have ~~and~~obtained ~~the~~licenses ~~down~~for ~~time~~certain ~~resulting~~of ~~from~~these technologies. ~~equipment~~We ~~failure~~may ~~could~~in ~~increase; •~~ the ~~custom~~future ~~nature~~be ofrequired ~~much~~to ofnegotiate ~~our~~to ~~manufacturing~~obtain ~~equipment~~licenses for ~~increases~~new ~~the~~products. ~~time~~Some ~~required~~of toour ~~remedy~~current ~~equipment~~licenses ~~failures~~are ~~and~~subject ~~replace~~to ~~equipment;~~rights •of termination weand ~~have~~may abe ~~limited~~terminated. ~~number~~Our oflicensors ~~associates~~may ~~dedicated~~not toabide ~~the~~by ~~operation~~their contractual obligations and, ~~maintenance~~as ofa ~~our~~result, ~~manufacturing~~may ~~equipment,~~limit the ~~loss~~benefits ofwe ~~whom~~currently derive ~~could~~from ~~impact~~their ~~our~~licenses. ~~ability~~We tomay ~~effectively~~be ~~operate~~unable ~~and~~to ~~service~~renegotiate ~~such~~or ~~equipment;~~obtain •licenses for wetechnology ~~manufacture~~patented ~~all~~by ofothers ~~our~~on ~~cassettes~~commercially atreasonable ~~our Hayward~~terms, ~~California~~or ~~manufacturing~~at ~~facility,~~all. We soalso ~~manufacturing~~may ~~operations~~be ~~are~~unable ~~at risk~~ to ~~interruption~~develop ~~from~~alternative ~~earthquake,~~approaches ~~fire,~~if ~~power~~we ~~outages~~are orunable ~~other~~to obtain ~~events~~licenses. ~~affecting~~Our ~~this~~future ~~one~~licenses ~~location;~~may ~~and~~also •not ~~our~~be ~~newest~~adequate ~~manufacturing~~for ~~line~~the isoperation of ~~operating~~our ~~at production capability~~business. ~~Our~~Failure ~~failure~~ to obtain, maintain ~~production~~or ~~levels~~enforce ~~and~~necessary ~~operate~~licenses ~~this~~on commercially ~~line~~reasonable atterms ~~production~~or ~~capability~~to ~~for~~identify anand ~~extended~~implement ~~period~~alternative approaches ~~would~~could ~~impact~~prevent ~~our~~us ~~ability~~from tointroducing ~~increase~~ our ~~manufacturing~~products ~~capacity~~and severely harm our business.

If third-party reimbursement for use of our products ~~Our operating~~is ~~results~~eliminated ~~may~~or ~~suffer~~reduced, ifour wesales dowill ~~not~~be ~~reduce~~greatly reduced and our ~~manufacturing~~ ~~costs~~business may fail

WeIn ~~believe~~the weUnited ~~will~~States, behealthcare ~~required~~providers tothat ~~reduce manufacturing costs for~~purchase ~~new~~products ~~and~~such ~~existing~~as ~~test~~the ~~cassettes~~LDX toSystem ~~achieve~~and ~~sustained profitability.~~the WeGDX ~~currently~~System ~~manufacture~~generally ~~the~~rely ~~majority~~on ~~of our dry~~their ~~chemistry~~patients’ ~~cassettes~~healthcare oninsurers, aincluding ~~single~~private ~~production~~health ~~line.~~insurance ~~A second~~plans, ~~manufacturing~~federal ~~line~~Medicare, isstate ~~currently~~Medicaid ~~used for overflow production~~ and ~~for~~ ~~research~~managed ~~and~~care ~~development~~organizations, ~~purposes.~~to ~~The~~reimburse all ~~complexity~~or ~~and~~part ~~custom nature~~ of ~~our manufacturing process increases~~ the ~~amount~~cost of ~~time and~~the ~~money~~procedure ~~required~~in towhich ~~add~~the anproduct ~~additional~~is ~~manufacturing~~being ~~line~~used. InWe ~~addition,~~will webe ~~may~~unable ~~need~~ to ~~implement~~successfully ~~additional~~market ~~cassette manufacturing~~our ~~cost~~products ~~reduction~~if ~~programs.~~their ~~Failure~~purchase toand ~~maintain~~use ~~full~~is ~~production~~not ~~levels~~subject ~~for~~to ~~our~~reimbursement ~~newest~~from ~~manufacturing~~government ~~line~~health ~~could prevent~~authorities, usprivate ~~from~~health insurers ~~satisfying~~and ~~customer~~other ~~orders~~third-party inpayors. aIf ~~timely~~this ~~manner, which~~reimbursement ~~could~~is ~~lead~~not toavailable or ~~customer~~is ~~dissatisfaction~~limited, ~~and~~healthcare ~~loss~~providers ~~of business~~will ~~and~~be amuch ~~failure~~less likely to ~~reduce~~use ~~manufacturing~~our products, ~~costs~~our ~~for~~sales ~~dry chemistry~~will ~~tests,~~be ~~which~~greatly ~~could~~reduced ~~prevent~~and usour ~~from~~business ~~achieving~~may ~~sustained profitability~~fail.

There are current ~~Our future~~conditions ~~results~~in ~~could~~the behealthcare ~~harmed~~industry bythat ~~economic,~~increase ~~political,~~the possibility that ~~regulatory~~third-party ~~and~~payors ~~other~~may ~~risks~~reduce ~~associated~~or ~~with~~eliminate ~~international~~reimbursement for tests using our ~~sales~~ products in certain settings. These conditions include:

· third-party ~~Historically,~~payors aare ~~significant~~increasingly ~~portion~~scrutinizing ofand ~~our~~challenging ~~total revenue has been generated outside of~~ the ~~United~~prices ~~States.~~charged ~~International~~for ~~revenue~~both asexisting ~~a percentage of our total revenue was approximately 13% in fiscal year 2006~~ and ~~14%~~new inmedical fiscal year 2005. We anticipate that international revenue will continue to represent a significant portion of our total revenue in the future. Our revenue is generally denominated in United States dollars; however, a strengthening of the dollar could make our products ~~less~~ ~~competitive in foreign markets~~ and, as a result, our future revenue from international operations may be unpredictable. We make foreign currency denominated purchases related to our GDX System in the United Kingdom. This exposes us to risks associated with currency exchange fluctuations. services;

· healthcare Inproviders ~~addition~~are moving toward a system in which employers are requiring participants to ~~foreign~~bear ~~currency~~a ~~risks,~~greater ~~our~~burden ~~international~~of ~~sales~~the cost of their healthcare benefits ~~and~~which ~~operations~~could ~~may~~result ~~also~~in befewer ~~subject~~elective toprocedures, such as the ~~following~~use ~~risks:~~of our products for diagnostic screening;

•· general uncertainty ~~our~~regarding ~~dependency~~what onchanges ~~pharmaceutical~~will ~~companies’~~be ~~promotional~~made ~~programs~~in asthe areimbursement ~~primary~~methods used ~~source~~by ofthird-party ~~international~~payors ~~revenue;~~and •how ~~unexpected~~that ~~changes~~will inaffect ~~regulatory~~the ~~requirements;~~use •of ~~the~~products ~~impact~~such ofas ours, ~~recessions~~which inmay ~~economies~~deter ~~outside~~healthcare providers from adopting the ~~United~~use ~~States~~of our products; and

· an overall escalating cost of medical products and services has led to and will 23continue to lead to increased pressures on the healthcare industry, both domestic and international, to reduce the cost of products and services, including products offered by us.

~~Table of Contents~~24

•Market ~~changes~~acceptance of our products in ainternational ~~specific~~markets ~~country’s~~is oralso ~~region’s~~dependent, ~~political~~in orpart, ~~economic~~on ~~conditions~~the availability of reimbursement or funding, ~~particularly~~as inthe ~~emerging~~case ~~nations;~~may •be, ~~less~~within ~~effective~~prevailing healthcare ~~protection~~systems. ofReimbursement, ~~intellectual~~funding ~~property~~and ~~rights~~healthcare payment systems in international ~~some~~markets ~~countries;~~vary •significantly ~~changes~~by incountry ~~tariffs~~and include both government sponsored healthcare and ~~other~~private ~~trade~~insurance. ~~protection~~Third-party ~~measures;~~reimbursement •and coverage ~~difficulties~~may not be available or adequate in ~~managing~~either the United States or international ~~operations;~~markets, and •current ~~potential~~reimbursement ~~insolvency~~or funding amounts may be decreased in the future. Also, future legislation, regulation or reimbursement policies of ~~international~~third-party ~~distributors~~payors ~~and~~may ~~difficulty~~adversely inaffect ~~collecting~~demand ~~accounts~~for ~~receivable~~our ~~and~~products ~~longer~~or our ~~collection~~ability ~~periods~~to sell our products on a profitable basis. Any of these events could materially harm our business.

If wethe ~~are~~healthcare system ~~unable~~in ~~to minimize~~ the ~~foregoing~~United ~~risks,~~States ~~they~~undergoes ~~may~~fundamental ~~harm our~~change, ~~current~~these ~~and~~changes ~~future international sales and, consequently,~~may harm our business.

We believe that the healthcare industry in the United States is likely to undergo fundamental changes due to current political, economic and regulatory influences. We ~~depend~~anticipate that Congress, state legislatures and the private sector will continue to review and assess alternative healthcare delivery and payment systems. Potential alternatives include mandated basic healthcare benefits, controls on ~~single~~healthcare ~~source~~spending ~~suppliers~~through ~~for~~limitations ~~certain~~on ~~materials~~the ~~used~~growth inof private ~~our~~health ~~manufacturing~~insurance ~~process~~premiums and ~~failure~~Medicare and Medicaid spending, the creation of large ~~our~~insurance ~~suppliers~~purchasing groups, price controls and other fundamental changes to the healthcare delivery system. We expect legislative debate to continue in ~~provide~~the ~~materials~~future and for market forces to usdemand ~~could~~reduced ~~harm~~costs. We cannot predict what impact the adoption of any federal or state healthcare reform measures, future private sector reform or market forces may have on our business. Any changes in the healthcare system could potentially have extremely negative effects on our business.

We ~~currently~~ depend on distributors ~~single source vendors~~ to ~~provide~~sell ~~certain subassemblies, components and raw materials used in the manufacture of~~ our products. ~~We also depend on a third-party manufacturer for the GDX System. Any supply interruption in a single sourced material or product could restrict our ability to manufacture~~ and ~~distribute~~failure ~~products until a new source of supply is identified and qualified. We may not be successful in qualifying additional sources of supply on a timely basis, or at all. Failure~~ to ~~obtain~~successfully amaintain ~~usable alternative source or product~~these relationships could ~~prevent~~adversely usaffect ~~from manufacturing and distributing~~ our ~~products,~~ resulting in inability to fill orders, customer dissatisfaction and loss of business. This would likely severely harm our business. In addition, an uncorrected impurity or supplier’s variation in material, either unknown to us or incompatible with our manufacturing process, could interfere with our ability to ~~manufacture~~generate and distribute products. Because we are a small customer of many of our suppliers and we purchase their subassemblies, components and materials with purchase orders instead of long-term commitments, our suppliers may not devote adequate resources to supplying our needs. Any interruption or reduction in the future supply of any materials currently obtained from single or limited sources could severely harm our business. revenue

To increase revenue and achieve sustained profitability, we will have to successfully maintain our existing distribution relationships and develop new distribution relationships. We depend on our distributors to assist us in promoting market acceptance of ~~rely~~the LDX System and the GDX System. However, we may be unable to enter into and maintain new arrangements on a ~~limited~~timely ~~number~~basis, or at all. Even if we do enter into additional distributor relationships, those distributors may not devote the resources necessary to provide effective sales and marketing support to our products. In addition, our distributors sell products offered by our competitors. If our competitors offer our distributors more favorable terms or have more products available to meet their needs or utilize the leverage of ~~customers~~broader product lines sold through the distributor, those distributors may de-emphasize or decline to carry our products. In addition, our distributors’ order decision-making process is complex and involves several factors, including end-user demand, warehouse allocation and marketing resources, which can make it difficult to accurately predict total sales for athe ~~substantial~~quarter ~~part~~until late in the quarter. In order to keep our products included in distributors’ marketing programs, in the past we have provided promotional goods or made short-term pricing concessions. The discontinuation of promotional goods or pricing concessions could have a negative effect on our ~~revenue~~business. Our distributors could also modify their business practices, such as payment terms, inventory levels or order patterns. If we are unable to maintain successful relationships with distributors or expand our distribution channels or we experience unexpected changes in payment terms, inventory levels or other practices by our distributors, our business will suffer.

~~While we~~We ~~believe~~may ~~that~~be weunable ~~currently~~to accurately ~~have~~predict ~~adequate~~future ~~internal~~sales ~~control~~through ~~over financial~~our ~~reporting~~distributors, wewhich ~~are~~could ~~exposed~~harm our ability to ~~risks~~efficiently ~~from~~manage ~~recent legislation~~our ~~requiring~~internal ~~companies~~resources to ~~evaluate~~match ~~internal~~market ~~control over financial reporting~~ demand

Our product sales are ~~Section 404~~primarily made through our network of over 85 domestic and international distributors. As a result, our financial results, quarterly product sales, trends and comparisons are affected by fluctuations in the ~~Sarbanes~~buying patterns of end-~~Oxley~~user ~~Act~~customers and our distributors, and by the changes in inventory levels of ~~2002~~our ~~requires~~products held by these distributors. We have only limited visibility over the inventory levels of our products held by our domestic and ~~management~~international distributors. While we attempt to ~~report~~assist onour ~~and~~distributors in maintaining targeted stocking level of our ~~independent~~products, ~~registered~~we ~~public~~may not consistently be ~~accounting~~accurate ~~firm~~or tosuccessful. ~~attest~~This process involves the exercise of judgment and use of assumptions as to future uncertainties including end-user customer demand, and the ~~effectiveness~~reaction of our ~~internal~~distributors to our new quarterly pricing policy. ~~control~~Consequently, ~~over~~actual ~~financial~~results ~~reporting~~could differ from our estimates. WeInventory ~~have~~levels of anour ~~ongoing~~products ~~program~~held by our distributors may exceed or fall below the levels we consider desirable on a going-forward basis, which may harm our financial results due to unexpected buying patterns of our distributors or our ability to ~~perform~~efficiently ~~the~~manage ~~system~~or ~~and~~invest ~~process~~in ~~evaluation~~internal ~~and~~resources, ~~testing~~such ~~necessary~~as manufacturing and shipping capacity, to ~~comply~~meet ~~with~~the ~~these~~actual ~~requirements~~demand for our products.

We ~~expect~~may tobe ~~continue~~unable to ~~incur significant expenses and to~~ ~~devote~~effectively ~~additional~~compete ~~resources~~against toother ~~Section 404~~providers ~~compliance~~of ondiagnostic ~~an ongoing basis. In addition~~products, itwhich ~~is difficult for us to predict~~could ~~how~~cause ~~long it will take to complete the assessment of the effectiveness of~~ our ~~internal~~sales ~~control over financial reporting each year and we may not be able~~ to decline

The market for diagnostic products in which we operate is intensely competitive. Our business is based on the sale of diagnostic 24products that physicians and other healthcare providers can administer in their own facilities without sending samples to laboratories. Thus, our competition consists primarily of clinical reference laboratories and hospital-based laboratories that use automated testing systems, as well as manufacturers of other rapid diagnostic tests. To achieve and maintain market acceptance for the LDX System, we must demonstrate that the LDX System is a cost effective and time saving alternative to other rapid diagnostic tests, as well as to clinical and hospital laboratories. Even if we can demonstrate that our products are more cost effective and save time, physicians and other healthcare providers may resist changing their established source of such tests. The LDX System may be unable to compete with these other testing services and analyzers. In addition, companies with a significant presence in the market for clinical diagnostics, such as Abbott Laboratories, Bayer Diagnostics, Beckman Coulter, Inc. and Roche Diagnostics (a subsidiary of Roche Holdings, Ltd.) have developed or are developing analyzers designed for point of care testing. These competitors have substantially greater financial, technical, research and other resources and larger, more established marketing, sales, distribution and service organizations than us. These competitors also offer broader product lines than us, have greater name recognition than us and offer discounts as a competitive tactic. In addition, several smaller companies are currently making or developing products that compete or will compete with ours. We may not have the financial resources, technical expertise or marketing, distribution or support capabilities to compete successfully in the future. Even if we do have such resources and capabilities, we may not employ them successfully.

~~Table~~Our LDX System, including the LDX Analyzer and single use test cassettes, currently accounts for substantially all of ~~Contents~~the revenue of our business. If this revenue does not grow, our overall business will be severely harmed. For us to increase revenue, sustain profitability and maintain positive cash flows from operations, the LDX System must continue to and begin to gain market acceptance among healthcare providers, particularly physician office laboratories. We have made only limited sales of the LDX System to physician office laboratories to date relative to the size of the available market. Factors that could prevent broad market acceptance of the LDX System include:

· low ~~complete~~levels ~~the~~of ~~process~~awareness onof ~~a timely basis. In~~ the ~~event~~availability ~~that internal controls over financial reporting are not effective as defined under Section 404, we cannot predict how regulators will react or how the market prices~~ of our ~~shares~~technology ~~will be affected. In addition, if we fail to maintain an effective system of internal control or if we were to discover material weaknesses~~ in ~~our~~both ~~internal~~the ~~control systems, we may be unable to~~physician ~~produce reliable financial reports or prevent fraud~~ and itother ~~could harm~~customer ~~our results of operations and financial condition.~~ groups;

· the ~~Our products~~availability ~~are~~and ~~subject~~pricing ~~to multiple levels~~ of ~~government~~other ~~regulation and~~testing ~~any regulatory changes are difficult to predict and may be damaging to our business~~ alternatives;

The manufacture and sale of our diagnostic products, including the LDX System and the GDX System, is subject to extensive regulation by numerous governmental authorities, principally the FDA and corresponding state and foreign regulatory agencies. We are unable to commence marketing or commercial sales in the United States of any of the new tests we develop until we receive the required clearances and approvals. The process of obtaining required regulatory clearances and approvals is lengthy, expensive and uncertain. As a result, our new tests under development, even if successfully developed, may never obtain such clearance or approval. Additionally, certain material changes to products that have already been cleared or approved are subject to further review and clearance or approval. Medical devices are subject to continual review, and later discovery of previously unknown problems with a cleared product may result in restrictions on the product’s marketing or withdrawal of the product from the market. If we lose previously obtained clearances, or fail to comply with existing or future regulatory requirements, we may be unable to market the affected products, which would depress our revenue and severely harm our business. 26

· a Indecrease ~~addition,~~in ~~any future amendment or addition to regulations impacting our products could prevent us from marketing~~ the ~~LDX System~~amount ~~and~~of ~~the~~reimbursement ~~GDX~~for ~~System.~~performing ~~Regulatory~~tests ~~changes could hurt our business by increasing burdens~~ on ~~our products or by reducing or eliminating certain competitive advantages of~~ the LDX ~~System’s~~ ~~and the GDX~~ System~~’s waived status~~. ~~Food and Drug Administration clearance or approval of products such as ours can be obtained by either of two processes:~~

	•	the 510(k) clearance process, which generally takes from four to 12 months but may take longer; and
	•	the pre-market approval process, which is a longer and more costly process than a 510(k) clearance process, involves the submission of extensive supporting data and clinical information and generally takes one to three years but may take significantly longer.

· many managed care organizations have contracts with laboratories, which require participating or employed physicians to send patient specimens to contracted laboratories; and

· physicians Ifare ~~our~~under ~~future~~growing ~~products~~pressure ~~are~~by ~~required~~Medicare toand ~~obtain~~other ~~a pre~~third-~~market approval,~~party ~~this~~payors ~~would significantly delay our ability~~ to ~~market~~limit ~~those~~their ~~tests~~testing ~~and~~to ~~significantly~~“medically ~~increase~~necessary” ~~the costs of development~~tests.

~~The~~If ~~use of~~ our ~~products~~LDX ~~and~~System ~~those~~does ofnot ~~our~~achieve ~~competitors~~broader ~~is also~~market ~~affected by federal and state regulations~~acceptance, ~~which~~our ~~provide~~business ~~for regulation~~will ofnot ~~laboratory~~grow. ~~testing,~~Even asif ~~well~~we asare bysuccessful ~~the~~in ~~laws and~~continuing ~~regulations~~to ofplace ~~foreign~~our ~~countries.~~LDX ~~The~~Analyzer ~~scope~~at ofphysician ~~these~~office ~~regulations includes~~laboratories ~~quality~~and ~~control,~~other near-patient ~~proficiency~~ testing sites, ~~personnel standards~~there ~~and~~can ~~inspections.~~be Inno ~~the~~assurance ~~United~~that ~~States,~~placement ~~clinical~~of these ~~laboratory~~products ~~testing~~will isresult ~~regulated~~in ~~under~~sustained ~~the~~demand ~~Clinical~~for ~~Laboratory Improvement~~our ~~Act~~single ofuse ~~1976~~test cassettes.

~~The~~In ~~LDX Analyzer~~addition, ~~our~~we ~~total~~must ~~cholesterol,~~leverage ~~high density lipoproteins, triglycerides and glucose tests in any combination,~~ our ~~ALT~~installed ~~test~~base ~~cassette, the GDX Analyzer and A1C~~of ~~test~~systems ~~cartridges~~in ~~have~~order ~~been~~to ~~classified~~increase ~~as waived from~~ the ~~application~~ ofsales ~~many~~ of ~~the~~our ~~requirements~~single ~~under~~use ~~the~~test ~~CLIA.~~cassettes Weand ~~believe~~single ~~this~~use ~~waived~~test ~~classification~~cartridges. isIf ~~critical~~we ~~for~~are ~~our~~unable ~~products~~ to beincrease ~~successful~~the inusage ~~their domestic markets. Any failure~~ of ~~our~~cassettes ~~new~~on ~~tests~~our tocurrent ~~obtain~~installed ~~waived~~base, ~~status~~we ~~under the CLIA~~ will ~~severely limit~~have ~~our ability~~ to ~~commercialize~~identify ~~such~~new ~~tests.~~customers ~~Loss of waived~~and ~~status~~induce ~~for~~them ~~existing diagnostic products or failure~~ to ~~obtain waived~~purchase ~~status~~an ~~for~~analyzer, ~~new~~which ~~products~~requires ~~could~~more ~~limit~~time ~~our~~and ~~revenue~~effort ~~from~~and ~~sales~~has ofa ~~such~~significantly ~~products,~~larger ~~which~~purchase ~~would~~price ~~severely~~than ~~harm~~the ~~our~~single ~~business~~use test cassettes.

As a result of these many Wehurdles to achieving broad market acceptance for the LDX System, demand may not ~~face~~be ~~fines~~sufficient orto sustain revenue and profits from operations. Because the LDX System currently contributes the vast majority of our ~~manufacturing~~revenue, ~~facilities~~we could be ~~closed~~required to cease operations if ~~we fail~~the toLDX ~~comply~~System ~~with~~does ~~manufacturing~~not achieve and ~~environmental~~maintain a ~~regulations~~ significant level of market acceptance.

~~Our~~If ~~manufacturing~~we ~~processes~~do ~~and,~~not successfully ~~in certain instances~~develop, ~~those~~acquire ~~of our~~or ~~contract~~form ~~manufacturers,~~alliances ~~are subject~~ to ~~stringent~~introduce ~~federal, state~~ and ~~local~~market ~~regulations governing the use, generation,~~new ~~manufacture,~~tests ~~storage, handling~~ and ~~disposal~~products, ofour ~~certain materials and wastes. Failure to comply with present or~~ future ~~regulations could~~business ~~result~~will inbe ~~many things, including warning letters, fines, injunctions, civil penalties, recall or seizure of products, total or partial~~ harmed

We believe our business will not grow significantly if we do not develop, acquire or form 25alliances for new tests and products to use in conjunction with the LDX System and the GDX System. If we do not develop market and introduce new tests and products to the market, our business will not grow significantly and will be harmed. Developing new tests involves many significant problems and risks, including:

~~Table~~· research and ofdevelopment ~~Contents~~is a very expensive process;

· research ~~suspension of production, refusal of the government to grant pre-market clearance or pre-market approval for devices, withdrawal of approvals~~ and ~~criminal~~development ~~prosecution.~~takes ~~Any~~a ofvery ~~these developments~~long ~~could~~time ~~harm our business. We and our contract manufacturers are also subject~~ to ~~federal,~~result ~~state~~in ~~and~~a ~~foreign regulations~~marketable ~~regarding the manufacture of healthcare products and diagnostic devices, including:~~ product;

•· significant costs ~~Quality~~(including ~~System~~diversion ~~Regulations,~~of ~~which~~resources) ~~requires~~may ~~manufacturers to~~ be incurred in ~~compliance~~development ~~with~~before knowing ~~Food~~if ~~and~~the ~~Drug~~development ~~Administration~~will ~~regulations;~~result •in ~~ISO9001/EN46001~~a ~~requirements,~~test ~~which~~that is ancommercially ~~industry standard for maintaining and assuring conformance to quality standards~~viable; ~~and • other foreign regulations and state and local health, safety and environmental regulations, which include testing, control and documentation requirements.~~

· a ~~Changes in existing regulations or adoption of~~ new ~~governmental regulations~~test orwill ~~policies~~not ~~could~~be ~~prevent~~successful orunless ~~delay~~it ~~regulatory approval~~is ofeffectively ~~our~~marketed ~~products or require us~~ to ~~incur~~its ~~significant~~target ~~costs to comply with manufacturing and environmental regulations, which could harm our business.~~ market;

· the Wemanufacturing ~~may pursue~~process ~~strategic~~for ~~acquisitions~~a ~~which~~new ~~could~~test ~~have~~must anbe ~~adverse~~reliable, ~~impact~~cost efficient and high onvolume ~~our~~and ~~business~~must ifbe ~~they~~developed ~~are~~and ~~unsuccessful~~implemented in a timely manner to produce the test for sale;

· new Wetests ~~continue~~must tomeet evaluate strategic opportunities available to us and we may pursue product, technology or business acquisitions. These acquisitions could be very costly, could result in dilution to existing investors and could result in integration problems that harm our business as a ~~whole. Any acquisition could result in expending~~ significant ~~amounts~~market ofneed ~~cash,~~to ~~issuing potentially dilutive equity securities or incurring debt or unknown liabilities associated with the acquired business. In addition, our acquisitions may not~~ be successful ~~in achieving our desired strategic objectives, which could materially harm our operating results~~ ; and business. Acquisitions may also result in difficulties in assimilating the operations, technologies, products, services and personnel of the acquired company or business or in achieving the cost savings or other financial benefits we anticipated. These difficulties could result in additional expenses, diversion of management attention and an inability to respond quickly to market issues. Any of these results could harm us financially.

· new Iftests ~~we are~~must ~~successful~~obtain inproper ~~growing~~regulatory ~~sales,~~approvals ~~our~~to ~~business will~~ be ~~harmed if we cannot effectively manage the operational and management challenges of growth~~ marketed.

IfWe wecould ~~are successful in achieving and maintaining market~~experience ~~acceptance~~difficulties ~~for~~that ~~the~~delay ~~LDX~~or ~~System~~prevent ~~and~~ the ~~GDX~~successful ~~System~~development, weintroduction ~~will be~~and ~~required~~marketing ~~to expand our operations, particularly in the areas~~ of ~~sales,~~ ~~marketing and manufacturing. As we expand our operations, this expansion will likely result in~~ new ~~and~~tests ~~increased responsibilities for management personnel~~ and ~~place~~products. ~~significant strain~~For ~~on our management~~example, ~~operating~~regulatory ~~and~~clearance ~~financial systems and~~or ~~resources.~~approval Toof ~~accommodate~~ any ~~such~~new ~~growth~~tests ~~and~~or ~~compete effectively,~~products wemay ~~will~~not be ~~required~~granted toon ~~implement~~a ~~and~~timely ~~improve~~basis, ~~our~~or ~~information~~at ~~systems,~~all. ~~procedures~~We ~~and~~have ~~controls,~~experienced ~~and~~difficulties toobtaining ~~expand, train,~~regulatory ~~motivate~~approval ~~and~~for tests ~~manage~~in ~~our~~the ~~work force~~past. ~~Our~~Because ~~personnel, systems,~~the ~~procedures~~evaluation ~~and~~of ~~controls~~applications ~~may~~by ~~not~~the beFDA ~~adequate~~for ~~to support~~CLIA ~~our~~waived ~~future~~status ~~operations.~~is ~~Any~~not ~~failure~~based toon ~~implement~~precisely ~~and~~defined, ~~improve~~objectively measurable ~~operational~~criteria, ~~financial~~we ~~and~~cannot ~~management~~predict ~~systems~~the orlikelihood toof ~~manage~~obtaining ~~our work~~CLIA ~~force~~waived asstatus ~~required by~~ for future ~~growth,~~products. ifIn ~~any~~addition, ~~could harm~~ our business ~~and~~strategy ~~prevent~~includes usentering ~~from~~into agreements ~~improving~~with ~~our~~clinical ~~financial~~and ~~condition as~~commercial acollaborators ~~result~~and ofother ~~increased~~third ~~sales.~~parties for the

~~Our business could be negatively affected by the loss of key personnel or our inability to hire qualified personnel~~ 27

development, ~~Our~~clinical ~~success~~evaluation ~~depends~~and inmarketing ~~significant~~of ~~part~~existing onproducts ~~the~~and ~~continued~~products ~~service~~under ofdevelopment. ~~certain~~These ~~key~~agreements ~~scientific,~~may ~~technical,~~be ~~regulatory~~subject to rights of termination and ~~managerial~~may ~~personnel~~be terminated without our consent. ~~Our~~The parties ~~success~~to ~~will~~these agreements also may ~~require~~not usabide toby ~~continue~~their ~~to identify,~~contractual ~~attract,~~obligations ~~hire~~to us and ~~retain~~may ~~additional~~discontinue ~~highly qualified~~or ~~personnel~~sell intheir ~~those~~current ~~areas~~lines of business. ~~Competition~~Research ~~for~~performed ~~qualified~~under ~~personnel~~a incollaboration ~~our~~for ~~industry~~which iswe ~~very~~receive ~~competitive~~or ~~due~~provide funding may not lead to the ~~limited~~development ~~number~~ of ~~people~~products ~~available~~in ~~with~~ the ~~necessary~~timeframe ~~technical~~expected, ~~skills~~or ~~and understanding~~at ~~of our industry~~all. WeIf ~~may~~these beagreements ~~unable~~are terminated toearlier ~~retain~~than ~~our key~~expected, ~~personnel~~ or ~~attract~~if orthird ~~retain~~parties ~~other~~do ~~necessary~~not ~~highly~~perform their ~~qualified~~obligations ~~personnel~~to inus ~~the~~properly ~~future~~and on a timely basis, ~~which~~we ~~would~~may ~~harm~~not ~~the~~be able to ~~development~~successfully ofdevelop ~~our~~new ~~business~~products as planned, or at all.

We face risks from failures in our manufacturing 26 processes

~~Table~~We manufacture all of ~~Contents~~the single use test cassettes that are used with the LDX Analyzer. The manufacture of single use test cassettes is a highly complex and precise process that is sensitive to a wide variety of factors. Significant additional resources, implementation of additional manufacturing equipment or changes in our manufacturing processes have been, and may continue to be, required for the scaling-up of each new product prior to commercialization or in order to meet increasing customer demand once commercialization begins, and this work may not be completed successfully or efficiently. In the past, we have experienced lower than expected manufacturing yields that have adversely affected gross margins and delayed product shipments. If we do not maintain acceptable manufacturing yields of test cassettes or experience product shipment delays, our business, financial condition and operating results could be materially adversely affected. We may reject or be unable to sell a substantial percentage of test cassettes because of:

· raw ~~Product liability~~materials ~~and~~variations ~~professional~~or ~~liability suits against us could result in expensive and time consuming litigation, payment of substantial damages and an increase in our insurance rates~~ impurities;

· human Sale and use of our products and the past performance of testing services by our formerly wholly owned subsidiary could lead to the filing of a product liability or professional liability claim. If any of these claims are brought, we may have to expend significant resources defending against them. If we are found liable for any of these claims, we may have to pay damages that could severely hurt our financial position. Loss of these claims could also hurt our reputation, resulting in our losing business and market share. The medical testing industry has historically been litigious, and we face financial exposure to these liability claims if use of our products results in personal injury or improper diagnosis. We also face the possibility that defects in the design or manufacture of our products might necessitate a product recall. error;

· manufacturing Weprocess ~~currently~~variances ~~maintain product liability insurance~~ and ~~professional~~ liability insurance for claims relating to the past performance of testing services, but there can be no assurance that the coverage limits of our insurance policies will be adequate. Insurance is expensive impurities; and difficult to obtain, and we may be unable to maintain product liability insurance in the future on acceptable terms or in sufficient amounts to protect us against losses due to product liability. Inability to maintain insurance at an acceptable cost or to otherwise protect against potential product liability could prevent or inhibit the continued commercialization of our products. In addition, a product liability or professional liability claim in excess of relevant insurance coverage or a product recall could severely harm our financial condition.

· decreased Wemanufacturing ~~may need~~equipment ~~additional capital in the future to support our growth, and such additional funds may not be available to us~~ performance.

WeOur ~~intend to expend substantial funds for capital expenditures~~LDX ~~and~~manufacturing ~~working~~equipment ~~capital related to research~~ and ~~development, expansion~~cassette ofmanufacturing ~~sales~~lines ~~and~~would ~~marketing~~be ~~activities~~costly and ~~other working~~ ~~capital~~time ~~and~~consuming ~~general~~to ~~corporate~~repair ~~purposes.~~or ~~Although~~replace weif ~~believe~~their ~~our cash,~~operation ~~cash~~were ~~equivalents,~~interrupted. ~~marketable securities, cash flow~~The ~~anticipated~~interruption toof beour ~~generated~~manufacturing ~~by future~~ operations ~~and~~or ~~available bank~~the ~~borrowings~~loss ~~under an existing line~~ of ~~credit~~associates ~~will be~~dedicated ~~sufficient~~ to ~~meet our operating requirements for~~ the ~~foreseeable~~ ~~future,~~manufacturing wefacility ~~may~~could ~~still~~severely ~~require~~harm ~~additional~~our ~~financing~~business. ~~For~~ ~~example,~~The ~~we may be required to expend greater than~~risks ~~anticipated~~involving ~~funds~~our ~~if unforeseen difficulties arise in expanding~~ manufacturing ~~capacity~~lines for existing cassettes or in the course of completing required additional development, obtaining necessary regulatory approvals, obtaining waived status under CLIA or introducing or scaling up manufacturing for new tests. include:

· as Ifour weproduction ~~need~~levels ~~additional capital in the future~~increase, we ~~may~~could ~~seek to raise additional funds through public or private financing, collaborative relationships or other arrangements. Any additional equity financing may~~ be ~~dilutive~~required to ~~our~~use ~~existing shareholders or have rights, preferences and privileges senior to those of~~ our ~~existing~~machinery ~~shareholders. If we raise additional~~more ~~capital~~hours ~~through~~per ~~borrowings,~~day ~~the~~and ~~terms of such borrowings may impose limitations on how our management may operate~~ the ~~business~~ indown ~~the~~time ~~future.~~resulting ~~Collaborative~~from ~~arrangements,~~equipment ~~if necessary to raise additional funds, may require us to relinquish our rights to technologies, products or marketing territories. Our~~ failure ~~to raise capital on acceptable terms when needed~~ could ~~prevent us from developing our products and our business.~~ increase;

· the ~~We have~~custom ~~made~~nature ~~use~~of much of aour ~~device~~manufacturing toequipment ~~limit~~increases the ~~possibility that we are~~time ~~acquired,~~required ~~which~~to ~~may~~remedy ~~mean~~equipment ~~that~~failures aand ~~transaction~~replace ~~that shareholders are in favor of or are benefited by may be prevented~~ equipment;

· we ~~Our~~have ~~board~~a oflimited ~~directors~~number ~~has the authority to issue up to 5,000,000 shares~~ of ~~preferred~~associates ~~stock~~dedicated ~~and~~ to ~~determine~~ the ~~rights,~~ ~~preferences,~~operation ~~privileges~~ and ~~restrictions~~ maintenance of ~~such shares without any further vote or action by~~ our ~~shareholders.~~manufacturing ~~To date~~equipment, ~~our~~ ~~board~~the ofloss ~~directors has designated 25,000 shares as Series A participating preferred stock in connection with our “poison pill” anti-takeover plan. The issuance~~ of ~~preferred~~ ~~stock~~whom ~~under certain circumstances~~ could ~~have~~impact ~~the effect of delaying or preventing an acquisition of~~ our ~~company or~~ability otherwise adversely affecting the rights of the holders of our stock. The “poison pill” may have the effect of rendering more difficult or discouraging an acquisition of our company which is deemed undesirable by our board of directors. The “poison pill” may cause substantial dilution to a ~~person~~effectively oroperate ~~group~~and ~~attempting~~service tosuch ~~acquire~~equipment; us on terms or in a manner not approved by our board of directors, except pursuant to an offer conditioned on the negation, purchase or redemption of the rights issued under the “poison pill.” and

· we manufacture all of our cassettes at our Hayward, California manufacturing facility, so manufacturing 27operations are at risk to interruption from earthquake, fire, power outages or other events affecting this one location.

~~Table of Contents~~28

~~ITEM~~Our ~~1B:~~future ~~UNRESOLVED~~results could ~~STAFF~~be ~~COMMENTS~~harmed by economic, political, regulatory and other risks associated with international sales

Historically, a significant portion of our total ~~None~~revenue has been generated outside of the United States. International revenue as a percentage of our total revenue was approximately 13% in fiscal year 2007 and 2006, and approximately 14% in fiscal year 2005. We anticipate that international revenue will continue to represent a significant portion of our total revenue in the future. Our revenue is generally denominated in United States dollars; however, a strengthening of the dollar could make our products less competitive in foreign markets and, as a result, our future revenue from international operations may be unpredictable. We make foreign currency denominated purchases related to our GDX System in the United Kingdom. This exposes us to risks associated with currency exchange fluctuations.

~~ITEM~~In 2:addition ~~PROPERTIES~~to foreign currency risks, our international sales and operations may also be subject to the following risks:

· our ~~Our~~dependency ~~offices~~on ~~are~~pharmaceutical ~~located~~companies’ inpromotional anprograms ~~approximately~~as ~~69,000 square foot~~a ~~leased facility in Hayward, California. Our facilities~~primary ~~contain~~source ~~approximately 10,000 square feet~~ of ~~warehouse space,~~international 8,000 square feet of manufacturing space, 4,000 square feet of laboratory space and the balance devoted to marketing and administrative and common areas. Our lease pertaining to this facility expires in April 2017. We expect that our current leased facilities will be sufficient for our needs over the next 12 months. revenue;

~~ITEM~~· unexpected changes 3:in ~~LEGAL~~regulatory ~~PROCEEDINGS~~requirements;

~~On August 2, 2002, N.V. Euromedix (“Euromedix”) filed suit against~~ · the ~~Company in the Commercial Court in~~ ~~Leuven,~~impact ~~Belgium (No. F5700-02), seeking damages for the wrongful termination~~ of anrecessions implied distribution agreement with the Company for Europe and parts of the Middle East. On November 7, 2002, the court dismissed the suit. On December 31, 2002, Euromedix filed another suit against the Company in ~~the~~economies ~~Commercial~~outside ~~Court in Leuven, Belgium (No. B/02/00044), seeking damages in~~ the ~~amount~~United of approximately 3.5 million Euros for the wrongful termination of an implied distribution agreement with our company for Europe and parts of the Middle East. At the introductory hearing on April 1, 2003, the case was sent to the general docket. The Company believes this claim is without merit and intends to continue to defend the claim vigorously. States;

· changes ~~On March 14, 2003, the Company initiated trademark infringement proceedings against Euromedix before the President of the Commercial Court~~ in ~~Leuven,~~a ~~Belgium (No. BRK/03/00017),~~specific seeking in principle an order (i) to prohibit Euromedix from selling, stocking, importing, exporting or promoting in the European Economic Area (“EEA”) products that violate the Companycountry’s ~~trademarks,~~ ~~under~~or a penalty of 10,000 Euros for each LDX-Analyzer sold, a penalty of 1,000 Euros for each cassette sold contrary to the prohibition and a 25,000 Euros penalty for each publicity of advertisement; (ii) to prohibit Euromedix from using certain slogans and phrases, in combination with products associated with certain of the Companyregion’s ~~trademarks,~~ inpolitical ~~trade documents~~ or ~~other~~economic ~~announcements~~conditions, ~~under a~~ ~~penalty~~particularly ofin ~~25,000~~emerging ~~Euros for each document used contrary to this prohibition~~nations; and (iii) to order the destruction of the inventory of products held by Euromedix that violate the Company’s trademarks, which have been imported into the EEA without the Company’s permission.

· less Aeffective ~~hearing~~protection ~~was held on April 29, 2003 regarding certain procedural issues. In a judgment rendered on May 27, 2003, the Judge~~ of ~~Seizures~~intellectual ofproperty ~~the~~rights Court of First Instance referred the complaint to the Constitutional Court before rendering a final decision. The Judge of Seizures asked the Constitutional Court to render an opinion regarding certain constitutional issues related to the trademark infringement arguments the Company raised at the hearing. Hearings in ~~the~~some Constitutional Court were held on July 8, 2003 and September 9, 2003. On March 24, 2004, the Constitutional Court issued its judgment which supported the Company’s claims. A hearing was scheduled for November 9, 2004 by the Judge of Seizures of the Court of First Instance to hear additional submissions. On December 21, 2004, the Judge of Seizures of the Court of First Instance decided against Euromedix’s opposition to certain procedural issues. countries;

· changes ~~After the decisions of the Judge of Seizures of the Court of First Instance, the Company filed requests for a procedural calendar~~ in ~~the~~tariffs ~~three trademark infringement proceedings against Euromedix of which two are pending before the President of the Commercial Court of Leuven~~ and ~~one~~other ~~before~~trade ~~the~~protection Commercial Court of Leuven. Both parties have exchanged submissions. All three cases were pleaded at a hearing on June 21, 2005 and were taken into deliberation. On September 13, 2005, a judgment was rendered in favor of the Company regarding items (i) and (ii) above. A judgment has not yet been rendered on item (iii). measures;

· difficulties ~~Euromedix filed a request for a procedural calendar~~ in ~~the~~managing ~~case pending~~international ~~before the Commercial Court of Leuven regarding the termination of the business relationship on July~~operations; ~~11, 2002. On December 13, 2005, the Commercial Court of Leuven decided in an interim decision that the termination of the relationship is not governed by Belgian law, but Californian law~~ and ~~allowed the parties to file further submissions in order to substantiate the claims under Californian law. The case has been sent to the general docket.~~

· potential insolvency of international distributors and difficulty in collecting accounts 28 receivable and longer collection periods.

~~Table~~If ofwe ~~Contents~~are unable to minimize the foregoing risks, they may harm our current and future international sales and, consequently, our business.

~~ITEM~~We 4:depend ~~SUBMISSION~~on OFsingle source ~~MATTERS~~suppliers TOfor Acertain ~~VOTE~~materials OFused ~~SECURITY~~in ~~HOLDERS~~our manufacturing process and failure of our suppliers to provide materials to us could harm our business

We currently depend on ~~None~~single source vendors to provide certain subassemblies, components and raw materials used in the manufacture of our products. We also depend on a third-party manufacturer for the GDX System. Any supply interruption in a single sourced material or product could restrict our ability to manufacture and distribute products until a new source of supply is identified and qualified. We may not be successful in qualifying additional sources of supply on a timely basis, or at all. Failure to obtain a usable alternative source or product could prevent us from manufacturing and distributing our products, resulting in inability to fill orders, customer dissatisfaction and loss of business. This would likely severely harm our business. In addition, an uncorrected impurity or supplier’s variation in material, either unknown to us or incompatible with our manufacturing process, could interfere with our ability to manufacture and distribute products. Because we are a small customer of many of our suppliers and we purchase their subassemblies, components and materials with purchase orders instead of long-term commitments, our suppliers may not devote adequate resources to supplying our needs. Any interruption or reduction in the future supply of any materials currently obtained from single or limited sources could severely harm our business.

~~PART II~~ 29

~~ITEM~~We 5:rely ~~MARKET~~on ~~FOR~~a ~~REGISTRANT’S~~limited ~~COMMON~~number ~~EQUITY,~~of ~~RELATED~~customers ~~STOCKHOLDER~~for ~~MATTERS~~a substantial ~~AND~~part ~~ISSUER~~of ~~PURCHASES~~our ~~OF EQUITY SECURITIES~~revenue

Sales to a limited number of customers have accounted for a significant portion of our revenue in each fiscal period. We expect that sales to a limited number of customers will continue to account for a substantial portion of our total revenue in future periods. Our ~~common~~top ~~stock~~ten iscustomers ~~quoted~~comprised onapproximately ~~the~~65% ~~NASDAQ~~of ~~National~~our ~~Market~~revenue ~~under~~in ~~the~~fiscal ~~symbol~~year ~~“CTEC~~2007.” OnIn ~~March 31~~fiscal year 2007, ~~2006~~Physicians Sales and Service accounted for approximately 21% of our total revenue, ~~the~~Henry ~~last~~Schein Inc. accounted for ~~reported~~approximately ~~sale~~10% ~~price~~and McKesson Medical Surgical accounted for approximately 8% of our ~~common~~total ~~stock~~revenue. onIn ~~the~~fiscal ~~NASDAQ~~year ~~National~~2006, Physicians Sales and Service ~~Market~~accounted ~~was~~for ~~$13~~approximately 22% of our total revenue, Henry Schein Inc.~~03 per~~ accounted ~~share~~for approximately 11% and McKesson Medical Surgical accounted for approximately 7% of our total revenue. ~~The~~In ~~following~~fiscal ~~table~~year ~~sets~~2005, ~~forth~~Physicians Sales ~~the~~and ~~quarterly~~Service ~~high~~accounted for approximately 24% of our total revenue, Henry Schein Inc. accounted for approximately 9% and ~~low~~McKesson ~~trading~~Medical ~~prices~~Surgical accounted for approximately 7% of our ~~common~~total ~~stock~~revenue. We have experienced periods in which sales to some of our major customers, as ~~reported~~a bypercentage ~~the~~of ~~NASDAQ~~total ~~National~~revenue, ~~Market~~have fluctuated ~~for~~due ~~the~~to ~~periods~~delays or failures to place expected orders. We do not have ~~indicated~~long-term agreements with any of our customers, who generally purchase our products pursuant to cancelable short-term purchase orders. If we were to lose a major customer or if orders by or shipments to a major customer were to otherwise decrease or be delayed, our operating results would be harmed.

	High		Low
FISCAL YEAR 2005
First Quarter	$	10.29	$	7.20
Second Quarter		8.15		6.16
Third Quarter		8.62		6.35
Fourth Quarter		13.68		7.69
FISCAL YEAR 2006
First Quarter	$	11.71	$	7.95
Second Quarter		11.89		9.47
Third Quarter		11.00		7.99
Fourth Quarter		13.19		9.29

While we believe that we currently have adequate internal control over financial reporting, we are exposed to risks from recent legislation requiring companies to evaluate internal control over financial reporting

AsSection 404 of ~~March 31,~~the ~~2006,~~Sarbanes-Oxley ~~there~~Act ~~were 14,868,825 shares~~ of 2002 requires our ~~common~~management ~~stock~~to ~~issued~~report on and ~~outstanding~~our ~~and~~independent ~~held~~registered bypublic ~~approximately~~accounting ~~146~~firm ~~holders~~to attest to the effectiveness of ~~record~~our internal control over financial reporting. We ~~estimate~~have ~~that~~an ~~there~~ongoing ~~are~~program to perform the system and ~~approximately~~process ~~4,800~~evaluation ~~beneficial~~and ~~owners~~testing ofnecessary ~~our~~to ~~common~~comply ~~stock~~with these requirements.

We expect to continue to incur significant expenses and to devote significant resources to Section 404 ~~Dividend~~compliance on an ongoing basis. In addition, it is difficult for us to predict ~~Policy~~how long it will take to complete the assessment of the effectiveness of our internal control over financial reporting each year and we may not be able to complete the process on a timely basis. In the event that internal controls over financial reporting are not effective as defined under Section 404, we cannot predict how regulators will react or how the market prices of our shares will be affected. In addition, if we fail to maintain an effective system of internal control or if we were to discover material weaknesses in our internal control systems, we may be unable to produce reliable financial reports or prevent fraud and it could harm our results of operations and financial condition.

WeOur ~~have~~products ~~never~~are subject ~~declared~~to ormultiple ~~paid~~levels ~~cash~~of ~~dividends~~government onregulation ~~our common stock~~ and doany ~~not~~regulatory ~~anticipate paying cash dividends in the~~changes ~~foreseeable~~are ~~future.~~difficult ~~We currently expect~~ to ~~retain~~predict ~~future earnings,~~and ifmay ~~any,~~be ~~for~~damaging ~~use~~to ~~in the operation and expansion of~~ our ~~business~~ ~~and do not anticipate paying any cash dividends in the foreseeable future.~~ business

The manufacture and sale of our diagnostic products, including the LDX System and the GDX System, is subject to extensive regulation ~~Equity~~by numerous governmental authorities, principally the FDA and corresponding ~~Compensation~~state ~~Plans~~and foreign regulatory agencies. We are unable to commence marketing or commercial sales in the United States of any of the new tests we develop until we receive the required clearances and approvals. The process of obtaining required regulatory clearances and approvals is lengthy, expensive and uncertain. As a result, our new tests under development, even if successfully developed, may never obtain such clearance or approval. Additionally, certain material changes to products that have already been cleared or approved are subject to further review and clearance or approval. Medical devices are subject to continual review, and later discovery of previously unknown problems with a cleared product may result in restrictions on the product’s marketing or withdrawal of the product from the market. If we lose previously obtained clearances, or fail to comply with existing or future

The information required by this item regarding equity compensation plans is incorporated by reference under the section entitled Equity Compensation Plan Information contained in our proxy statement for our 2006 annual meeting of shareholders. 30

~~ITEM~~regulatory 6:requirements, we ~~SELECTED~~may ~~FINANCIAL~~be ~~DATA~~unable to market the affected products, which would depress our revenue and severely harm our business.

~~The~~In ~~following~~addition, ~~selected~~any future ~~financial~~amendment ~~data~~or ~~should~~addition beto ~~read~~regulations ~~in conjunction~~impacting ~~with~~ our ~~financial~~products ~~statements and notes thereto and~~could ~~“Management’s~~prevent ~~Discussion~~us ~~and~~from ~~Analysis~~marketing ofthe ~~Financial Condition~~LDX System and ~~Results~~the ofGDX ~~Operations~~System.” ~~The~~Regulatory ~~following~~changes ~~selected~~could ~~statement~~hurt ofour ~~operations~~business ~~data~~by ~~for~~increasing ~~the~~burdens ~~fiscal~~on ~~years~~our ~~ended March 31,~~products ~~2006,~~or ~~March 25,~~by ~~2005,~~reducing ~~and March 26,~~or ~~2004~~eliminating ~~and~~certain ~~the~~competitive ~~selected~~advantages ~~balance sheet data as~~ of ~~March 31, 2006~~the ~~and~~LDX ~~March 25,~~System’s ~~2005 are derived from,~~ and ~~qualified by reference to,~~ the ~~audited financial statements included~~GDX ~~elsewhere~~System’s inwaived ~~this Annual Report on Form 10-K~~status. ~~The~~ ~~selected~~Food ~~statement of operations data for the fiscal year ended March 28, 2003~~ and ~~March 29,~~Drug ~~2002~~Administration ~~and~~clearance ~~the balance~~or ~~sheet~~approval ~~data as~~ of ~~March 25, 2004, March 28,~~ ~~2003~~products ~~and~~such ~~March~~as ~~29,~~ours ~~2002~~can ~~have~~be ~~been~~obtained ~~derived~~by ~~from~~either ~~our~~of ~~audited~~ two processes:

· the 510(k) pre-market notification process, which generally takes from two to 29 four months but may take longer; and

~~Table~~· the pre-market approval process (PMA), which is a longer and more costly process than a 510(k) clearance process, involves the submission of ~~Contents~~extensive supporting data and clinical information and generally takes six months to a year but may take significantly longer.

~~financial~~If ~~statements~~our ~~not~~future ~~included~~products inare ~~this~~required ~~Annual~~to ~~Report.~~obtain ~~These~~a ~~historical~~pre-market ~~results~~approval, ~~are~~this ~~not~~would ~~necessarily~~significantly ~~indicative~~delay ofour ~~the~~ability ~~results of~~to ~~operations~~market tothose tests beand ~~expected~~significantly ~~from~~increase ~~any~~the ~~future~~costs ~~period~~of development.

	Year Ended March 31,(1)
	2006		2005		2004			2003			2002
	(In thousands, except per share data)
Statement of Operations Data:
Revenue	$	64,093	$	52,877	$	52,376		$	48,541		$	41,747
Cost of revenue		23,902		21,390		23,180			20,424			17,040
Gross profit		40,191		31,487		29,196			28,117			24,707
Operating expenses:
Sales and marketing		13,036		11,494		12,654			11,737			9,241
Research and development		7,553		4,252		3,159			2,722			2,201
General and administrative		11,230		9,864		8,153			7,008			6,447
Other operating costs		—		—		250			—			—
Litigation and other related		—		—		7,786			307			126
Total operating expenses		31,819		25,610		32,002			21,774			18,015
Income (loss) from operations		8,372		5,877		(2,806	)		6,343			6,692
Interest and other income, net		923		243		334			438			449
Income (loss) before taxes		9,295		6,120		(2,472	)		6,781			7,141
Provision (benefit) for income taxes(2)		3,661		1,972		(11,179	)		(3,934	)		289
Income from continuing operations		5,634		4,148		8,707			10,715			6,852
Loss from discontinued operations		—		—		—			(1,377	)		(1,302	)
Loss from sale of discontinued operations		—		—		—			(4,445	)		—
Net income	$	5,634	$	4,148	$	8,707		$	4,893		$	5,550
Income from continuing operations per share:
Basic	$	0.38	$	0.29	$	0.63		$	0.79		$	0.54
Diluted	$	0.38	$	0.29	$	0.61		$	0.76		$	0.50
Loss from discontinued operations per share:
Basic	$	0.00	$	0.00	$	0.00		$	(0.43	)	$	(0.10	)
Diluted	$	0.00	$	0.00	$	0.00		$	(0.41	)	$	(0.10	)
Net income per share:
Basic	$	0.38	$	0.29	$	0.63		$	0.36		$	0.44
Diluted	$	0.38	$	0.29	$	0.61		$	0.35		$	0.40
Shares used to compute net income per share(3):
Basic		14,687		14,295		13,922			13,551			12,658
Diluted		15,013		14,472		14,235			14,077			13,730

The use of our products and those of our competitors is also affected by federal and state regulations, which provide for regulation of laboratory testing, as well as by the laws and regulations of foreign countries. The scope of these regulations includes quality control, proficiency testing, personnel standards and inspections. In the United States, clinical laboratory testing is regulated under the Clinical Laboratory Improvement Act of 1976.

The LDX Analyzer, our total cholesterol, high density lipoproteins, triglycerides and glucose tests 30in any combination, our ALT test cassette, the GDX Analyzer and A1C test cartridges have been classified as waived from the application of many of the requirements under the CLIA. We believe this waived classification is critical for our products to be successful in their domestic markets. Any failure of our new tests to obtain waived status under the CLIA will severely limit our ability to commercialize such tests. Loss of waived status for existing diagnostic products or failure to obtain waived status for new products could limit our revenue from sales of such products, which would severely harm our business.

~~Table~~We ofmay ~~Contents~~face fines or our manufacturing facilities could be closed if we fail to comply with manufacturing and environmental regulations

	Year Ended March 31,(1)
	2006			2005			2004			2003			2002
	(In thousands)
Balance Sheet Data:
Cash, cash equivalents and marketable securities and long term investments	$	42,676		$	33,468		$	23,602		$	26,081		$	22,107
Working capital		37,290			33,578			23,986			22,579			20,848
Total assets		80,702			74,121			63,230			52,012			42,751
Accumulated deficit		(19,098	)		(24,732	)		(28,880	)		(37,587	)		(42,480	)
Shareholders’ equity		74,132			66,592			57,278			44,728			36,721

Our manufacturing processes and, in certain instances, those of our contract manufacturers, are subject to stringent federal, state and local regulations governing the use, generation, manufacture, storage, handling and disposal of certain materials and wastes. Failure to comply with present or future regulations could result in many things, including warning letters, fines, injunctions, civil penalties, recall or seizure of products, total or partial suspension of production, refusal of the government to grant pre-market clearance or pre-market approval for devices, withdrawal of approvals and criminal prosecution. Any of these developments could harm our business. We and our contract manufacturers are also subject to federal, state and foreign regulations regarding the manufacture of healthcare products and diagnostic devices, including:

(1)		Our fiscal year is a 52-53 week period ending on the last Friday in March. Fiscal year 2006 referenced in this Annual Report on From 10-K consisted of 53 weeks and fiscal years 2005, 2004, 2003 and 2002 referenced in this Annual Report on Form 10-K consisted of 52 weeks. For convenience, we have indicated in this Annual Report on Form 10-K that our fiscal year ends on March 31 and refer to the fiscal year ending March 31, 2006 as fiscal year 2006, March 25, 2005 as fiscal year 2005, March 26, 2004 as fiscal year 2004, March 28, 2003 as fiscal year 2003, and the fiscal year ending March 29, 2002 as fiscal year 2002.
(2)		Benefit for income taxes in fiscal years 2004 and 2003 includes a $10.2 million and $4.2 million, respectively, gain from a net deferred income tax benefit which resulted from the reversal of a portion of the valuation allowance previously established for deferred tax assets, primarily net operating losses.
(3)		See Note 1 of Notes to Financial Statements for an explanation of the shares used to compute net income per share.

· ISO 13485:2003 requirements, which is an industry standard for maintaining and assuring conformance to quality management systems; and

~~Item~~· Canadian Medical 7.Devices ~~MANAGEMENT’S~~Conformity ~~DISCUSSION~~Assessment ~~AND~~System ~~ANALYSIS~~(CMDCAS), OFwhich ~~FINANCIAL~~implements Canadian ~~CONDITION~~regulations ~~AND~~requiring ~~RESULTS~~medical OFdevices ~~OPERATION~~be designed and manufactured under a registered quality management system.

· other foreign regulations and state and local health, safety and environmental ~~Introduction~~ regulations, which include testing, control and documentation requirements.

Management’s discussion and analysis of financial condition and results of operation, or MD&A, is provided as a supplement to the accompanying financial statements and footnotes contained in Item 15 of this report and provides an understanding of our results of operation, financial condition and changes in financial condition. This discussion contains forward-looking statements. These statements are based on our current expectations, assumptions, estimates and projections about our business and our industry, and involve known and unknown risks, uncertainties and other factors that may cause our or our industry’s results, levels of activity, performance or achievement to be materially different from any future results, levels of activity, performance or achievements expressed or implied in or contemplated by the forward-looking statements. Our actual results and the timing of selected events could differ materially from those anticipated in these forward-looking statements as a result of selected factors, including those set forth in “Item 1A: Risk Factors” beginning on page 16 in this document. MD&A is organized as follows: 31

•Changes ~~Overview.~~in ~~This~~existing regulations ~~section~~or ~~provides~~adoption ~~a general description and recent history~~ of ~~our~~new ~~business.~~governmental •regulations ~~Results~~or ofpolicies ~~operations.~~could prevent ~~This~~or ~~section~~delay ~~provides~~regulatory ~~our~~approval ~~analysis and outlook for the significant line items on our statements~~ of ~~operations. • Liquidity and capital resources. This section provides an analysis of~~ our ~~liquidity~~products ~~and~~or cash flows, as well as a discussion of our commitments that existed as of March 31, 2006. • Critical accounting policies. This section discusses those accounting policies that both are considered important to our financial condition and results of operations, and require us to ~~exercise~~incur significant ~~subjective~~costs orto ~~complex~~comply ~~judgments~~with inmanufacturing ~~their~~and ~~application.~~environmental ~~In addition~~regulations, which ~~all~~could ofharm our ~~significant accounting policies, including our critical accounting policies, are summarized in Note 1 to our financial statements~~business. ~~• Recent accounting pronouncements. This section describes the issuance and effects of new accounting pronouncements.~~

Our business could be negatively affected by the loss 31 of key personnel or our inability to hire qualified personnel

~~Table~~Our success depends in significant part on the continued service of ~~Contents~~certain key scientific, technical, regulatory and managerial personnel. Our success will also require us to continue to identify, attract, hire and retain additional highly qualified personnel in those areas. Competition for qualified personnel in our industry is very competitive due to the limited number of people available with the necessary technical skills and understanding of our industry. We may be unable to retain our key personnel or attract or retain other necessary highly qualified personnel in the future, which would harm the development of our business.

Product liability and professional liability suits against us could result in expensive and time ~~Overview~~consuming litigation, payment of substantial damages and an increase in our insurance rates

WeSale ~~are~~and ause ~~medical~~of ~~device~~our ~~company~~products ~~that~~and ~~develops,~~the ~~manufactures~~past ~~and~~performance ~~markets~~of ~~products~~testing ~~that~~services ~~perform~~by ~~diagnostic~~our ~~testing~~formerly atwholly ~~sites~~owned subsidiary could lead to the ~~outside~~filing of ~~traditional~~a ~~hospital~~product ~~and~~liability ~~clinical~~or ~~laboratories~~professional ~~to assist~~liability inclaim. ~~the~~If ~~assessment~~any of ~~the~~these claims ~~risk~~are ofbrought, ~~heart~~we ~~disease,~~may ~~diabetes~~have to expend significant resources defending ~~and~~against ~~certain~~them. ~~liver~~If ~~diseases~~we ~~and~~are infound ~~the~~liable ~~monitoring~~for any of ~~therapy~~these claims, we may have to ~~treat~~pay ~~those~~damages ~~diseases.~~that ~~Our~~could ~~products~~severely ~~are~~hurt ~~sold~~our ~~worldwide~~financial position. ~~Our~~Loss of these ~~primary~~claims ~~market~~could isalso ~~the~~hurt ~~physician~~our ~~laboratory~~reputation, resulting in our losing business and market share. The medical testing industry has historically been litigious, ~~which~~and ~~consists~~we offace ~~approximately~~financial ~~111,000~~exposure ~~sites~~to ~~that~~these ~~are~~liability ~~registered~~claims ~~with~~if use of our products ~~the~~results ~~Centers~~in ~~for~~personal ~~Medicare &~~injury ~~Medicaid~~or ~~Services (“CMS”),~~improper ~~approximately~~diagnosis. ~~53,000~~We ofalso ~~which~~face ~~are~~the ~~registered~~possibility tothat ~~perform~~defects ~~only~~in ~~tests~~the ~~that~~design ~~have~~or ~~been~~manufacture ~~waived~~of ~~under~~our ~~CLIA.~~products might necessitate a product recall.

We currently maintain ~~Our~~product ~~corporate~~liability ~~headquarters~~insurance isand ~~located~~professional inliability ~~Hayward,~~insurance ~~California.~~for claims ~~All~~relating to the past performance of ~~our~~testing ~~manufacturing~~services, ~~research,~~but ~~regulatory~~there ~~and~~can be no ~~administrative~~assurance ~~activities~~that ~~are~~the ~~conducted~~coverage atlimits ~~this~~of ~~location~~our insurance policies will be adequate. Insurance Weis expensive and difficult to obtain, and we may be unable to maintain ~~sell~~product ~~our~~liability ~~products~~insurance ~~through~~in athe ~~worldwide~~future ~~network~~on ofacceptable ~~over~~terms 85or in sufficient ~~distributors.~~amounts Weto ~~have~~protect 21us ~~regional~~against ~~sales~~losses ~~managers~~due ~~who~~to ~~coordinate~~product liability. Inability to ~~and~~maintain ~~work~~insurance ~~with~~at ~~our~~an ~~distribution~~acceptable ~~partners~~cost or to ~~identify~~otherwise ~~and~~protect ~~promote~~against ~~sales~~potential product liability could prevent or inhibit the continued commercialization of our products. WeIn ~~also~~addition, ~~employ~~a 13product ~~field~~liability ~~technical service~~or ~~representatives~~professional ~~who~~liability ~~are~~claim ~~responsible~~in ~~for~~excess ~~field~~of ~~customer~~relevant ~~service and~~insurance ~~customer~~coverage ~~retention~~or ~~initiatives~~a product ~~within~~recall ~~our~~could ~~existing~~severely ~~installed base~~harm ofour ~~products~~financial condition.

Our stock price has been highly volatile and is likely to continue to be volatile, which could result in substantial losses for ~~Recent Events~~ investors

The market price of Weour ~~have~~common ~~experienced~~stock ~~recent~~has ~~significant~~in ~~developments~~the past been, and ~~are~~in the future is likely to be, ~~monitoring~~highly ~~certain~~volatile. ~~events~~For ~~that~~example, ~~may~~between ~~have~~April an1, ~~impact~~2006 onand ~~our~~March 30, 2007, the ~~company~~price of our common stock, ~~including~~as reported on the ~~following:~~NASDAQ Stock Market LLC, has ranged from a low of $10.67 to a high of $19.35. These fluctuations could result in substantial losses for investors. Our stock price may fluctuate for a number of reasons including:

•· quarterly variations ~~In June 2005, we announced that we had been granted a patent by the U.S. Patent Office (6,881,581) and the European Patent Office (EP 1,329,724) for a new method of measuring HDL~~ in human blood. We believe that this patent provides a very different approach than those of other existing patents describing the measurement of HDL and that this patent also permits the development of the Cholestech LDX Lipid/ALT cassette by preventing the interference of the HDL chemistry with the ALT assay on the same cassette. • In June 2005, we announced that the Cholestech LDX® System had been certified by the Cholesterol Reference Method Laboratory Network. This certification validates that the system consistently meets the gold standard for accuracy and reproducibility developed by the Centers for Disease Control and Prevention for the measurement of total cholesterol and HDL cholesterol consistent with NCEP analytical goals. • In September 2005, we announced the shipment of the first orders for the Cholestech LDX® hs-CRP diagnostic test. C-reactive protein (CRP) is a systemic marker of inflammation. The hs-CRP test is used to detect low level increases in CRP in apparently healthy individuals. These increases are due to more subtle forms of inflammation, such as inflammation in the blood vessels, and cannot be detected using conventional CRP assays. This important diagnostic test expands the utility of the LDX and enables us to continue our ~~strategy~~operating ofresults; leveraging our LDX installed base with additional new tests. • In October 2005, we announced that we are partnering with AstraZeneca, a leading pharmaceutical company. We are providing a high sensitivity C-Reactive Protein (hs-CRP) test for the Cholestech LDX® System to rapidly pre-screen patients for eligibility to participate in a global multi-site clinical study, sponsored by AstraZeneca. The AstraZeneca clinical trial is designed to investigate the effect of a statin in the primary prevention of cardiovascular events in patients with normal to low cholesterol levels but elevated hs-CRP. CRP is a systemic marker of inflammation. The hs-CRP test is used to detect low-level increases of CRP in apparently healthy individuals. These increases are due to more subtle forms of inflammation, such as inflammation in the blood vessels, and cannot be detected using conventional CRP assays. Although we earned incremental revenue during the year in connection with this arrangement, the timing and level of market acceptance of the hs-CRP test are still uncertain. • In November 2005, we announced that we signed a definitive agreement with Boule. Under the terms of the agreement, we will collaborate with Boule on the development and commercialization of a point of care CBC system, designed for waiver CLIA. We will receive exclusive distribution rights covering all human applications in the United States and Canada. For these and other rights, we paid $2.5 million upon signing, and will pay $500,000 upon receipt of FDA 510(k) clearance and $1.0 million upon receipt of waiver under CLIA. We currently anticipate commercializing the CBC system in late calendar 2007 or early 2008. Currently, there are no CLIA-waived CBC systems in use in the United States and it is expected that this

· litigation 32 or threat of litigation;

~~Table~~· developments in ofor ~~Contents~~disputes regarding patent or other proprietary rights;

~~could~~· announcements of betechnological ~~the~~or ~~first.~~competitive ~~The~~developments ~~initial~~by ~~$2.5~~us ~~million payment was expensed during the quarter ending December 23, 2005 as the project is still in the development stage~~ and ~~feasibility~~our ~~has not been established.~~competitors;

· regulatory ~~Results of~~developments ~~Operations~~ regarding us or our competitors;

· changes ~~Comparison of~~in ~~Fiscal~~the ~~Years~~current ~~Ended~~structure ~~March 31,~~of ~~2006~~the healthcare financing and ~~March 25, 2005~~ payment systems;

	Fiscal Year Ended
	March 31,					March 25,
	2006					2005					Amount of		Percentage
			% of					% of			Increase		Increase
	Amount		Sales			Amount		Sales			(Decrease)		(Decrease)
Revenue	$	64,093		100	%	$	52,877		100	%	$	11,216		21	%
Cost of revenue		23,902		37			21,390		40			2,512		12
Gross profit		40,191		63			31,487		60			8,704		28
Operating expenses
Sales and marketing		13,036		20			11,494		22			1,542		13
Research and development		7,553		12			4,252		8			3,301		78
General and administrative		11,230		18			9,864		18			1,366		14
Total operating expenses		31,819		50			25,610		48			6,209		24
Income from operations		8,372		13			5,877		12			2,495		42
Interest and other income, net		923		1			243		—			680		280
Provision for income taxes		3,661		6			1,972		4			1,690		86
Net income	$	5,634		9	%	$	4,148		8	%	$	1,486		36	%

· our ~~Revenue. Our~~failure ~~total revenue increased 21%~~ to ~~$64.1 million~~ inachieve, ~~fiscal~~or ~~year~~changes ~~2006 from $52.9 million~~ in ~~fiscal year 2005 due primarily to increased sales of single-use test cassettes. In addition~~, ~~revenue~~financial ~~for~~estimates ~~our LDX analyzer remained relatively consistent with fiscal year 2005, as our strong domestic sales of the LDX analyzer were offset~~ by a ~~decrease~~securities ~~in international analyzer sales. Revenue for our GDX~~analysts ~~analyzer~~ and ~~related~~comments ~~single-use~~or ~~test~~opinions ~~cartridges~~about ~~decreased~~us 6%by ~~in fiscal~~securities ~~year~~analysts ~~2006.~~or ~~The~~major ~~decline in GDX and related product revenue related to our continued focus on our core LDX business.+~~ shareholders;

· stock ~~Domestic~~market ~~revenue~~price ~~for~~and ~~fiscal~~volume ~~year 2006 increased $10.5 million~~fluctuations, ~~or 23% to $56.1 million from $45.6 million in fiscal year 2005. Most of the increase in domestic revenue related to revenue from single-use test cassettes~~ which ~~increased~~have ~~$8.8 million,~~particularly oraffected ~~23%, to $47.9 million for fiscal year 2006 from $39.1 million for fiscal year 2005. Revenue for~~ the ~~LDX analyzer increased~~ ~~$0.6 million,~~market orprices ~~34%, to $2.5 million~~ for ~~fiscal~~medical ~~year 2006~~products ~~from~~and ~~$1.9 million~~high ~~for~~technology ~~fiscal~~companies ~~year 2005. We expect domestic LDX related revenue for fiscal year 2007 to increase due to the release of new test cassettes~~ and ~~increased~~which ~~testing~~are onoften ~~our~~unrelated ~~installed base due~~ to the ~~screening~~operating performance of ~~lipids~~such ~~for~~companies; ~~the Medicare population. Additionally, domestic revenue for our GDX analyzer~~ and related single-use test cartridges decreased $0.3 million, or 19%, to $1.3 million for fiscal year 2006 from $1.6 million for fiscal year 2005. The decline in GDX and related product revenue related to our decision to de-emphasize those products in order to focus on our core LDX business.

· general International revenue decreased 10% in fiscal year 2006 from fiscal year 2005. International revenue is primarily related to pharmaceutical promotional programs which tend to occur in irregular patterns and are difficult to forecast. Sales of single-use test cassetteseconomic, ~~which~~political ~~increased 25% in fiscal year 2006, were offset by a 45% decrease in LDX analyzer revenue for the same period. Additionally, international revenue for our GDX~~ and ~~related~~market ~~products increased 56% in fiscal year 2006~~conditions.

~~Cost~~With ofthe ~~Revenue. Cost~~advent of ~~revenue~~the ~~includes direct labor~~internet, ~~direct~~new ~~material,~~avenues ~~overhead~~have ~~and~~been created ~~royalties.~~for ~~Our~~the ~~cost~~ dissemination of ~~revenue~~information. ~~increased~~We ~~12%~~do tonot ~~$23.9 million~~have ~~for~~control ~~fiscal~~over ~~year~~the ~~2006~~information ~~from~~that ~~$21.4 million~~is ~~for~~distributed ~~fiscal~~and ~~year~~discussed ~~2005.~~on ~~The~~electronic ~~increase~~bulletin boards and ininvestment ~~cost~~chat ofrooms. ~~revenue~~The ~~related~~motives ~~primarily~~of tothe ~~additional~~people ~~products shipped~~or inorganizations ~~support~~that distribute ofsuch ~~the~~information ~~21%~~may ~~increase~~not be in ~~revenue~~our ~~during~~best ~~fiscal year~~interest ~~2006~~or ~~over~~in the ~~prior~~interest of ~~fiscal~~our ~~year~~shareholders. AsThis, ain ~~percentage~~addition to other forms of ~~sales,~~investment ~~the~~information, ~~gross~~including ~~margins~~newsletters ~~were~~and ~~63%~~research ~~and~~publications, ~~60%~~could ~~for~~result ~~fiscal~~in a significant decline in the market price of our common stock.

In addition, stock markets have from time to time experienced extreme price and volume fluctuations. The market prices for 33diagnostic product companies have been affected by these market fluctuations and such effects have often been unrelated to the operating performance of such companies. These broad market fluctuations may cause a decline in the market price of our common stock.

~~Table~~Securities class action litigation is often brought against a company after a period of ~~Contents~~volatility in the market price of its stock. This type of litigation has been brought against us in the past and could be brought against us in the future, which could result in substantial expense and damage awards and divert management’s attention from running our business.

~~year~~ITEM 1B: UNRESOLVED ~~2006~~STAFF and fiscal year 2005, respectively. The improvement in gross margin related to higher average selling prices and the continued shift in product mix toward single-use cassettes, which are our highest margin products. In addition, continued efficiencies in the manufacturing process have contributed to the margin increase. During fiscal year 2007, we anticipate factory spending will continue to increase at a rate lower than the increase in unit production as we improve manufacturing efficiency through increased production and cost control. COMMENTS

We have licensed certain technology used in some of our products. One royalty agreement, which expired in March 2006, required us to pay a royalty of 2% on net sales of single use test cassettes. In December 2003, as part of a settlement agreement with Roche, we entered into another royalty agreement that applies to only the HDL portion of cholesterol test cassettes we sell. This agreement was effective as of December 1, 2003 and expires on December 3, 2013. Royalty payments are charged to cost of revenue as incurred. None

~~Operating Expenses~~ ITEM 2: PROPERTIES

~~Sales~~Our ~~and~~offices ~~Marketing. Sales~~are ~~and~~located ~~marketing~~in ~~expenses~~an ~~include~~approximately ~~salaries~~69,000 square ~~commissions,~~foot ~~bonuses,~~leased ~~expenses~~facility ~~for outside~~in ~~services~~Hayward, ~~marketing programs and travel expenses~~ California. ~~Sales and~~Our ~~marketing~~facilities ~~expenses~~contain ~~increased~~approximately ~~$1.5 million~~17,000 square orfeet ~~13%, to~~of ~~$13.0 million~~warehouse ~~for~~space, ~~fiscal year 2006 from $11.5~~7,000 ~~million for~~square ~~fiscal~~feet ~~year 2005. The increase is mainly attributable to increased compensation for achievement~~ of ~~revenue~~manufacturing ~~goals.~~space, ~~Additionally~~5,000 square ~~there~~feet ~~was~~of ~~increased~~laboratory ~~spending~~space ~~for trade shows~~ and ~~distributor~~ ~~relations~~the ~~during~~balance ~~fiscal~~devoted ~~year~~to ~~2006. As a percent of~~marketing ~~total~~and ~~revenue,~~administrative ~~sales~~ and ~~marketing~~common ~~expenses~~areas. ~~were~~Our ~~20%~~lease ~~and~~pertaining ~~22%~~to ~~for~~this facility ~~fiscal~~expires ~~year~~in ~~2006~~April ~~and 2005~~1, ~~respectively~~2017. We expect that our ~~sales~~ ~~and~~current ~~marketing~~leased ~~expenses~~facilities will ~~increase slightly as a~~be ~~percentage~~sufficient offor ~~revenue~~our inneeds ~~fiscal~~over ~~year~~the ~~2007~~next 12 months.

Research and Development. Research and development expenses include salaries, bonuses, professional consulting service expenses, supplies and depreciation of capital equipment. Research and development expenses increased $3.3ITEM ~~million, or 78%, to $7.6 million for fiscal year 2006 from $4.~~3 ~~million~~: LEGAL for fiscal year 2005. The increased spending related primarily to the $2.5 million payment to Boule as part of the development and distribution agreement entered into in November 2005. Additionally, a one-time severance payment to the former VP of Development contributed to the increased spending for fiscal year 2006. As a percent of total revenue, research and development expenses were 12% and 8% for fiscal year 2006 and 2005, respectively. We expect that our research and development expenses will decrease as a percentage of revenue in fiscal year 2007. PROCEEDINGS

~~General~~On ~~and~~August 2, ~~Administrative~~2002, N. ~~General~~V. ~~and~~Euromedix (“Euromedix”) ~~administrative~~filed ~~expenses~~suit ~~include~~against ~~compensation,~~the ~~benefits~~Company ~~and expenses~~in ~~for~~the ~~outside~~Commercial ~~professional~~Court ~~services~~in Leuven, ~~including information~~Belgium ~~services~~(No. F5700-02), seeking ~~legal~~damages ~~and~~for ~~accounting.~~the ~~General~~wrongful ~~and administrative~~termination ~~expenses~~of ~~increased~~an ~~$1.4 million,~~implied ordistribution agreement ~~14%,~~with ~~to $11.2 million~~the Company for ~~fiscal~~Europe ~~year~~and ~~2006~~parts ~~from~~of $9the Middle East.9 On November ~~million~~7, ~~for~~2002, ~~fiscal~~the ~~year~~court ~~2005~~dismissed the suit. ~~The~~On ~~increase~~December 31, ~~resulted~~2002, ~~from~~Euromedix ~~higher~~filed ~~compensation~~another ~~related~~suit toagainst ~~achievement~~the ofCompany ~~management~~in ~~goals~~the ~~and increased~~Commercial ~~headcount~~Court in Leuven, Belgium (No. B/02/00044), seeking Asdamages ain ~~percent~~the amount of ~~total~~approximately ~~revenue,~~3.5 million ~~general~~Euros ~~and~~for the ~~administrative~~wrongful ~~expenses~~termination ~~were~~of ~~18%~~an ~~and~~implied ~~18%~~distribution ~~for~~agreement ~~fiscal~~with ~~year~~our ~~2006~~company for Europe and ~~fiscal~~parts ~~year~~of ~~2005,~~the ~~respectively~~Middle East. WeAt ~~expect~~the ~~that~~introductory ~~our~~hearing ~~general~~on April 1, ~~and~~2003, ~~administrative~~the ~~expenses~~case ~~will~~was ~~remain~~sent ~~consistent~~to asthe ageneral docket. The Company believes this claim ~~percentage~~is ofwithout ~~revenue~~merit inand ~~fiscal~~intends ~~year~~to ~~2007~~continue to defend the claim vigorously.

~~Interest~~On ~~and~~March 14, ~~Other Income~~2003, ~~Net. Interest income~~the ~~and~~Company ~~other~~initiated trademark ~~income,~~infringement ~~net~~proceedings ~~reflects~~against ~~income~~Euromedix ~~from~~before the ~~investment~~ President of the ~~cash~~Commercial ~~balances~~Court ~~and~~in ~~marketable securities~~Leuven, ~~net~~Belgium ~~of expenses~~(No. ~~Interest~~ BRK/03/00017), ~~income~~seeking ~~increased~~in principle ~~280%~~an order (i) to ~~$923,000~~prohibit inEuromedix ~~fiscal year 2006~~ from ~~$243~~selling,~~000~~ ~~in fiscal 2005. The increase was primarily~~stocking, ~~attributable~~importing, toexporting anor ~~increase~~promoting in ~~cash~~the ~~and~~European ~~marketable~~Economic ~~securities~~Area (“EEA”) ~~and~~products anthat ~~increase~~violate inthe ~~interest~~Company’s ~~rates~~trademarks, ~~during~~under ~~fiscal~~a ~~year~~penalty ~~2006.~~

Income Taxes. For fiscal year 2006, we recorded a provision for income taxes of $3.7 million for an effective tax rate of 39.4%. The effective tax rate represents the federal tax at the statutory rate and the average statutory rate for all jurisdictions in which we are subject to income tax. The effective tax rate was 32.2% in fiscal year 2005 due to a benefit relating to a California manufacturers’ investment credit. We expect to use net operating loss carryforwards (“NOL”) and other tax carryforwards to the extent taxable income is earned in fiscal year 2007 and beyond. As of March 31, 2006, we had NOL carryforwards of $33~~.5 million available to reduce future taxable income for federal income tax purposes.~~

of 10,000 Euros for each LDX-Analyzer sold, a penalty of 1,000 Euros for each cassette sold contrary to 34the prohibition and a 25,000 Euros penalty for each publicity of advertisement; (ii) to prohibit Euromedix from using certain slogans and phrases, in combination with products associated with certain of the Company’s trademarks, in trade documents or other announcements, under a penalty of 25,000 Euros for each document used contrary to this prohibition; and (iii) to order the destruction of the inventory of products held by Euromedix that violate the Company’s trademarks, which have been imported into the EEA without the Company’s permission.

~~Table~~A hearing was held on April 29, 2003 regarding certain procedural issues. In a judgment rendered on May 27, 2003, the Judge of ~~Contents~~Seizures of the Court of First Instance referred the complaint to the Constitutional Court before rendering a final decision. The Judge of Seizures asked the Constitutional Court to render an opinion regarding certain constitutional issues related to the trademark infringement arguments the Company raised at the hearing. Hearings in the Constitutional Court were held on July 8, 2003 and September 9, 2003. On March 24, 2004, the Constitutional Court issued its judgment which supported the Company’s claims. A hearing was scheduled for November 9, 2004 by the Judge of Seizures of the Court of First Instance to hear additional submissions. On December 21, 2004, the Judge of Seizures of the Court of First Instance decided against Euromedix’s opposition to certain procedural issues.

After the decisions of the Judge of Seizures of the Court of First Instance, the Company filed requests for a procedural calendar ~~Comparison~~in the three trademark infringement proceedings against Euromedix of which two are pending before the President of ~~Fiscal~~the ~~Years~~Commercial ~~Ended~~Court ~~March~~of Leuven and one before the Commercial Court of Leuven. Both parties have exchanged submissions. All three cases were pleaded at a hearing on June 2521, 2005 and ~~March~~were taken into deliberation. On September 2613, 2005, a judgment was rendered in favor ~~2004~~of the Company regarding items (i) and (ii) above. A judgment has not yet been rendered on item (iii).

	Fiscal Year Ended
	March 25,					March 26,
	2005					2004						Amount of			Percentage
			% of						% of			Increase			Increase
	Amount		Sales			Amount			Sales			(Decrease)			(Decrease)
Revenue	$	52,877		100	%	$	52,376			100	%	$	501			1	%
Cost of revenue		21,390		40			23,180			44			(1,790	)		(8	)
Gross profit		31,487		60			29,196			56			2,291			8
Operating expenses
Sales and marketing		11,494		22			12,654			24			(1,160	)		(9	)
Research and development		4,252		8			3,159			6			1,093			35
General and administrative		9,864		18			8,153			16			1,711			21
Other operating costs		—		—			250			—			(250	)		(100	)
Legal and other related		—		—			7,786			15			(7,786	)		(100	)
Total operating expenses		25,610		48			32,002			61			(6,392	)		(20	)
Income (loss) from operations		5,877		12			(2,806	)		(5	)		8,683			309
Interest and other income, net		243		—			334			1			(91	)		(27	)
Provision (benefit) for income taxes		1,972		4			(11,179	)		(21	)		13,151			(118	)
Net income	$	4,148		8	%	$	8,707			17	%	$	(4,559	)		(52	)%

Euromedix filed a request for a procedural calendar in the case pending before the Commercial Court of Leuven regarding the termination of the business relationship on July 11, 2002. On December 13, 2005, the Commercial Court of Leuven decided in an interim decision that the termination of the relationship is not governed by Belgian law, but Californian law and allowed the parties to file further submissions in order to substantiate the claims under Californian law. Euromedix has appealed the ruling of the Commercial Court of Leuven and the appeal will be initiated at a hearing on September 21, 2007 before the First Chamber of the Court of Appeal of Brussels.

~~Revenue. Our total revenue increased 1% to $52.9~~ITEM ~~million in fiscal year 2005 from $52.~~4 ~~million in~~: SUBMISSION ~~fiscal~~OF ~~year~~MATTERS ~~2004~~TO ~~due~~A ~~primarily~~VOTE toOF ~~increased~~SECURITY sales of single-use test cassettes, which was offset by decreased sales in the first quarter of fiscal year 2005 due to our decision to eliminate quarter end discounts on large volume purchases by its distribution partners. Revenue for our LDX analyzer decreased 18% in fiscal year 2005. The revenue decline was attributable to a promotion earlier in the year in which certain end-users were provided a free LDX when they purchased a predetermined number of single-use test cassettes from our distribution partners. HOLDERS

~~Revenue for our GDX analyzer and related single-use test cartridges decreased 33% in fiscal year 2005~~None. The decline in GDX and related product revenue related to our decision to de-emphasize those products in order to focus on our lipid and products under development and business in light of Medicare reimbursement for cholesterol and diabetes screening, which can be performed on the LDX.

Domestic revenue for fiscal year 2005 increased $0.6 million, or 1% to $45.6 million from $45.0 million in fiscal year 2004. On October 1, 2004, we increased our domestic list price for all of our LDX related products by 3%, which increased domestic LDX revenue by approximately $750,000. Most of the increase in domestic revenue related to revenue from single-use test cassettes which increased $1.8 million, or 5%, to $39.1 million for fiscal year 2005 from $37.3 million for fiscal year 2004. Revenue for the LDX analyzer decreased $0.9 million, or 33%, to $1.9 million for fiscal year 2005 from $2.8 million for fiscal year 2004. Additionally, domestic revenue for our GDX analyzer and related single-use test cartridges decreased $0.6 million, or 26%, to $1.6 million for fiscal year 2005 from $2.2 million for fiscal year 2004. The decline in GDX and related product revenue related to our decision to de-emphasize those products in order to focus on our lipid and pending products and business in light of Medicare reimbursement for cholesterol and diabetes screening which can be performed on the LDX. 34

International revenue decreased 2% in fiscal year 2005 from fiscal year 2004. The decrease was primarily related to a reduction of orders from pharmaceutical companies in Latin America. International revenue is primarily to related pharmaceutical promotional programs which tend to occur in irregular patterns and are difficult to forecast. Most of the decline related to the sale of single-use test cassettes, which decreased 3% in fiscal year 2005. This was offset by LDX revenue which increased 21% for the same period. Additionally, international revenue for our GDX and related products decreased 57% in fiscal year 2005. PART II

ITEM 5: MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND 35 ISSUER PURCHASES OF EQUITY SECURITIES

~~Table~~Our common ofstock ~~Contents~~is quoted on the NASDAQ Stock Market LLC under the symbol “CTEC.” On March 30, 2007, the last reported sale price for our common stock on the NASDAQ Stock Market LLC was $17.24 per share. The following table sets forth the quarterly high and low trading prices for our common stock as reported by the NASDAQ Stock Market LLC for the periods indicated.

Cost of Revenue. Cost of revenue includes direct labor, direct material, overhead and royalties. Our cost of revenue decreased $1.8 million, or 8%, to $21.4 million in fiscal year 2005 from $23.2 million in fiscal year 2004. As a percentage of sales, the gross margins were 60% and 56% for fiscal year 2005 and fiscal year 2004, respectively. The improvement in gross margin related to the shift in product mix toward single-use cassettes, which are our highest margin products. Factory spending decreased 2% for fiscal year 2005 compared to fiscal year 2004. In addition, inventory scrap decreased by $1.0 million due to improvements in the manufacturing process and controls, which improved the yield during the production of single-use test cassettes. A 3% price increase on domestic LDX and related products, increased margins by approximately $750,000 or 1%.

	High		Low
FISCAL YEAR 2006
First Quarter	$	11.71	$	7.95
Second Quarter	11.89		9.47
Third Quarter	11.00		7.99
Fourth Quarter	13.19		9.29
FISCAL YEAR 2007
First Quarter	$	14.11	$	12.09
Second Quarter	13.02		10.67
Third Quarter	19.00		12.16
Fourth Quarter	19.35		15.97

WeAs ~~have licensed certain technology used in some~~ of ~~our products. One ongoing royalty agreement~~March 30, ~~which expires in calendar year 2006~~2007, ~~requires us to pay a royalty of 2% on net~~ ~~sales~~there ofwere ~~single use test cassettes. In December 2003~~15,564,749 shares ~~as part~~ of a ~~settlement~~our ~~agreement~~common ~~with~~stock ~~Roche,~~issued weand ~~entered into another~~outstanding ~~royalty~~and ~~agreement~~held ~~that~~by ~~applies~~approximately to124 ~~only~~holders ~~the HDL portion~~ of ~~cholesterol~~ ~~test cassettes we sell~~record. ~~This~~We ~~agreement~~estimate ~~was~~that ~~effective as~~there ~~of December 1, 2003 and expires on December 3,~~are ~~2013.~~approximately ~~Royalty spending in fiscal year 2005 increased by $1 million~~5,500 orbeneficial ~~80%,~~owners ~~from fiscal year 2004 due to the agreement with Roche relating to HDL products. Royalty payments are charged to cost~~ of ~~revenue~~our ascommon ~~incurred~~stock.

~~Operating Expenses~~ Dividend Policy

~~Sales~~We ~~and~~have ~~Marketing. Sales~~never ~~and~~declared ~~marketing~~or ~~expenses~~paid ~~include~~cash ~~salaries,~~dividends ~~commissions,~~on ~~bonuses,~~our ~~travel~~common ~~and expenses~~stock ~~for outside services related to marketing programs. Sales~~ and ~~marketing~~do ~~expenses~~not ~~decreased~~anticipate ~~$1.2 million,~~paying ~~or 9%,~~cash todividends ~~$11.5 million~~in ~~for~~the ~~fiscal~~foreseeable ~~year 2005 from $12~~future.~~7 million~~ ~~for~~We ~~fiscal~~currently ~~year~~expect ~~2004.~~to Aretain ~~decline~~future ~~of $1.3 million in product marketing expenses~~earnings, ~~including~~ ~~product~~if ~~sample~~any, ~~advertising~~for ~~and~~use ~~market~~in ~~research, was~~ the ~~primary reason~~operation ~~for the decrease. Additionally, travel costs decreased by $337,000. This was partially offset by wages, commissions~~ and ~~related~~ ~~costs~~expansion ~~which~~of ~~increased~~our bybusiness ~~$479,000~~ and ~~employee~~do ~~costs,~~not ~~including~~anticipate ~~recruiting~~paying ~~and~~any ~~relocation,~~cash ~~which~~dividends ~~increased~~in ~~by $225,000.~~the Asforeseeable ~~a percent of total revenue, sales and marketing expenses were 22% and 24% for fiscal year 2005 and fiscal year 2004, respectively~~future.

~~Research~~Equity ~~and Development. Research and~~Compensation development expenses include salaries, bonuses, professional consulting service expenses, supplies and depreciation of capital equipment. Research and development expenses increased $1.1 million, or 35%, to $4.3 million for fiscal year 2005 from $3.2 million for fiscal year 2004. The increased spending related primarily to higher headcount and associated wages, benefits and allocated facilities, which were connected to new product development. Outside consultants costs related to new product development also increased. As a percent of total revenue, research and development expenses increased to 8% for fiscal year 2005 from 6% for fiscal year 2004. Plans

~~General~~The ~~and Administrative. General and administrative expenses include compensation, benefits and expenses for outside professional services, including~~ information ~~services, legal and accounting. General and~~required ~~administrative~~by ~~expenses~~this ~~increased~~item ~~$1.7 million,~~regarding orequity ~~21%,~~compensation ~~to $9.9 million~~plans ~~for~~is ~~fiscal~~incorporated ~~year~~by ~~2005 from $8.2 million~~reference ~~for~~under ~~fiscal~~the ~~year~~section ~~2004.~~entitled ~~This increase was primarily attributable~~Equity toCompensation aPlan Information ~~$836,000 increase~~ contained in ~~costs~~our ~~associated~~proxy ~~with~~statement ~~outside professional services and consulting, including accounting support, which primarily related to compliance cost~~ for ~~the Sarbanes-Oxley~~our ~~Act~~2007 ofannual ~~2002.~~meeting Additionally, bonuses and other benefit related costs increased $1.2 million relating to obtaining management goals, higher benefit cost structure and increased headcount. This increase was offset by lower insurance premiums including directors and officers’ liability insurance premiums, which decreased $328,000. As a percent of ~~total~~ ~~revenue, general and administrative expenses increased to 18% for fiscal year 2005 from 16% for fiscal year 2004~~shareholders.

Other Operating Costs. For fiscal year 2004, other operating costs were $250,000, with no corresponding costs for fiscal year 2005. This cost related to the write-off of an option to purchase a patent which we determined no longer had an economic value. 35

~~Litigation~~Stock ~~and Other Related. Our litigation~~Performance and other related expenses included professional consulting fees, court related costs and other fees relating to Roche litigation. These costs were $7.8 million in fiscal year 2004 with no corresponding expense in fiscal year 2005. These costs are related to our settlement with Roche in connection with ongoing patent infringement litigation. Pursuant to the settlement agreement, which serves as a Graph

Notwithstanding any statement to the contrary in any of our previous filings with the SEC, the following information relating to the 36price performance of our Common Stock shall not be deemed “filed” with the SEC or “Soliciting Material” under the Securities Exchange Act of 1934, as amended, or subject to Regulation 14A or 14C, or to liabilities of Section 18 of the Exchange Act except to the extent we specifically request that such information be treated as soliciting material or to the extent we specifically incorporate this information by reference.

~~Table~~The graph below matches Cholestech Corporation’s cumulative 5-year total shareholder return on common stock with the cumulative total returns of ~~Contents~~the NASDAQ Composite index and the NASDAQ Medical Equipment index. The graph tracks the performance of a $100 investment in our common stock and in each of the indexes (with the reinvestment of all dividends) from 3/31/2002 to 3/31/2007.

basis for the dismissal of all patent litigation between us and Roche on a worldwide basis, we made a lump sum payment of $7.0 million to Roche on December 30, 2003.

3/02

3/03

3/04

3/05

3/06

3/07

Cholestech Corporation

100.00

45.55

49.25

56.41

72.92

96.48

NASDAQ Composite

100.00

71.63

109.32

109.98

131.49

138.22

NASDAQ Medical Equipment

100.00

91.68

140.11

147.32

180.00

188.44

~~Interest~~The ~~and Other Income, Net. Interest~~stock ~~income~~price ~~and~~performance ~~other~~included ~~income, net reflects income from the investment of cash balances and marketable securities, net of expenses. Interest and other income, net, decreased 27% to $243,000~~ in ~~fiscal~~ ~~year~~this ~~2005~~graph ~~from~~is ~~$334,000~~not innecessarily ~~fiscal~~indicative ~~2004. Loss from the sale~~ of ~~marketable securities was $18,000 during fiscal year~~ ~~2005~~future ~~compared~~stock toprice ~~a gain of $121,000 in fiscal year 2004.~~ performance

Income Taxes. For fiscal year 2005, we recorded a provision for income taxes of $2.0 million for an effective tax rate of 32.2%. The effective tax rate is less than the applicable federal and state tax rates due to a benefit relating to a California manufacturers’ investment credit and research and development credits. The income tax benefit of $11.2 million recorded in fiscal year 2004, primarily related to the release of the valuation allowance previously established for our net operating losses. As of March 25, 2005, we had NOL carryforwards of $42.6 million available to reduce future taxable income for federal income tax purposes and $2.7 million for state tax purposes. 36

~~Liquidity and~~ITEM 6: SELECTED ~~Capital~~FINANCIAL ~~Resources~~ DATA

The following selected ~~Cash~~financial ~~flow~~data ~~information~~should be read in conjunction with our financial statements and notes thereto and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” The following selected statement of operations data for the ~~two~~fiscal years ended March 30, 2007, March 31, 2006, and March 25, 2005 ~~was~~and the selected balance sheet data as ~~follows~~of (March 30, 2007 and March 31, 2006 are derived from, and qualified by reference to, the audited financial statements included elsewhere in ~~thousands):~~this Annual Report on Form 10-K. The selected statement of operations data for the fiscal year ended March 26, 2004 and March 28, 2003 and the balance sheet data as of March 25, 2005, March 26, 2004 and March 28, 2003 have been derived from our audited financial statements not included in this Annual Report. These historical results are not necessarily indicative of the results of operations to be expected from any future period.

	Mar 31,				Mar 25,
	Year Ended March 31,(1)
	2006				2005
	2007			2006			2005		2004			2003
Cash, cash equivalents, and marketable securities	$	42,676			$	33,468
	(In thousands, except per share data)
Net cash provided by operating activities		10,718				10,242
Statement of Operations Data:
Net cash used in investing activities		(9,478	)			(11,432	)
Revenue	$	69,526		$	64,093		$	52,877	$	52,376		$	48,541
Net cash provided by financing activities		1,617				2,992
Cost of revenue	23,042			23,902			21,390		23,180			20,424
Net increase in cash and cash equivalents	$	2,857			$	1,802
Gross profit	46,484			40,191			31,487		29,196			28,117
Operating expenses:
Sales and marketing	14,785			13,036			11,494		12,654			11,737
Research and development	6,280			7,553			4,252		3,159			2,722
General and administrative	13,718			11,230			9,864		8,153			7,008
Other operating costs	—			—			—		250			—
Litigation and other related	—			—			—		7,786			307
Total operating expenses	34,783			31,819			25,610		32,002			21,774
Income (loss) from operations	11,701			8,372			5,877		(2,806		)	6,343
Interest and other income, net	2,158			923			243		334			438
Income (loss) before taxes	13,859			9,295			6,120		(2,472		)	6,781
Provision (benefit) for income taxes(2)	4,453			3,661			1,972		(11,179		)	(3,934		)
Income from continuing operations	9,406			5,634			4,148		8,707			10,715
Loss from discontinued operations	—			—			—		—			(1,377		)
Loss from sale of discontinued operations	—			—			—		—			(4,445		)
Net income	$	9,406		$	5,634		$	4,148	$	8,707		$	4,893
Income from continuing operations per share:
Basic	$	0.62		$	0.38		$	0.29	$	0.63		$	0.79
Diluted	$	0.61		$	0.38		$	0.29	$	0.61		$	0.76
Loss from discontinued operations per share:
Basic	$	0.00		$	0.00		$	0.00	$	0.00		$	(0.43	)
Diluted	$	0.00		$	0.00		$	0.00	$	0.00		$	(0.41	)
Net income per share:
Basic	$	0.62		$	0.38		$	0.29	$	0.63		$	0.36
Diluted	$	0.61		$	0.38		$	0.29	$	0.61		$	0.35
Shares used to compute net income per share(3):
Basic	15,106			14,687			14,295		13,922			13,551
Diluted	15,468			15,013			14,472		14,235			14,077

We have financed our operations primarily through the sale of equity securities, including employee stock option exercises, and net cash provided by operations. In addition, we have available a $4.0 million revolving bank line of credit agreement which was renewed in September 2005 and will expire in September 2008. While the agreement is in effect, we are required to deposit assets with a collective value, as defined in the line of credit agreement, equivalent to no less than 100% of the outstanding principal balance. Amounts outstanding under the line of credit bear interest at either our choice of 0.5% below the bank’s prime rate or 1.00% above the LIBOR rate, depending on the payment schedule. We did not borrow under this line of credit during fiscal year 2006. As a result, there were no limitations on our deposited assets. 37

Cash Provided by Operating Activities. The net cash provided by operations increased $0.5 million to $10.7 million for fiscal year 2006. Net cash provided by operations was primarily attributable to net income of $5.6 million and $6.2 million of non-cash adjustments, including depreciation and deferred taxes. In addition, inventories decreased $1.1 million while accounts receivable, prepaid expenses and other current and long-term assets increased $1.2 million. Accounts payable and accrued expenses decreased $1.5 million.

	Year Ended March 31,(1)
	2007			2006			2005			2004			2003
	(In thousands)
Balance Sheet Data:
Cash, cash equivalents and marketable securities and long term marketable securities	$	62,452		$	42,676		$	33,468		$	23,602		$	26,081
Working capital	63,025			37,290			33,578			23,986			22,579
Total assets	100,701			80,702			74,121			63,230			52,012
Accumulated deficit	(9,692		)	(19,098		)	(24,732		)	(28,880		)	(37,587		)
Shareholders’ equity	94,215			74,132			66,592			57,278			44,728

~~The~~(1) Our ~~net~~fiscal ~~cash~~year ~~provided~~is bya ~~operations increased $11.4~~52-53 ~~million~~week toperiod ~~$10.2 million~~ending ~~for~~on ~~fiscal~~the ~~year~~last ~~2005~~Friday in March. ~~Net~~Fiscal ~~cash~~year ~~provided~~2007 ~~by operations~~referenced ~~was~~in ~~primarily~~this Annual ~~attributable~~Report toon ~~net~~From ~~income~~10-K consisted of ~~$4.1~~ 52 ~~million~~weeks. ~~and~~Fiscal ~~$4.9 million~~year 2006 consisted of ~~non-cash~~53 ~~adjustments~~weeks and fiscal years 2005, ~~including~~ ~~depreciation~~2004 and ~~deferred~~2003 ~~taxes.~~referenced ~~Accounts~~in ~~receivable~~this ~~decreased~~Annual ~~$1.4 million~~Report ~~due~~on toForm 10-K aconsisted ~~more~~of ~~consistent~~52 weeks. For ~~distribution~~convenience, ofwe ~~revenue~~have ~~within~~indicated ~~the~~in this Annual Report on Form 10-K that our fiscal year ~~related~~ends on March 31 and refer to the fiscal year ending ~~end~~March 30, of2007 ~~quarter~~as ~~end~~fiscal ~~discounts~~year to2007, ~~distribution~~March 31, ~~partners.~~2006 ~~This~~as ~~was~~fiscal year ~~offset~~2006, byMarch 25, a2005 ~~$2.2 million~~as ~~increase~~fiscal inyear ~~inventory~~2005, ~~due~~March 26, to2004 as fiscal ~~anticipation~~year of2004, ~~increased~~and ~~sales~~the ~~volumes~~fiscal year ending March 28, 2003 as fiscal year 2003.

~~Cash~~(2) Benefit ~~Used~~for inincome ~~Investing Activities. Investing~~taxes ~~activities~~in ~~resulted~~fiscal inyears ~~the~~2004 ~~net~~and ~~use~~2003 ofincludes a $910.52 million ~~of cash during fiscal year 2006. Spending on additional manufacturing~~ and ~~computer equipment, facilities improvements and software~~ ~~accounted for~~ $24.62 million ~~of capital expenditures~~, ~~as well as an additional $500~~respectively,~~000~~ ~~for~~gain from a ~~license~~net ~~fee.~~deferred ~~Net~~income ~~purchases~~tax ofbenefit ~~marketable~~which ~~securities~~resulted ~~during~~from the ~~year~~reversal ~~used~~of ana ~~additional $6.4 million~~portion inof ~~cash.~~the ~~During~~valuation ~~fiscal year 2007, we intend to~~allowance ~~invest~~previously ~~approximately~~established ~~$4.9 million~~for indeferred ~~capital~~tax ~~purchases of manufacturing equipment~~assets, ~~office~~primarily ~~and~~net ~~computer~~operating ~~equipment and tenant improvements~~losses.

(3) See Note 1 of Notes to Financial Statements for an explanation of the shares used to compute net 37 income per share.

~~Table of Contents~~38

~~Investing~~Item ~~activities resulted in the net use of $11~~7.~~4 million~~ ofMANAGEMENT’S ~~cash~~DISCUSSION ~~during~~AND ~~fiscal~~ANALYSIS ~~year~~OF ~~2005.~~FINANCIAL ~~Spending~~CONDITION ~~on additional~~AND ~~manufacturing~~RESULTS ~~equipment,~~OF ~~facilities improvements and software accounted for $3.1 million of capital improvements, as well as an $8.3 million net purchase of marketable securities during the year.~~ OPERATIONS

~~Cash Provided by Financing Activities.~~ Introduction

Management’s ~~Cash~~discussion ~~provided~~and byanalysis ~~financing~~of ~~activities~~financial ~~for~~condition ~~fiscal~~and ~~years~~results ~~2006~~of ~~and~~operation, or ~~2005~~MD&A, ~~relate~~is provided as a supplement to the ~~issuance~~accompanying financial statements and footnotes contained in Item 15 of ~~common~~this ~~stock~~report ~~pursuant~~and toprovides ~~the~~an ~~employee~~understanding ~~stock~~of ~~incentive~~our results of operation, financial condition and ~~employee~~changes ~~stock~~in financial ~~purchase~~condition. ~~plans~~This discussion contains forward-looking statements. These ~~During~~statements ~~fiscal~~are ~~years~~based ~~2006~~on our current expectations, assumptions, estimates and projections ~~2005~~about weour ~~raised~~business ~~$1.6 million~~and our industry, and involve known and unknown risks, uncertainties and ~~$3.0 million~~other factors that may cause our or our industry’s results, ~~respectively~~levels of activity, performance or achievement to be materially different from ~~the~~any ~~two~~future ~~programs.~~results, ~~The~~levels of activity, performance or ~~amount~~achievements ~~raised~~expressed or implied in or contemplated by the ~~future~~forward-looking statements. ~~will~~Our ~~depend~~actual onresults and the ~~market~~timing ~~value~~ of selected events could differ materially ~~our~~from ~~common~~those ~~stock,~~anticipated ~~the~~in ~~prices~~these offorward-looking ~~the~~statements ~~incentive~~as ~~options~~a ~~and~~result ~~the~~of ~~purchase~~selected ~~price~~factors, ~~relating~~including tothose ~~the~~set ~~employee~~forth ~~stock~~in ~~purchase~~“Item 1A: ~~plan.~~Risk Factors” beginning on page 20 in this document. MD&A is organized as follows:

· Overview. This section provides a general description ~~Contractual Obligations~~ and recent history of our business.

~~The~~· Results ~~following~~of ~~summarizes~~operations. This ~~our~~section ~~contractual~~provides ~~obligations as of~~our ~~March 31,~~analysis ~~2006,~~ and ~~the~~outlook ~~effect~~for ~~such~~the ~~obligations~~significant ~~are expected~~line toitems ~~have~~ on our ~~liquidity~~statements ~~and cash flow in future~~of ~~periods is (in thousands):~~ operations.

	Payments Due by Period
							More than
	Less than 1 Year		1-3 Years		3-5 Years		5 Years		Total
Operating lease obligations(1)	$	1,115	$	1,767	$	1,940	$	2,899	$	7,721
Purchase obligations		104		65		—		—		169
Total	$	1,219	$	1,832	$	1,940	$	2,899	$	7,890

· Liquidity and capital resources. This section provides an analysis of our liquidity and cash flows, as well as a discussion of our commitments that existed as of March 30, 2007.

~~(1)~~· Critical accounting policies and estimates. This section ~~represents~~discusses ~~the~~those ~~minimum~~accounting ~~payments~~policies ~~due~~that ~~under~~both ~~lease~~are ~~obligations~~considered important to our financial condition and results of operations, and require us to exercise subjective or complex judgments in their application. In addition, all of our significant accounting policies, including our critical accounting policies, are summarized in Note 1 to our financial statements.

· Recent Weaccounting ~~expect~~pronouncements. This ~~that~~section ~~cash~~describes ~~generated~~the ~~from our projected revenue,~~issuance ~~existing cash, cash equivalents~~ and ~~marketable~~effects ~~securities and proceeds from the exercise~~ of ~~employee~~new ~~stock~~accounting ~~options will enable us to maintain our current and planned core operations for at least the next 12 months~~pronouncements. Excluding the Roche settlement in fiscal year 2004, we have achieved positive net cash provided by operations for fiscal years 2001 through 2006, and we expect to continue to generate cash from operations for the foreseeable future.

In our efforts to grow, we are looking to acquire technologies which could complement our current product offering. However, should we acquire such technologies we may need to use a significant amount of cash which could cause us to need to raise funds from debt or equity offerings. In the event that we would need additional financing for the operation of our business, we can draw upon our existing $4.0 million line of credit which would require us to maintain cash and investments as collateral. However, we may be required to finance any additional requirements through additional equity, debt financing or credit facilities. We may not be able to obtain additional financings or credit facilities, or if these funds are available, they may not be available on satisfactory terms. Overview

We are a medical device company that develops, manufactures and markets products that perform diagnostic testing at sites ~~Off-Balance~~outside of traditional hospital and clinical laboratories to assist in the ~~Sheet~~assessment ~~Arrangements~~of the risk of heart disease, diabetes and certain liver diseases and in the monitoring of therapy to treat those diseases. Our products are sold worldwide. Our primary market is the physician laboratory market, which consists of approximately 106,000 sites that are registered with the Centers for Medicare & Medicaid Services (“CMS”), approximately 54,000 of which are registered to perform only tests that have been waived under CLIA.

WeOur docorporate ~~not~~headquarters is ~~have~~located ~~any~~in ~~off-balance~~Hayward, ~~sheet~~California. ~~arrangements~~All ~~that~~of ~~have~~our manufacturing, orresearch, regulatory and administrative activities are ~~reasonably~~conducted ~~likely~~at tothis ~~have,~~location. We sell our products through a ~~current~~worldwide ornetwork ~~future~~of ~~effect~~over on85 ~~our~~distributors. We have ~~financial~~21 ~~condition,~~regional ~~changes~~sales inmanagers ~~financial~~who ~~condition,~~coordinate ~~revenues~~and orwork with our distribution ~~expenses,~~partners ~~results~~to identify and promote sales of ~~operations,~~our ~~liquidity,~~products. ~~capital~~We ~~expenditures~~also employ 13 field ortechnical ~~capital~~service ~~resources~~representatives ~~that~~who are ~~material~~responsible tofor ~~investors.~~field customer service and customer retention initiatives within our existing installed base of products.

38 Recent Developments

~~Table~~On June 4, 2007, Cholestech, Inverness Medical Innovations, Inc., a Delaware corporation (“Inverness”), and Iris Merger Sub, Inc., a California corporation and wholly owned subsidiary of ~~Contents~~

~~Quarterly Financial Data~~ 39

	Quarter Ended
	Mar. 31,		Dec. 23,		Sept. 23,		June 24,		Mar. 25,		Dec. 24,		Sept. 24,		June 25,
	2006		2005		2005		2005		2005		2004		2004		2004
	(In thousands, except share data) (Unaudited)
Revenue	$	17,577	$	16,165	$	15,286	$	15,065	$	15,214	$	14,573	$	13,537	$	9,553
Gross profit		11,224		10,054		9,320		9,593		9,323		8,802		7,813		5,549
Net income (loss)	$	2,105	$	321	$	1,616	$	1,592	$	1,810	$	1,679	$	1,005	$	(345	)
Earnings (loss) per share:
Basic	$	0.14	$	0.02	$	0.11	$	0.11	$	0.13	$	0.12	$	0.07	$	(0.02	)
Diluted	$	0.14	$	0.02	$	0.11	$	0.11	$	0.12	$	0.12	$	0.07	$	(0.02	)

Inverness (“Merger Sub”), entered into an Agreement and Plan of Reorganization (the “Merger Agreement”), pursuant to which Cholestech and Inverness will combine their businesses through a merger of Cholestech and Merger Sub (the “Merger”). The completion of the Merger is subject to various closing conditions, including obtaining the approval of Cholestech shareholders and receiving antitrust approvals (including under the Hart-Scott-Rodino Antitrust Improvements Act). The Merger is intended to qualify as a reorganization for federal income tax purposes.

At the effective time of the Merger (the “Effective Time”), by virtue of the Merger and without any action on the part of the ~~Critical~~holder of any capital stock of Cholestech, each share of common stock of ~~Accounting~~Cholestech ~~Policies~~issued and outstanding immediately prior to the Effective Time will be converted into the right to receive 0.43642 (the “Exchange Ratio”) of a share of common stock of Inverness (each full share, an “Inverness Share”).

~~Our~~In ~~discussion~~the ~~and~~Merger, ~~analysis~~each ofoption ~~our~~to ~~financial~~purchase ~~condition~~shares ~~and~~of ~~results~~Cholestech ofcommon ~~operations~~stock ~~are~~granted ~~based~~under ~~upon~~employee ~~our~~and ~~financial~~director ~~statements, which~~stock ~~have~~plans ~~been~~of Cholestech ~~prepared~~that inis ~~accordance~~outstanding ~~with~~as ~~accounting principles~~of ~~generally~~immediately ~~accepted~~prior into the ~~United~~Effective ~~States~~Time, whether ofvested ~~America. The~~or ~~preparation~~unvested, ofshall ~~financial~~be ~~statements~~converted ~~requires~~into ~~management~~a right to acquire ~~make~~Inverness ~~estimates~~Shares ~~and~~on ~~judgments~~the ~~that~~same ~~affect~~terms ~~the~~and ~~reported~~conditions ~~amounts~~as ofwere applicable to such ~~assets~~option ~~and~~prior ~~liabilities,~~to ~~revenue~~the ~~and~~Effective ~~expenses~~Time, ~~and~~provided ~~disclosures~~that at the ~~date~~number of Inverness Shares receivable and the ~~financial~~exercise ~~statements.~~price Onof anthe ~~ongoing~~option ~~basis,~~shall webe adjusted to ~~evaluate~~reflect ~~our~~the ~~estimates,~~Exchange ~~including~~Ratio. ~~those~~All ~~related~~other toCholestech ~~accounts~~equity-based awards ~~receivable,~~outstanding ~~inventories~~as ~~and~~of ~~income~~the ~~taxes.~~Effective WeTime ~~use~~will ~~authoritative pronouncements,~~remain ~~historical~~in ~~experience~~effect ~~and~~but ~~other~~will ~~assumptions as~~be ~~the~~denominated ~~basis~~in ~~for~~Inverness ~~making~~Shares, ~~estimates.~~with ~~Actual~~applicable ~~results~~adjustments ~~could~~to ~~differ~~reflect ~~from~~the ~~these~~Exchange ~~estimates~~Ratio.

WeThe ~~believe~~Boards ~~the~~of ~~following~~Directors ~~critical accounting policies affect our~~of ~~more~~Cholestech ~~significant judgments~~ and ~~estimates~~Inverness ~~used~~have inapproved the ~~preparation of~~Merger ~~our~~and ~~financial~~the ~~statements~~Merger Agreement.

Results of ~~Revenue Recognition~~ Operations

WeComparison ~~recognize revenue from product sales when there is pervasive~~of ~~evidence~~Fiscal ~~that~~Years anEnded ~~arrangement exists~~March 30, ~~title~~2007 ~~has transferred to our customers, the price is fixed~~ and ~~determinable and collection is reasonably assured. Provisions for discounts to customers~~March 31, returns or other adjustments are recorded as a reduction of revenue and provided for in the same period that the related product sales are recorded based upon analyses of historical discounts and returns. We recognize revenue associated with service contracts upon completion of the services to be performed under contract when all obligations are satisfied, and collection is reasonably assured. If all conditions to recognize revenue are not met, we are required to defer revenue recognition. 2006

Allowance for Doubtful Accounts

	Fiscal Year Ended
	March 30, 2007						March 31, 2006						Amount of				Percentage
				% of						% of			Increase				Increase
	Amount			Revenue			Amount			Revenue			(Decrease)				(Decrease)
Revenue		$	69,526		100	%		$	64,093		100	%		$	5,433			8	%
Cost of revenue		23,042			33			23,902			37			(860		)		(4	)
Gross profit		46,484			67			40,191			63			6,293				16
Operating expenses
Sales and marketing		14,785			21			13,036			20			1,749				13
Research and development		6,280			9			7,553			12			(1,273		)		(17	)
General and administrative		13,718			20			11,230			18			2,488				22
Total operating expenses		34,783			50			31,819			50			2,964				9
Income from operations		11,701			17			8,372			13			3,329				40
Interest and other income, net		2,158			3			923			1			1,235				134
Provision for income taxes		4,453			6			3,661			6			792				22
Net income		$	9,406		14	%		$	5,634		9	%		$	3,772			67	%

WeRevenue. Our ~~maintain~~total anrevenue ~~allowance~~increased ~~for~~8% ~~doubtful accounts based primarily~~to on$69.5 million ~~analysis~~in offiscal ~~historical~~year ~~trends~~2007 ~~and~~from ~~experience~~$64.1 million Wein ~~review~~fiscal ~~the~~year ~~allowance~~2006 ~~for~~due ~~doubtful~~primarily ~~accounts~~to ~~monthly.~~increased ~~Past~~sales ~~due~~of ~~balances~~single-use ~~over~~test cassettes which ~~90 days~~increased ~~and~~$5.5 ~~over~~million, aor ~~specified~~10% ~~amount~~to ~~are~~$59.4 ~~reviewed individually~~million ~~for~~from ~~collectibility~~$53.9 Ifmillion. ~~the~~In addition, ~~financial~~revenue ~~condition~~for of our ~~customers~~LDX ~~were~~analyzer toincreased ~~deteriorate~~$299,000, ~~resulting~~or 9% to $3.5 million in anfiscal ~~impairment~~year ~~of their~~2007 ~~ability~~from to$3.2 ~~make~~in ~~payments,~~fiscal ~~additional~~year ~~allowances~~2006, ~~may~~as beour strong ~~required,~~international ~~which~~sales ~~could~~of ~~adversely~~the ~~affect~~LDX ~~our~~analyzer ~~operating~~were ~~results.~~offset by a decrease in domestic ~~The~~analyzer ~~allowance~~sales. Revenue for ~~doubtful~~our ~~accounts~~GDX ~~was~~analyzer ~~$198,000~~and related single-use test cartridges and accessories decreased $~~173~~416,000, asor 6% in fiscal year 2007. The ofdecline ~~March 31,~~in ~~2006~~GDX and ~~March 25,~~related ~~2005,~~product ~~respectively.~~revenue related to our continued focus on our core LDX business.

~~Inventory Valuation~~ 40

WeDomestic ~~state~~revenue ~~inventories~~for atfiscal ~~the~~year ~~lower~~2007 ofincreased $4.1 million, ~~cost~~ or ~~market,~~8% ~~cost~~to ~~being determined~~$60.2 million ~~using~~from ~~standard~~$56.1 ~~costs~~million ~~which~~in ~~approximates~~fiscal year 2006. Most of the ~~first-~~ increase in, domestic revenue related to revenue from ~~first~~single-~~out~~use ~~(FIFO)~~test ~~method.~~cassettes Wewhich ~~establish~~increased ~~provisions~~$4.6 million, ~~for~~or ~~excess~~10%, to ~~obsolete~~$52.5 million ~~and~~for ~~unusable~~fiscal ~~inventories~~year ~~after~~2007 ~~evaluation~~from of$47.9 ~~historical~~million for fiscal year ~~sales~~2006. Revenue for the LDX analyzer decreased $186,000, ~~forecasted~~or ~~sales~~7%, ~~product~~to $2.3 million ~~expiration~~for ~~and~~fiscal ~~current inventory~~year ~~levels~~2007 from $2.5 million Iffor ~~the~~fiscal ~~market~~year ~~value~~2006. We ofexpect ~~our~~domestic ~~products~~LDX ~~decline, the~~related ~~demand~~revenue for ~~our~~fiscal ~~products~~year ~~decline,~~2008 orto ifincrease adue ~~significant amount~~to the release of ~~material~~new ~~were~~test tocassettes ~~become~~and ~~unusable~~increased ~~our~~testing ~~operating~~on ~~results~~our ~~could~~expanding beinstalled ~~adversely affected~~base. ~~The~~Additionally, ~~inventory~~domestic ~~reserve~~revenue ~~was~~for ~~$144,000~~our GDX analyzer and related single-use test cartridges decreased $~~429~~136,000, asor of10%, ~~March~~to $1.2 million for fiscal year 2007 from $1.3 ~~31,~~million for fiscal year 2006. The decline in GDX and ~~March 25,~~related ~~2005,~~product revenue related to our decision to de-emphasize those ~~respectively~~products in order to focus on our core LDX business.

International revenue increased $1.3 million, or 16%, to $9.3 million in fiscal year 2007 from $8.0 million in fiscal year 2006. 39International revenue is primarily related to pharmaceutical promotional programs which tend to occur in irregular patterns and are difficult to forecast. Most of the revenue increase resulted from single-use test cassettes which increased $891,000, or 15%, to $6.9 million in fiscal year 2007 from $6.0 million in fiscal year 2006. Additionally, international revenue for our LDX Analyzer increased $485,000, or 66%, to $1.2 million in fiscal year 2007 from $736,000 in fiscal year 2006. The increases were offset by a decrease in accessories of $158,000, or 18%, to $699,000 in fiscal year 2007 from $857,000 in fiscal year 2006.

~~Table~~Cost of Revenue. Cost of ~~Contents~~revenue includes direct labor, direct material, overhead and royalties. Our cost of revenue decreased 4% to $23.0 million for fiscal year 2007 from $23.9 million for fiscal year 2006. As a percentage of revenue, the gross margins were 67% and 63% for fiscal year 2007 and fiscal year 2006, respectively. The improvement in gross margin related to higher average selling prices and the continued shift in product mix toward single-use cassettes, which are our highest margin products. In addition, continued efficiencies in the manufacturing process and the expiration of a royalty agreement in March 2006 which previously required us to pay a royalty of 2% on net sales of single-use test cassettes have contributed to the margin increase. The increase was offset by $492,000 in stock-based compensation expense recognized in accordance with SFAS 123(R). During fiscal year 2008, we anticipate factory spending will continue to increase at a rate lower than the increase in unit production as we continue to improve manufacturing efficiency through increased production and cost control.

We have licensed certain technology used in some of our products. One royalty agreement, which expired ~~Income~~in March 2006, required us to pay a royalty of 2% on net sales of ~~Taxes~~single-use test cassettes. In December 2003, as part of a settlement agreement with Roche, we entered into another royalty agreement that applies to only the HDL portion of cholesterol test cassettes we sell. This agreement was effective as of December 1, 2003 and expires on December 3, 2013. Royalty payments are charged to cost of revenue as incurred.

WeOperating use the asset and liability method of accounting for income taxes, which requires the recognition of deferred tax liabilities and assets for the expected future tax consequences of temporary differences between the financial reporting and income tax bases of assets and liabilities. We continually review our deferred tax asset to determine if a valuation allowance is required, primarily based on its estimates of future taxable income. Changes in our assessment of the need for a valuation allowance could give rise to a valuation allowance and an expense in the period of the change. Expenses

Sales and Marketing. Sales ~~Stock~~and marketing expenses include salaries, commissions, bonuses, expenses for ~~Based~~outside ~~Compensation~~services, marketing programs and travel expenses. Sales and marketing expenses increased $1.7 million, or 13%, to $14.8 million for fiscal year 2007 from $13.0 million for fiscal year 2006. The increase is mainly attributable to $558,000 increased compensation related expenses due to higher headcount and $632,000 in stock-based compensation recognized in accordance with SFAS 123(R). Additionally, travel expenses, marketing expenses and consulting fees of $487,000 contributed to the overall increase during fiscal year 2007. As a percent of total revenue, sales and marketing expenses were 21% and 20% for fiscal year 2007 and 2006, respectively. We expect that our sales and marketing expenses will remain consistent as a percentage of revenue in fiscal year 2008.

We account for stock-based employee compensation arrangements in accordance with provisions of APB Opinion No. 25, Accounting for Stock Issued to Employees (“APB 25”) and comply with the disclosure provision of Statement on Financial Accounting Standards, “SFAS”, No. 123, Accounting for Stock-based Compensation (“SFAS 123”) as amended by SFAS No. 148, Accounting for Stock-based Compensation Transition and Disclosure. The pro forma disclosure of the difference between compensation expense included in net income and the related cost measured by the fair value method is presented in Note 1 to the financial statements included in this Annual Report on Form 10-K. If we were to include the cost of stock-based employee compensation in the financial statements, our operating results would decline based on the fair value of the stock-based employee compensation. The fair market value used to determine the amount of compensation is based on several estimates including expected stock volatility, expected life of grant and expected employee turnover. 41

Research and Development. Research ~~Recent~~and development expenses include salaries, bonuses, professional consulting ~~Accounting~~service ~~Pronouncements~~expenses, supplies and depreciation of capital equipment. Research and development expenses decreased $1.3 million, or 17%, to $6.3 million for fiscal year 2007 from $7.6 million for fiscal year 2006. The decrease was mainly attributable to $2.5 million of costs related to the Boule transaction in the prior year. The decrease was offset by increased spending related to laboratory supplies costs, which consists of cassettes used for testing and chemicals, which increased $513,000 primarily due to the impending launch of our Lipid/ALT test cassette. Compensation related expenses increased $341,000 due to higher headcount and $230,000 in stock-based compensation recognized in accordance with SFAS 123(R). Additionally, consulting fees of $193,000 contributed to the increase during fiscal year 2007. As a percent of total revenue, research and development expenses were 9% and 12% for fiscal year 2007 and 2006, respectively. We expect that our research and development expenses will remain consistent as a percentage of revenue in fiscal year 2008.

General Inand ~~November~~Administrative. General and ~~2004,~~administrative ~~the~~expenses ~~Financial~~include ~~Accounting~~compensation, ~~Standards~~benefits ~~Board~~and expenses for ~~(“FASB”)~~outside ~~issued~~professional ~~SFAS No. 151~~services, ~~“Inventory~~ ~~Costs — an~~including ~~amendment~~information ofservices, ~~ARB~~legal and Noaccounting. ~~43”~~ ~~(“SFAS 151”),~~General ~~which~~and isadministrative ~~the result~~expenses ofincreased ~~its~~$2.5 million, ~~efforts~~or 22%, to ~~converge U~~$13.S.7 ~~accounting~~million ~~standards~~ for ~~inventories~~fiscal ~~with~~year ~~International~~2007 ~~Accounting~~from ~~Standards~~$11. ~~SFAS~~2 ~~151~~million ~~requires~~for fiscal ~~idle~~year ~~facility~~2006. Compensation related expenses, ~~freight,~~increased ~~handling costs~~$2.0 ~~and~~million ~~wasted~~mainly due ~~material~~to ~~(spoilage)~~$1.6 ~~costs~~million toin bestock-based compensation recognized ~~as current~~in ~~period~~accordance ~~charges~~with SFAS 123(R). ItAdditionally, ~~also~~legal ~~requires~~expenses ~~that~~and ~~allocation~~consulting fees of $534,000 ~~fixed~~contributed ~~production overheads~~ to the ~~cost~~overall ofincrease ~~conversion~~during befiscal ~~based~~year ~~on the~~2007. ~~normal~~As ~~capacity~~a percent of total ~~the~~revenue, ~~production~~general ~~facilities.~~and ~~SFAS 151 is~~administrative ~~effective~~expenses ~~for~~were ~~inventory~~20% ~~costs~~and ~~incurred~~18% ~~during~~for fiscal ~~years~~ ~~beginning~~year ~~after~~2007 ~~June 15~~and fiscal year 2006, ~~2005~~respectively. We ~~do not~~ expect ~~this standard~~that toour ~~have~~general aand administrative ~~material~~expenses ~~impact~~will ondecrease ~~our~~slightly ~~financial~~as ~~position, results~~a percentage of ~~operations~~revenue orin fiscal ~~cash~~year ~~flows~~2008.

Interest Inand ~~December~~Other ~~2004~~Income, ~~the FASB issued SFAS No~~Net. ~~123~~ Interest ~~(revised~~income ~~2004),~~and ~~“Share-Based~~other ~~Payment” (“SFAS 123(R)”) which requires the measurement of all employee share-based payments to employees~~income, ~~including~~reflects ~~grants of~~income ~~employee~~from ~~stock options, using a fair-value-based method and~~ the ~~recording~~investment of ~~such~~cash ~~expense in our statements of~~balances ~~income.~~and Inmarketable ~~March 2005~~securities, ~~the~~net ~~SEC~~of ~~released Staff Accounting Bulletin No~~expenses. ~~107,~~ ~~“Share-Based~~Interest ~~Payment” (“SAB No. 107”)~~income ~~relating~~increased to134% ~~the adoption of~~to ~~SFAS 123(R)~~$2.2 ~~Beginning~~million in ~~the first quarter of~~ fiscal year 2007, wefrom ~~will~~$923,000 ~~adopt~~in ~~SFAS 123(R)~~fiscal ~~under the modified prospective transition method using the Black-Scholes pricing model~~2006. ~~Under~~The ~~the~~increase ~~new standard, our estimate of compensation~~was ~~expense~~primarily ~~will~~attributable ~~require~~to aan ~~number~~increase ofin ~~complex~~cash and ~~subjective assumptions~~marketable ~~including~~securities ~~our~~and ~~stock price volatility, employee~~an ~~exercise~~increase ~~patterns~~in ~~(expected~~interest ~~life~~rates ofduring ~~the options), future forfeitures and related tax effects. During the first quarter of~~ fiscal year 2007~~, we will begin recording the fair value of our share-based compensation in our financial statements in accordance with Statement of Financial Accounting Standards No~~. 123(R), “Share-Based Payment (Revised 2004).” Although the adoption of SFAS 123(R) will have no adverse impact to our balance sheet and cash flows, it will adversely affect our net profit (loss) and earnings (loss) per share.

InIncome ~~October~~Taxes. For ~~2005~~fiscal year 2007, ~~the~~we ~~FASB~~recorded ~~issued~~a provision ~~Financial~~for ~~Statement~~income taxes of ~~Position (“FSP”) FAS~~$4.5 ~~123(R)-2,~~million ~~“Practical Accommodation~~for toan ~~the~~effective ~~Application~~tax rate of 32.1%. ~~Grant~~The ~~Date~~effective astax ~~Defined~~rate ~~in FAS 123(R)”~~represents ~~(“FSP~~the ~~123(R)-2”).~~federal ~~FSP~~tax ~~123(R)-2 provides~~at ~~guidance~~the onstatutory rate and the ~~application~~average ofstatutory ~~grant~~rate ~~date~~for asall ~~defined~~jurisdictions in which we are subject to ~~SFAS No~~income tax. ~~123(R).~~ In ~~accordance~~addition, ~~with~~the ~~this~~effective ~~standard~~tax ~~a grant~~rate ~~date~~in offiscal anyear ~~award~~2007 ~~exists~~was positively ifimpacted a) by the ~~award~~completion isof ~~unilateral~~a research tax credit study that ~~grant~~resulted ~~and~~in b) the ~~key~~recognition ~~terms~~of an additional $304,000 in tax credits and ~~conditions~~a $348,000 ofincrease in the ~~award~~deferred ~~are expected~~tax toasset beas ~~communicated~~a toresult anof ~~individual~~the ~~recipient~~change ~~within~~in athe ~~relatively~~applicable ~~short~~federal ~~time~~statutory ~~period~~rate. ~~from~~The ~~the~~effective ~~date~~tax ofrate ~~approval~~was 39.4% Wein ~~will~~fiscal ~~adopt~~year ~~this~~2006. ~~standard~~We ~~when~~expect weto ~~adopt~~use ~~FAS 123~~net operating loss carryforwards (R“NOL”) ~~beginning~~and inother tax carryforwards to the ~~first~~extent ~~quarter~~taxable ofincome is earned in fiscal year 2008 and beyond. As of March 30, 2007, ~~and~~ we dohad ~~not~~NOL ~~expect~~carryforwards itof ~~will~~$20.6 million ~~have~~available ato ~~material~~reduce ~~impact~~future ontaxable ~~our~~income ~~financial~~for ~~position,~~federal ~~results~~income oftax ~~operations or cash flows~~purposes.

In November 2005, the FASB issued FSP FAS 123(R)-3, “Transition Election Related to Accounting for Tax Effects of Share-Based Payment Awards” (“FSP 123(R)-3”). FSP 123(R)-3 provides an elective alternative method 42

Comparison of 40 Fiscal Years Ended March 31, 2006 and March 25, 2005

	Fiscal Year Ended
	March 31, 2006					March 25, 2005					Amount of			Percentage
			% of					% of			Increase			Increase
	Amount		Sales			Amount		Sales			(Decrease)			(Decrease)
Revenue	$	64,093		100	%	$	52,877		100	%		$	11,216		21	%
Cost of revenue	23,902			37		21,390			40			2,512			12
Gross profit	40,191			63		31,487			60			8,704			28
Operating expenses
Sales and marketing	13,036			20		11,494			22			1,542			13
Research and development	7,553			12		4,252			8			3,301			78
General and administrative	11,230			18		9,864			18			1,366			14
Total operating expenses	31,819			50		25,610			48			6,209			24
Income from operations	8,372			13		5,877			12			2,495			42
Interest and other income, net	923			1		243			—			680			280
Provision for income taxes	3,661			6		1,972			4			1,690			86
Net income	$	5,634		9	%	$	4,148		8	%		$	1,486		36	%

~~that~~Revenue. Our ~~establishes~~total arevenue ~~computational~~increased ~~component~~21% to $64.1 million ~~arrive~~in atfiscal ~~the~~year 2006 from $52.9 million in fiscal year ~~beginning~~2005 ~~balance~~due ofprimarily ~~the~~to ~~accumulated~~increased ~~paid~~sales of single-inuse ~~capital~~test ~~pool~~cassettes. In ~~related~~addition, torevenue ~~employee~~for ~~compensation~~our ~~and~~LDX ~~simplified~~analyzer ~~method~~remained torelatively consistent with ~~determine~~fiscal ~~the~~year ~~subsequent~~2005, ~~impact~~as our strong domestic sales of the ~~accumulated~~LDX ~~paid-in~~analyzer ~~capital~~were offset ~~pool~~by ~~employee~~a ~~awards~~decrease ~~that~~in ~~are~~international ~~fully~~analyzer ~~vested~~sales. ~~and~~Revenue ~~outstanding~~for ~~upon~~our GDX analyzer and ~~the~~related ~~adoption~~single-use oftest ~~SFAS No~~cartridges decreased 6% in fiscal year 2006. ~~123(R).~~ WeThe decline ~~are~~in ~~currently~~GDX and related product revenue related to our continued focus on ~~evaluating~~our ~~this~~core ~~transition~~LDX ~~method~~business.

InDomestic ~~May~~revenue ~~2005,~~for ~~the~~fiscal ~~FASB~~year ~~issued~~2006 ~~SFAS No~~increased $10.5 ~~154~~million, ~~“Accounting~~ ~~Changes~~or ~~and~~23% ~~Error~~to ~~Corrections” (“SFAS No~~$56.1 ~~154).~~million ~~SFAS No~~from $45. ~~154~~6 ismillion ain fiscal ~~replacement~~year 2005. Most of ~~Accounting~~the ~~Principles~~increase ~~Board~~in ~~Opinion~~domestic ~~No. 20 and~~revenue ~~SFAS No. 3.~~related ~~SFAS No. 154~~to ~~provides~~revenue from ~~guidance~~single-use ontest ~~the~~cassettes ~~accounting~~which ~~for~~increased ~~and~~$8.8 million, ~~reporting~~or of23%, ~~accounting~~to ~~changes~~$47.9 million ~~and~~for ~~error~~fiscal ~~corrections.~~year It2006 ~~establishes~~from ~~retrospective application~~$39.1 million asfor ~~the~~fiscal ~~required~~year 2005. ~~method~~Revenue for ~~reporting~~the aLDX ~~change~~analyzer ~~in accounting~~increased ~~principle~~$0. ~~SFAS~~6 ~~No. 154~~million, ~~provides~~or ~~guidance~~34%, to $2.5 million for ~~determining~~fiscal ~~whether~~year ~~retrospective~~2006 ~~application~~from of$1.9 million afor ~~change~~fiscal inyear ~~accounting~~2005. ~~principle~~We isexpect ~~impracticable~~domestic ~~and~~LDX ~~for~~related ~~reporting~~revenue afor ~~change when~~fiscal ~~retrospective~~year ~~application~~2007 isto ~~impracticable.~~increase ~~SFAS No. 154~~due ~~also~~to ~~addresses~~ the ~~reporting~~release of ~~a correction~~new oftest ancassettes ~~error~~and byincreased ~~restating~~testing ~~previously~~on ~~issued~~our ~~financial~~installed ~~statements.~~base ~~SFAS No~~due ~~154~~to isthe ~~effective~~screening of lipids for ~~accounting~~the ~~changes~~Medicare population. Additionally, ~~and~~domestic ~~corrections~~revenue offor ~~errors~~our ~~made~~GDX inanalyzer ~~fiscal~~and ~~years~~related ~~beginning~~single-use ~~after~~test cartridges ~~December~~decreased $0.3 15million, ~~2005~~or 19%, to $1.3 million Wefor dofiscal ~~not~~year ~~believe~~2006 from ~~that~~$1.6 million itfor ~~will~~fiscal ~~have~~year a2005. The decline in GDX and related ~~material~~product ~~impact~~revenue onrelated to our ~~financial~~decision ~~position,~~to ~~results~~de-emphasize ofthose ~~operations~~products in order orto ~~cash~~focus ~~flows~~on our core LDX business.

InInternational ~~November~~revenue ~~2005,~~decreased ~~the~~10% ~~FASB~~in ~~issued~~fiscal ~~FSP~~year ~~FAS 115-1 and FAS 124-1, “The~~2006 ~~Meaning~~from ~~of Other-Than-Temporary Impairment~~fiscal ~~and~~year ~~Its~~2005. ~~Application~~International torevenue ~~Certain Investments” (“FSP 115-1 and 124-1”), which clarifies when an investment~~ is ~~considered~~primarily ~~impaired,~~related ~~whether the impairment is~~to ~~other-than-temporary, and~~pharmaceutical ~~the~~promotional ~~measurement~~programs ofwhich antend ~~impairment loss. It also includes accounting considerations subsequent~~ to ~~the~~occur ~~recognition~~in ofirregular ~~the~~patterns ~~other-than-temporary impairment~~ and ~~requires~~are ~~certain~~difficult ~~disclosures~~to ~~about unrealized losses that have not been recognized as other-than-temporary impairments~~forecast. ~~FSP~~Sales ~~115-1~~of ~~and 124~~single-1use ~~are~~test ~~effective~~cassettes, ~~for all reporting~~which ~~periods~~increased ~~beginning~~25% ~~after~~in ~~December 15,~~fiscal ~~2005.~~year ~~At March 31,~~ 2006, wewere ~~have~~offset noby ~~unrealized~~a ~~investment~~45% ~~losses that~~decrease ~~had~~in ~~not been recognized as~~LDX ~~other-than-temporary impairments~~analyzer inrevenue ~~our available-~~for~~-sale securities.~~ Wethe dosame ~~not~~period. ~~anticipate~~Additionally, ~~that~~international ~~the~~revenue ~~implementation of~~for ~~these~~our ~~statements~~GDX ~~will~~and ~~have~~related aproducts ~~significant~~increased ~~impact~~56% onin ~~our~~fiscal ~~financial position,~~year ~~results of operations or cash flows~~2006.

~~ITEM~~Cost 7Aof Revenue. Cost ~~QUANTITATIVE~~of ~~AND~~revenue ~~QUALITATIVE~~includes ~~DISCLOSURES~~direct labor, ~~ABOUT~~direct ~~MARKET~~material, ~~RISK~~overhead and royalties. Our cost of revenue increased 12% to $23.9 million for fiscal year 2006 from $21.4 million for fiscal year 2005. The increase in cost of revenue related primarily to additional products shipped in support of the 21% increase in revenue during fiscal year 2006 over the prior fiscal year. As a percentage of sales, the gross margins were 63% and 60% for fiscal year 2006 and fiscal year 2005, respectively. The improvement in gross margin related to higher average selling prices and the continued shift in product mix toward single-use cassettes, which are our highest margin products. In addition, continued efficiencies in the manufacturing process contributed to the margin increase.

~~Quantitative Disclosures~~ 43

~~Our~~Operating ~~exposure to market risks is inherent in our operations, primarily to interest rates relating to our investment portfolio.~~ Expenses

Sales Weand ~~are~~Marketing. Sales and ~~subject~~marketing toexpenses ~~interest~~include ~~rate~~salaries, ~~risks~~commissions, onbonuses, ~~cash~~expenses for outside services, marketing programs and ~~cash~~travel expenses. Sales and marketing ~~equivalents~~expenses increased $1.5 million, ~~available~~or 13%, to $13.0 million for ~~sale~~fiscal year ~~marketable~~2006 ~~securities~~from ~~and~~$11.5 million ~~any future~~for ~~financing~~fiscal ~~requirements~~year 2005. ~~Interest~~The ~~rate~~increase ~~risks~~is ~~related~~mainly attributable to increased compensation for achievement of revenue goals. ~~marketable~~Additionally, ~~securities~~there ~~are~~was ~~managed~~increased byspending ~~managing~~for ~~maturities~~trade inshows ~~our~~and distributor relations ~~marketable~~during ~~securities~~fiscal ~~portfolio~~year 2006. As a percent of total revenue, sales and marketing expenses were 20% and 22% for fiscal year 2006 and 2005, respectively.

Research ~~Generally~~and weDevelopment. Research and ~~hold~~development ~~our~~expenses ~~marketable~~include ~~securities~~salaries, ~~until~~bonuses, ~~maturity.~~professional consulting ~~These~~service ~~securities~~expenses, ~~have~~supplies ~~maturity~~and ~~dates~~depreciation ~~that~~of docapital ~~not~~equipment. ~~exceed~~Research ~~fiscal~~and ~~year~~development ~~2008~~expenses ~~and~~increased ~~have~~$3.3 million, ~~predominately~~or ~~fixed~~78%, ~~interest~~to ~~rates~~$7.6 million for Wefiscal ~~have concluded~~year ~~that~~2006 ~~the~~from ~~income~~$4.3 million onfor ~~our~~fiscal ~~investments~~year ~~would~~2005. ~~not~~The beincreased ~~significantly~~spending ~~impacted~~related byprimarily ~~short~~to ~~term~~the ~~changes~~$2.5 million inpayment ~~interest~~to ~~rates. When~~Boule ~~the~~as ~~securities~~part ~~mature~~of the development and ~~the~~distribution ~~principal~~agreement isentered ~~reinvested,~~into ~~the~~in November 2005. ~~yield~~Additionally, ~~will~~a ~~reflect~~one-time ~~the~~severance ~~market~~payment ~~conditions~~to atthe ~~that~~former ~~time.~~VP of Development ~~Fluctuations~~contributed into ~~short-term~~the ~~interest~~increased ~~rates~~spending ~~may~~for ~~change~~fiscal ~~the~~year ~~fair market~~2006. ~~value~~As ofa ~~our~~percent ~~investments;~~of total ~~however~~revenue, asresearch ~~the~~and ~~marketable securities~~development ~~approach~~expenses ~~maturity,~~were ~~the~~12% ~~fair~~and ~~value~~8% ~~will~~for ~~approximate~~fiscal ~~our~~year ~~cost~~2006 ~~basis~~and 2005, respectively.

General Inand ~~fiscal~~Administrative. General and ~~year~~administrative ~~2005~~expenses weinclude ~~used~~compensation, ~~forward~~benefits ~~exchange~~and ~~contracts~~expenses ~~to manage~~for aoutside ~~portion~~professional ofservices, ~~the~~including ~~foreign~~information ~~currency~~services, ~~exposures~~legal ~~arising from~~and ~~inventory~~accounting. ~~purchases~~General and ~~accounts~~administrative ~~payable~~expenses ~~denominated~~increased in$1.4 million, ~~foreign~~or ~~currencies.~~14%, ~~There~~to ~~was~~$11.2 million nofor ~~gain~~fiscal oryear ~~loss~~2006 ~~recorded~~from in$9.9 million ~~the period~~for ~~from~~fiscal ~~hedge~~year ~~ineffectiveness~~2005. orThe increase resulted from ~~forecasted~~higher ~~transactions~~compensation norelated to ~~longer~~achievement ~~expected~~of tomanagement ~~occur.~~goals Weand doincreased ~~not~~headcount. ~~enter~~As ~~into~~a ~~foreign~~percent ~~exchange~~of total ~~forward~~revenue, ~~contracts~~general ~~for~~and ~~trading~~administrative ~~purposes.~~expenses Aswere of18% ~~March 31, 2006,~~for weboth ~~had~~fiscal noyear ~~outstanding~~2006 and ~~forward~~fiscal ~~contracts~~year 2005.

Interest and Other Income, Net. Interest 41income and other income, net reflects income from the investment of cash balances and marketable securities, net of expenses. Interest income increased 280% to $923,000 in fiscal year 2006 from $243,000 in fiscal 2005. The increase was primarily attributable to an increase in cash and marketable securities and an increase in interest rates during fiscal year 2006.

~~Table~~Income Taxes. For fiscal year 2006, we recorded a provision for income taxes of ~~Contents~~$3.7 million for an effective tax rate of 39.4%. The effective tax rate represents the federal tax at the statutory rate and the average statutory rate for all jurisdictions in which we are subject to income tax. The effective tax rate was 32.2% in fiscal year 2005 due to a benefit relating to a California manufacturers’ investment credit. We expect to use net operating loss carryforwards (“NOL”) and other tax carryforwards to the extent taxable income is earned in fiscal year 2007 and beyond. As of March 31, 2006, we had NOL carryforwards of $33.5 million available to reduce future taxable income for federal income tax purposes.

~~The~~Liquidity ~~following table presents the future principal cash flows or amount~~ and ~~related weighted average interest rates expected by~~ ~~year~~Capital ~~for our existing cash and cash equivalents, marketable securities and long-term marketable securities.~~ Resources

	Fiscal Year
	2007			2008			Total		Fair Value
	(In thousands)
Cash, cash equivalents	$	7,161		$	—		$	7,161	$	7,161
Short-term marketable securities	$	21,071			—		$	21,071	$	21,071
Weighted average interest rate		3.86	%		—			—		—
Long-term marketable securities	$	—		$	14,444		$	14,444	$	14,444
Weighted average interest rate		—			4.36	%		—		—

Cash flow information for the two years ended March 30, 2007 and March 31, 2006 was as follows (in thousands):

Qualitative Disclosures

	Mar 30, 2007			Mar 31, 2006
Cash, cash equivalents, and marketable securities	$	62,452		$	42,676
Net cash provided by operating activities	13,042			10,718
Net cash used in investing activities	(21,766		)	(9,478		)
Net cash provided by financing activities	8,124			1,617
Net increase (decrease) in cash and cash equivalents	$	(600	)	$	2,857

~~Our primary interest rate risk exposures relate to:~~ 44

•We ~~available~~have ~~for~~financed our operations primarily through the sale of equity securities, including employee stock option exercises, and net cash provided by operations. In fiscal year 2007, net proceeds from the issuance of common stock relating to the exercise of employee stock options were a significant component of our liquidity. In addition, we have available a $4.0 million revolving bank line of credit agreement which was renewed in September 2005 and will ~~fall~~expire in September 2008. While the agreement is in effect, we are required to deposit assets with a collective value, ifas ~~market~~defined ~~interest~~in ~~rates~~the ~~increase;~~line of ~~and~~credit •agreement, equivalent to no less than 100% of the ~~impact~~outstanding principal balance. Amounts outstanding under the line of credit bear interest at either our choice of 0.5% below the bank’s prime rate ~~movements~~or 1.00% above the LIBOR rate, depending on ~~our~~the ~~ability~~payment toschedule. ~~obtain~~We ~~adequate~~have ~~financing~~no tooutstanding borrowings ~~fund~~under ~~future~~this ~~operations~~line of credit at March 30, 2007. As a result, there were no limitations on our deposited assets.

Cash WeProvided ~~have~~by ~~the~~Operating ~~ability~~Activities. The tonet ~~hold~~cash aprovided ~~significant~~by ~~portion~~operations increased of$2.3 million ~~the~~to ~~fixed income~~$13.0 million ~~investments~~for ~~until~~fiscal ~~maturity~~year ~~and~~2007. Net ~~therefore~~cash ~~would~~provided ~~not~~by ~~expect~~operations was primarily attributable ~~the~~to ~~operating~~net ~~results~~income orof $9.4 million and $7.4 million of non-cash adjustments, ~~flows~~including todepreciation, bestock-based ~~affected~~compensation, totax abenefits ~~significant~~from ~~degree~~exercise byof ashare-based ~~sudden~~payment ~~change~~awards, inexcess ~~market~~tax ~~interest~~benefits ~~rates~~from onshare-based ~~our~~compensation ~~short~~and deferred taxes. In addition, inventories increased $1.6 million and ~~long~~accounts receivable, prepaid expenses and other current and long-term ~~marketable~~assets ~~securities~~increased ~~portfolio~~$2 million.

~~ITEM~~The 8net cash provided by operations increased $0.5 million ~~FINANCIAL~~to ~~STATEMENTS~~$10.7 million ~~AND~~for ~~SUPPLEMENTARY~~fiscal ~~DATA~~year 2006. Net cash provided by operations was primarily attributable to net income of $5.6 million and $6.2 million of non-cash adjustments, including depreciation and deferred taxes. In addition, inventories decreased $1.1 million while accounts receivable, prepaid expenses and other current and long-term assets increased $1.2 million. Accounts payable and accrued expenses decreased $1.5 million.

Cash ~~Our~~Used ~~financial~~in ~~statements~~Investing ~~and~~Activities. Investing ~~the~~activities ~~independent~~resulted ~~accountants’~~in ~~report~~the ~~appear~~net use of $21.8 million of cash during fiscal year 2007. Spending on additional ~~pages~~manufacturing F-and computer equipment, facilities improvements and software accounted for $1.5 million toof ~~F-23~~capital expenditures. Net purchases of ~~this~~marketable ~~Annual~~securities ~~Report~~during the year used an additional $20.3 million in ~~See~~cash. During fiscal year 2008, we intend to invest approximately ~~Item~~$4.0 15million ~~for~~in ancapital ~~index~~purchases of ~~financial~~manufacturing ~~statements~~equipment, office and ~~supplementary~~computer ~~data~~equipment and leasehold improvements.

~~ITEM~~Investing activities resulted in the net use of $9.5 million ~~CHANGES~~of INcash ~~AND~~during ~~DISAGREEMENTS~~fiscal ~~WITH~~year ~~ACCOUNTANTS~~2006. ONSpending ~~ACCOUNTING~~on ~~AND~~additional manufacturing ~~FINANCIAL~~and ~~DISCLOSURE~~computer equipment, facilities improvements and software accounted for $2.6 million of capital expenditures, as well as an additional $500,000 for a license fee. Net purchases of marketable securities during the year used an additional $6.4 million in cash.

Cash Provided by Financing ~~None~~Activities. Cash provided by financing activities for fiscal years 2007 and 2006, relate to the issuance of common stock pursuant to the employee stock incentive and employee stock purchase plans. During fiscal years 2007 and 2006 we raised $8.1 million and $1.6 million, respectively, from the two programs. The amount raised in the future will depend on the market value of our common stock, the prices of the incentive options and the purchase price relating to the employee stock purchase plan.

~~ITEM 9A. CONTROLS AND PROCEDURES~~45

~~Evaluation~~Contractual of Disclosure Controls and Procedures. Our principal executive and financial officers evaluated our disclosure controls and procedures (as defined in Exchange Act Rule 13a-15(e)) as of the end of the period covered by this Annual Report on Form 10-K. Based on that evaluation, our principal executive and financial officers concluded that our disclosure controls and procedures are effective to ensure that information required to be disclosed in reports that we file or submit under the Exchange Act is accumulated and communicated to our management, including our principal executive and financial officers as appropriate to allow timely decisions regarding required disclosures, and that such information is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms. Obligations

~~Changes~~The infollowing ~~Internal Control Over Financial~~summarizes ~~Reporting. There were no changes in~~ our ~~internal control~~contractual ~~over~~obligations ~~financial~~as ~~reporting~~of ~~during the quarter ended~~ March 3130, ~~2006~~2007, ~~that~~and ~~have~~the ~~materially~~effect ~~affected,~~such obligations or are ~~reasonably~~ ~~likely~~expected to ~~materially~~have ~~affect,~~on our ~~internal~~liquidity ~~control over~~and ~~financial~~cash ~~reporting.~~flow in future periods is (in thousands):

MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING

	Payments Due by Period
	Less than 1 Year			1-3 Years			3-5 Years			More than 5 Years			Total
Operating lease obligations(1)		$	570		$	1,197		$	1,272		$	3,567	$	6,606
Purchase obligations		49			16			—			—		65
Total		$	619		$	1,213		$	1,272		$	3,567	$	6,671

(1) This ~~Management~~represents is responsible for establishing and maintaining adequate internal control over financial reporting for Cholestech. Our internal control over financial reporting is designed to provide reasonable assurance regarding the ~~reliability~~ ofminimum ~~financial~~payments ~~reporting~~due ~~and~~under ~~the~~lease ~~preparation of financial statements for external purposes in accordance with generally accepted accounting principles~~obligations. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

We expect that cash generated from our projected revenue, existing cash, cash equivalents and marketable securities and proceeds 42from the exercise of employee stock options will enable us to maintain our current and planned core operations for at least the next 12 months. Excluding the Roche settlement in fiscal year 2004, we have achieved positive net cash provided by operations for fiscal years 2001 through 2007, and we expect to continue to generate cash from operations for the foreseeable future.

~~Table~~In our efforts to grow, we are looking to acquire technologies which could complement our current product offering. However, should we acquire such technologies we may need to use a significant amount of ~~Contents~~cash which could cause us to need to raise funds from debt or equity offerings. In the event that we would need additional financing for the operation of our business, we can draw upon our existing $4.0 million line of credit which would require us to maintain cash and investments as collateral. However, we may be required to finance any additional requirements through additional equity, debt financing or credit facilities. We may not be able to obtain additional financings or credit facilities, or if these funds are available, they may not be available on satisfactory terms.

~~To evaluate the effectiveness of internal control over financial reporting, as required by Section 404 of the Sarbanes~~Off-~~Oxley Act,~~Balance ~~management~~Sheet conducted an assessment, including testing, using the criteria in Internal Control — Integrated Framework, issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on their assessment, management concluded that we maintained effective internal control over financial reporting as of March 31, 2006, based on criteria in Internal Control — Integrated Framework issued by the COSO. Management’s assessment of the effectiveness of our internal control over financial reporting as of March 31, 2006, has been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in their report which is included herein. Arrangements

~~ITEM~~We ~~9B.~~do ~~OTHER~~not ~~INFORMATION~~have any off-balance sheet arrangements that have, or are reasonably likely to have, a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to investors.

Critical Accounting ~~None.~~ Policies and Estimates

Our discussion and analysis of our financial condition and results of operations are based upon our financial statements, which have been ~~PART III~~prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of financial statements requires management to make estimates and judgments that affect the reported amounts of assets and liabilities, revenue and expenses and disclosures at the date of the financial statements. On an ongoing basis, we evaluate our estimates, including those related to accounts receivable, inventories and income taxes. We use authoritative pronouncements, historical experience and other assumptions as the basis for making estimates. Actual results could differ from these estimates.

~~ITEM~~We ~~10.~~believe ~~DIRECTORS~~the ~~AND~~following critical ~~EXECUTIVE~~accounting ~~OFFICERS~~policies OFaffect ~~THE~~our ~~REGISTRANT~~more significant judgments and estimates used in the preparation of our financial statements.

~~The~~Revenue information required by this item concerning our directors is incorporated by reference from the sections captioned “Proposal One — Election of Directors” and “Section 16(a) Beneficial Ownership Reporting Compliance” contained in our Proxy Statement related to the 2006 Annual Meeting of Shareholders to be held August 16, 2006, to be filed by us within 120 days of the end of our fiscal year pursuant to General Instruction G(3) of Form 10-K (the “Proxy Statement”). Certain information required by this item concerning executive officers is set forth in Part I of this Annual Report under “Business — Executive Officers”. Recognition

~~ITEM~~We 11recognize revenue from product sales when there is pervasive evidence that an arrangement exists, title has transferred to our customers, the price is fixed and determinable and collection is reasonably assured. ~~EXECUTIVE~~Provisions ~~COMPENSATION~~for discounts to customers, returns and other adjustments are recorded as a reduction

The information required by this item is incorporated by reference from the section captioned “Executive Compensation and Other Matters” and “Corporate Governance” contained in our Proxy Statement. 46

~~ITEM~~of 12revenue and provided for in the same period that the related product sales are recorded based upon analyses of historical discounts and returns. ~~SECURITY~~We ~~OWNERSHIP~~recognize OFrevenue ~~CERTAIN~~associated with ~~BENEFICIAL~~services ~~OWNERS~~upon ~~AND~~completion ~~MANAGEMENT~~of ~~AND~~the ~~RELATED~~services ~~STOCKHOLDER~~to ~~MATTERS~~be performed under contract when all obligations are satisfied, and collection is reasonably assured. Generally terms of sale are FOB shipping point and revenue recognition at time of shipment. When the terms of sale are FOB receiving point, assuming that all other revenue recognition criteria have been met, revenue is recognized when the products have reached the destination point.

~~The~~We ~~information~~offer ~~required~~an byearly ~~this~~payment ~~item~~discount isto ~~incorporated by~~qualified ~~reference from the section captioned “Security Ownership of Certain Beneficial Owners and Management” and “Equity Compensation Plan Information” contained in our Proxy Statement~~customers.

~~ITEM~~We 13maintain a warranty allowance for the estimated amount of repairs or replacement cost of all products which are found to be defective. ~~CERTAIN~~Provisions ~~RELATIONSHIPS~~for ~~AND~~warranty ~~RELATED~~are ~~TRANSACTIONS~~provided for in the same period that the related product sales are recorded. The amount of allowance is based upon analyses of historical repairs and replacements, known improvements in design or changes in reliability.

We maintain an allowance for doubtful accounts based ~~The~~primarily ~~information~~on ~~required~~analysis byof ~~this~~historical ~~item~~trends isand ~~incorporated~~experience. byWe review its ~~reference~~allowance ~~from~~for ~~the~~doubtful ~~sections~~accounts ~~captioned~~monthly. ~~“Compensation Committee~~Past ~~Interlocks~~due balances over 90 days and ~~Insider~~over ~~Participation”~~a ~~and “Related~~specified ~~Party~~amount ~~Transactions”~~are ~~contained~~reviewed inindividually ~~our~~for ~~Proxy Statement~~collectibility.

~~ITEM~~Shipping 14and handling charges are invoiced to customers based on the amount of products sold. ~~PRINCIPAL~~Shipping ~~ACCOUNTANT~~and ~~FEES~~handling ~~AND~~fees ~~SERVICES~~are recorded at the time of revenue recognition, and are included in revenue.

We will from time to time ~~The~~provide ~~information~~free ~~required~~goods byto ~~this~~customers ~~item~~as issamples ~~incorporated~~for

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