e10vq

Impact of Adoption of SFAS No. 123R

The Company elected to adopt the modified prospective application method as provided by SFAS No. 123R. Under that transition method, compensation costs recognized in the three and six months ended June 30, 2006, include (a) compensation cost for all share-based payments granted prior to, but not yet vested as of January 1, 2006, based on the grant-date fair value estimated in accordance with the original provisions of SFAS No. 123, and (b) compensation costs for all share-based payments granted subsequent to January 1, 2006, based on the grant-date fair value estimated in accordance with the provisions of SFAS No. 123R.

In the three and six months ended June 30, 2006, we recognized compensation expense in connection with the adoption of FAS 123R of $0.9 million and $1.8 million, respectively. Diluted earnings per share was reduced by $0.03 and $0.05 for the three and six months ended June 30, 2006 as a result of the Company’s adoption of FAS 123R. As of June 30, 2006 the stock-based compensation capitalized as inventory was minimal.

As a result of adoption FAS 123R, the Company’s income before income taxes and net income for the three months ended June 30, 2006 are $0.7 million and $0.4 million lower, respectively, than if the Company had continued to account for share-based compensation under Opinion 25.

Equity Incentive Program

The Company’s equity incentive program is a long-term retention program that is intended to attract and retain qualified management and technical employees and align stockholder and employee interests. At June 30, 2006, the equity incentive program consisted of the 2004 Equity Incentive Plan (the 2004 Plan). Under the 2004 Plan, options, stock appreciation rights, stock purchase rights and restricted stock may be issued to employees, officers, directors, and consultants of Adeza. The 2004 Plan permits the grant of share options for up to 1,875,000 shares of common stock. The maximum number of shares shall be increased annually on January 1 of each year by a number of shares equal to the lesser of (a) three percent of the number of shares issued and outstanding on the immediately preceding December 31, (b) 525,000 Shares, and (c) a number of Shares set by the Board. The 2004 Plan provides that the exercise price for incentive stock options will be no less than 100% of fair value of Adeza’s common stock on the date of grant. Generally, these options vest ratably over four years and have a term of 10 years. No restricted stock, stock appreciation or purchase rights have been issued as of June 30, 2006.

The following table provides certain information with respect to the 2004 Plan, which was in effect as of June 30, 2006:

Number of Securities

Remaining Available

for Future Issuance

Under Equity

Number of

Compensation Plan

Securities to be

(Excluding

Issued upon

Weighted-Average

Securities

Exercise of

Exercise Price of

Reflected in

Outstanding Options

Column (a))

(a)

(b)

(c)

Equity compensation plan approved by security holders

1,633,408

9.26

2,486,091

The fair value of each option award is estimated on the date of grant using the Black-Scholes valuation model, consistent with the provisions of SFAS No. 123R, SEC SAB No. 107 and the Company’s prior period pro forma disclosures of net earnings, including stock-based compensation (determined under a fair value method as prescribed by SFAS No. 123). Expected volatilities used in 2006 are based on volatilities from the Company’s peer group, which is consistent with the technique the Company used prior to the adoption of SFAS No. 123R. Due to the Company’s short public trading history the Company determined that the use of a peer group is more reflective of market conditions and a better indicator of expected volatility than a historical volatility. The Company uses historical data to estimate the expected option forfeiture rate. The expected term of options granted is derived from analysis of the Company’s peer group and historical data. The risk-free rate

for periods within the contractual life of the option is based on a risk-free zero-coupon spot interest rate at the end of the reporting period. The Company has never declared or paid any cash dividends and does not presently plan to pay cash dividends in the foreseeable future.

The fair value of stock options granted to employees in the three and six months ended June 30, 2006 and June 30, 2005 was estimated at the date of grant using the Black-Scholes model using the following weighted-average assumptions:


	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2006			2005			2006			2005
Expected volatility		60	%		75	%		65	%		75	%
Risk-free interest rate		5.17	%		3.72	%		5.0	%		4.01	%
Expected term (in years)		5.0			4.0			5.0			4.0
Dividends		—			—			—			—

SFAS No. 123R requires the use of option pricing models that were not developed for use in valuing employee stock options. The Black-Scholes option-pricing model was developed for use in estimating the fair value of short-lived exchange traded options that have no vesting restrictions and are fully transferable. In addition, option-pricing models require the input of highly subjective assumptions, including the option’s expected life and the price volatility of the underlying stock.

The following table summarizes the combined activity under the equity incentive plans for the indicated periods:


							Weighted-		Weighted-Average		Aggregate
	Available			Options			Average		Remaining Contract		Intrinsic Value
	for Grant			Outstanding			Exercise Price		Term (in years)		(in thousands)
Balance at December 31, 2005		2,035,208			1,668,688		$	8.53		—		—

Shares authorized		521,290			—			—		—		—
Options granted		(85,600	)		85,600			17.28		—		—
Options exercised					(105,687	)		3.74		—		—
Options forfeited		15,193			(15,193	)		12.68		—		—


Balance at June 30, 2006		2,486,091			1,633,408		$	9.26		7.2	$	9,125


Vested and expected to vest at June 30, 2006					1,577,779		$	9.10		7.2	$	9,023


Exercisable at June 30, 2006					934,608		$	6.29		6.2	$	7,547

The aggregate intrinsic value in the table above represents the total pretax intrinsic value, based on the Company’s closing stock price of $14.02 as of June 30, 2006, which would have been received by the option holders had all option holders with in-the-money options exercised their options as of that date. Stock options that expired during the six months ended June 30, 2006 were minimal.

The weighted average grant date fair value of options granted during the three months ended June 30, 2006 was $8.29 per share. The total intrinsic value of options exercised during the three month period ended June 30, 2006 was approximately $0.4 million. The total cash received from employees as a result of stock option exercises during the three months ended June 30, 2006 was approximately $0.1 million. In connection with these exercises, the tax benefits realized by the Company for the three months ended June 30, 2006 was minimal.

The Company settles employee stock option exercises with newly issued common shares.

As of June 30, 2006, the unrecorded deferred stock-based compensation balance related to stock options was $5.3 million and will be recognized over an estimated weighted average amortization period of 1.4 years.

The Company makes quarterly assessments of the adequacy of its tax credit pool to determine if there are any deficiencies which require recognition in its condensed statements of operations.

8. PROVISION FOR INCOME TAXES

The Company recorded a provision for income taxes of $0.5 million for the three months ended June 30, 2006, related to federal and state taxes, compared to a provision for income taxes of $0.1 million for the three months ended June 30, 2005. The Company’s effective tax rate for the three months ended June 30, 2006 and 2005 was 50.0% and 5.3%, respectively. The Company recorded a provision for income taxes of $0.5 million for the six months ended June 30, 2006, related to federal and state taxes, compared to a provision for income taxes of $0.2 million for the six months ended June 30, 2005. The Company’s effective tax rate for the six months ended June 30, 2006 and 2005 was 50.0% and 5.3%, respectively. For the three months ended June 30, 2006 and 2005, the provision for income taxes is based on the Company’s annual effective tax rate in compliance with SFAS 109. The annual effective tax rate was calculated on the basis of the Company’s expected level of profitability that results in federal and state income taxes. To the extent the Company’s expected profitability changes during the year, the effective tax rate would be revised to reflect any changes in the projected profitability. For the three months ended June 30, 2006, the difference between the provision for income tax that would be derived by applying the statutory rate to the Company’s income before tax and the provision actually recorded is primarily due to the impact of non-deductible 123R stock option compensation expenses. For the three months ended June 30, 2005, the difference between the provision for income tax that would be derived by applying the statutory rate to the Company’s income before tax and the provision actually recorded is primarily due to the benefit of operating loss carryforwards that reduced the provision to federal alternative minimum tax and state income tax. Excluding the effects of FAS123R, the Company’s tax rate would be closer to the statutory rate.

The Company accounts for income taxes in accordance with SFAS No. 109, “Accounting for Income Taxes,” which requires that deferred tax assets and liabilities be recognized using enacted tax rates for the effect of temporary differences between the book and tax bases of recorded assets and liabilities. SFAS No. 109 also requires that deferred tax assets be reduced by a valuation allowance if it is more likely than not that some or all of the deferred tax assets will not be realized. The Company evaluates quarterly the realizability of its deferred tax assets by assessing its valuation allowance and, if necessary, the Company adjusts the amount of such allowance. The factors used to assess the likelihood of realization include the Company’s forecast of future taxable income and available tax planning strategies that could be implemented to realize the net deferred tax assets. The Company assessed its deferred tax assets at the end of 2005, as well as the end of the first and second quarters of 2006, and determined that it was more likely than not that the Company would be able to realize approximately $5,122,000 of net deferred tax assets based upon its forecast of future taxable income and other relevant factors. Changes to the realization of the net deferred tax assets would have an impact to the Company’s tax provision and in turn would affect net income.

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion of our financial condition and results of operations should be read in conjunction with the condensed financial statements and the notes thereto included in Item 1 of this Quarterly Report on Form 10-Q. Statements in this Management’s Discussion and Analysis of Financial Condition and Results of Operations and elsewhere in this quarterly report on Form 10-Q which express that we “believe,” “anticipate,” “expect” or “plan to” as well as other statements which are not historical fact, are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Examples of forward-looking statements include, without limitation, statements regarding expected financial results, tax rates and stock-based compensation expense, the expansion of products, markets and offerings and additional product indications. Actual events or results may differ materially as a result of the risks and uncertainties described herein and elsewhere including, but not limited to, those factors described under “Risk Factors” below and those described under “Business” set forth in Part I of our Annual Report on Form 10-K for the year-ended December 31, 2005.

BUSINESS OVERVIEW

We design, develop, manufacture and market innovative products for women’s health. Our initial focus is on reproductive healthcare, using our proprietary technologies to predict preterm birth and assess infertility. Our principal product is a patented diagnostic test FullTerm™, The Fetal Fibronectin Test, that utilizes a single-use, disposable cassette and is analyzed on our patented instrument, the TLi_IQ^® System. This FDA-approved product is designed to objectively determine a woman’s risk of preterm birth by detecting the presence of a specific protein, fetal fibronectin, in vaginal secretions during pregnancy. We began selling our single-use, disposable FullTerm™, The Fetal Fibronectin Test in 1999 and launched our second-generation system, the TLi_IQ^® System, in 2001. Sales of TLi_IQ^® Systems to hospital and clinical laboratories allow healthcare providers access to our FullTerm™, The Fetal Fibronectin Test, resulting in the potential for better patient care and for significant cost savings by avoiding unnecessary medical treatment. We have also submitted to the FDA a New Drug Application, or NDA, for Gestiva™ (17 alpha-hydroxyprogesterone caproate injection 250 mg/ml), our product candidate to prevent preterm birth in women who have a history of preterm delivery.

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

Recent Business Developments

Gestiva™

On May 4, 2006, we announced our submission of a New Drug Application, or NDA, with the FDA for Gestiva™, our product candidate to prevent preterm birth in women with a history of preterm birth. Gestiva is an injectable long-acting form of a naturally occurring progesterone. On June 5, 2006, we announced that our Gestiva NDA was granted priority review status by the FDA. A priority review designation set a six month goal date, which will be on October 20, 2006, for FDA response to the NDA. Priority review is granted by the FDA if the subject drug product, if approved, would be a significant improvement compared to marketed approved products in the treatment, diagnosis, or prevention of a disease. On July 6, 2006, we announced that our Gestiva NDA was accepted for filing by the FDA. We have also submitted an application to the FDA requesting Orphan Drug designation for Gestiva. The FDA Orphan Drug designation is reserved for promising new therapies being developed to treat life-threatening or very serious diseases that affect fewer than 200,000 people in the United States. On July 18, 2006, we announced that our Gestiva NDA will be reviewed by the Reproductive Health Drugs Advisory Committee to the FDA on August 29, 2006. At present, no drug product is approved by the FDA for the prevention of preterm birth in women who have a history of preterm delivery. If Gestiva is approved for marketing in the United States, we plan to use our existing sales force to market the product to the same physicians to whom we market FullTerm™, The Fetal Fibronectin Test, thereby leveraging our direct sales efforts.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

We prepare our financial statements in accordance with U.S. generally accepted accounting principles. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. Except as stated below regarding SFAS No. 123R, our critical accounting policies and estimates have not changed significantly from the critical accounting policies and estimates discussed in our Annual Report on Form 10-K for the year ended December 31, 2005.

Stock-Based Compensation

Beginning as of January 1, 2006 we account for our employee stock option plans under the provisions of SFAS No. 123R. SFAS No. 123R requires the recognition of the fair value of stock-based compensation in net income. The fair value of our stock options was estimated using a Black-Scholes option valuation model. This model requires the input of highly subjective assumptions and elections in adopting and implementing SFAS No. 123R, including expected stock price volatility and the estimated life of each award. The fair value of stock-based awards is amortized over the vesting period of the award. We have elected to use the straight-line method for awards granted after the adoption of SFAS No. 123R and continue to use a graded vesting method for awards granted prior to the adoption of SFAS No. 123R. We make quarterly assessments of the adequacy of our tax credit pool to determine if there are any deficiencies which require recognition in our condensed statements of operations. Prior to adoption of SFAS No. 123R, we accounted for our stock option plans under the provisions of Accounting Principles Board (APB) Opinion No. 25 “Accounting For Stock Issued to Employees” (APB No. 25) and Financial Accounting Standards Board (FASB) Interpretation No. 44, “Accounting for Certain Transactions Involving Stock Compensation – an Interpretation of APB Opinion No. 25” and made pro forma footnote disclosures as required by Statement of Financial Accounting Standards (SFAS) No. 148, “Accounting For Stock-Based Compensation – Transition and Disclosure”, which amends SFAS No. 123, “Accounting For Stock-Based Compensation”. Pro forma net income and pro forma net income per share disclosed in the footnotes to our condensed financial statements were estimated using a Black-Scholes option valuation model. For more information, see Note 7 in the Notes to the Consolidated Financial Statements, “Stock-Based Compensation.”

RESULTS OF OPERATIONS

Product Sales

Our product sales are derived primarily from the sale of our disposable FullTerm™, The Fetal Fibronectin Test. In addition, we derive a small portion of our revenues from the sale of TLi_IQ^® Systems and other consumables. We currently use distributors for sales outside of the United States and Canada. Our business has been in the past and may continue to be seasonal and is affected by customer ordering patterns, which may involve quarterly or semi-annual orders, as well as other factors which may cause quarterly variances in our sales. As a result, our sales may not increase in sequential quarters and our net income may fluctuate significantly.

The following is a summary of product sales for the three months and six months ended June 30, 2006 and June 30, 2005:


	Three Months Ended							Six Months Ended
	June 30,							June 30,
					Percent							Percent
(Dollars in thousands)	2006		2005		Change			2006		2005		Change
Product sales	$	13,029	$	10,634		22.5	%	$	23,822	$	20,244		17.7	%

The $2.4 million increase in product sales in the three months ended June 30, 2006, compared to the three months ended June 30, 2005 was entirely attributable to increased sales volume of our Fetal Fibronectin Test cassettes. The $3.6 million increase in product sales in the six months ended June 30, 2006, compared to the six months ended June 30, 2005 was primarily attributable to increased sales volume of our Fetal Fibronectin Test cassettes, which was partially offset by slight decreases in sales from other products.

Geographic sales information is based on the location of the end customer. The following is a summary of product sales by geographic region for the three months and six months ended June 30, 2006 and June 30, 2005:


	Three Months Ended									Six Months Ended
	June 30,									June 30,
							Percent									Percent
(Dollars in thousands)	2006			2005			Change			2006			2005			Change
United States	$	12,689		$	10,405			22.0	%	$	23,260		$	19,812			17.4	%
Percentage of total product sales		97.4	%		97.8	%					97.6	%		97.9	%

International	$	340		$	229			48.5	%	$	562		$	432			30.1	%
Percentage of total product sales		2.6	%		2.2	%					2.4	%		2.1	%

International sales, as well as sales in the United States, remained relatively consistent as a percentage of total product sales for the three and six months ended June 30, 2006 compared to the three and six months ended June 30, 2005. We expect international sales, as a percentage of total product sales, to remain relatively consistent for the remainder of the year ending December 31, 2006.

Cost of Product Sales

Our cost of product sales represents the cost of materials, direct labor and overhead associated with the manufacture of our products, and delivery charges, lab services and royalties. The following is a summary of cost of product sales for the three months and six months ended June 30, 2006 and June 30, 2005:


	Three Months Ended									Six Months Ended
	June 30,									June 30,
							Percent									Percent
(Dollars in thousands)	2006			2005			Change			2006			2005			Change
Cost of product sales	$	1,907		$	1,429			33.4	%	$	3,662		$	2,856			28.2	%
Percentage of product sales		14.6	%		13.4	%					15.4	%		14.1	%

The increase in cost of product sales in the three and six months ended June 30, 2006, compared to the three and six months ended June 30, 2005 was primarily due to the increase in sales volume over the respective periods and partially due to stock-based compensation expense associated with the adoption of SFAS No. 123R on January 1, 2006.

Royalties

We have certain royalty commitments associated with the shipment and licensing of certain products. Royalty costs are generally based on a dollar amount per unit shipped or a percentage of the underlying revenue. The following is a summary of royalty costs for the three months and six months ended June 30, 2006 and June 30, 2005:


	Three Months Ended									Six Months Ended
	June 30,									June 30,
							Percent									Percent
(Dollars in thousands)	2006			2005			Change			2006			2005			Change
Royalty costs	$	777		$	645			20.5	%	$	1,445		$	1,238			16.7	%
Percentage of product sales		6.0	%		6.1	%					6.1	%		6.1	%

The increase in royalty costs in the three and six months ended June 30, 2006, compared to the three and six months ended June 30, 2005 was primarily due to the increase in sales volume over the respective periods. As a percentage of product sales, royalty costs remained relatively consistent for the three and six months ended June 30, 2006 and 2005. Although royalty costs as a percentage of product sales is expected to fluctuate as it is dependent on several factors, including the level and type of sales and the level of allowed deductions, we believe royalty costs as a percentage of product sales will remain below 7.5% for the year ended December 31, 2006, assuming no new licenses involving royalties are required.

Gross Profit


	Three Months Ended									Six Months Ended
	June 30,									June 30,
							Percent									Percent
(Dollars in thousands)	2006			2005			Change			2006			2005			Change
Gross profit	$	11,122		$	9,205			20.8	%	$	20,160		$	17,388			15.9	%
Percentage of product sales		85.4	%		86.6	%					84.6	%		85.9	%

The decrease in gross margins, or gross profit as a percentage of sales, in the three and six months ended June 30, 2006, compared to the three months ended June 30, 2005, was primarily due to slight changes in average selling price and partially due to stock-based compensation expense associated with the adoption of SFAS No. 123R on January 1, 2006.

Sales and Marketing

Sales and marketing expenses consist primarily of sales and marketing personnel and sales force incentive compensation and costs related to travel, tradeshows, promotional materials and programs, advertising and healthcare provider education materials and events.


	Three Months Ended									Six Months Ended
	June 30,									June 30,
							Percent									Percent
(Dollars in thousands)	2006			2005			Change			2006			2005			Change
Sales and marketing expenses	$	7,416		$	4,787			54.9	%	$	13,461		$	9,512			41.5	%
Percentage of product sales		56.9	%		45.0	%					56.5	%		47.0	%

The $2.6 million increase in sales and marketing expenses in the three months ended June 30, 2006, compared to the three months ended June 30, 2005 was primarily attributable to (i) an increase of $1.5 million related to the expansion of our direct sales force and associated costs, (ii) an increase of $0.7 million in marketing expenses due to the timing of certain programs, and (iii) an increase of $0.4 million in stock-based compensation expense, primarily associated with the adoption of SFAS No. 123R on January 1, 2006.

The $3.9 million increase in sales and marketing expenses in the six months ended June 30, 2006, compared to the six months ended June 30, 2005 was primarily attributable to (i) an increase of $2.6 million related to the expansion of our direct sales force and associated costs, (ii) an increase of $0.8 million in stock-based compensation expense, primarily associated with the adoption of SFAS No. 123R on January 1, 2006, and (iii) an increase of $0.5 million in marketing expenses due to the timing of certain programs.

We expect our selling and marketing expenditures to increase as we continue our efforts to increase our market penetration and commence any marketing and selling efforts related to Gestiva. We also expect our employee related costs to increase, including stock-based compensation expense.

General and Administrative

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


	Three Months Ended									Six Months Ended
	June 30,									June 30,
							Percent									Percent
(Dollars in thousands)	2006			2005			Change			2006			2005			Change
General and administrative expenses	$	2,160		$	1,867			15.7	%	$	4,462		$	3,404			31.1	%
Percentage of product sales		16.6	%		17.6	%					18.7	%		16.8	%

The $0.3 million increase in general and administrative expenses in the three months ended June 30, 2006, compared to the three months ended June 30, 2005 was primarily attributable to (i) an increase of $0.4 million in costs associated with operating as a public company, including personnel costs, professional services related to audit and tax and other general costs, and (ii) an increase of $0.2 million in stock-based compensation expense, primarily associated with the adoption of SFAS No. 123R on January 1, 2006. This increase was partially offset by a decrease of $0.3 million in legal fees and facility costs.

The $1.1 million increase in general and administrative expenses in the six months ended June 30, 2006, compared to the six months ended June 30, 2005 was primarily attributable to (i) an increase of $0.9 million in costs associated with operating as a public company, including personnel costs, professional services related to audit and tax and other general costs, and (ii) an increase of $0.5 million in stock-based compensation expense, primarily associated with the adoption of SFAS No. 123R on January 1, 2006. This increase was partially offset by a decrease of $0.3 million in legal fees and facility costs.

We expect our general and administrative expenses to increase primarily related to continuously increasing costs associated with being a public company and anticipated increased headcount. We also expect our employee related costs to increase, including stock-based compensation expense.

Research and Development

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


	Three Months Ended									Six Months Ended
	June 30,									June 30,
							Percent									Percent
(Dollars in thousands)	2006			2005			Change			2006			2005			Change
Research and development expenses	$	1,600		$	1,213			31.9	%	$	3,273		$	2,077			57.6	%
Percentage of product sales		12.3	%		11.4	%					13.7	%		10.3	%

The increase in research and development expenses in the three and six months ended June 30, 2006, compared to the three and six months ended June 30, 2005, was primarily attributable to an increase in costs associated with our continued product development efforts, including costs related to Gestiva, our drug candidate for the prevention of preterm birth in women who have a history of preterm delivery.

We expect that our research and development costs will increase as a result of our continued product development efforts. We also expect our employee-related costs to increase, including stock-based compensation expense.

Interest Income

Interest income consists primarily of interest income generated from our investments in commercial paper, money market funds and repurchase agreements.


	Three Months Ended									Six Months Ended
	June 30,									June 30,
							Percent									Percent
(Dollars in thousands)	2006			2005			Change			2006			2005			Change
Interest income	$	1,128		$	593			90.2	%	$	2,122		$	1,073			97.8	%
Percentage of product sales		8.7	%		5.6	%					8.9	%		5.3	%

The increase in interest income in the three and six months ended June 30, 2006, compared to the three and six months ended June 30, 2005, was primarily attributable to an increase in the levels of cash and cash equivalents, as well as higher average interest rates.

Provision for Income Taxes


	Three Months Ended									Six Months Ended
	June 30,									June 30,
							Percent									Percent
(Dollars in thousands)	2006			2005			Change			2006			2005			Change
Provision for income taxes	$	537		$	102			426.5	%	$	543		$	183			196.7	%
Percentage of product sales		4.1	%		1.0	%					2.3	%		0.9	%

We recorded a provision for income taxes of $0.5 million for the three months ended June 30, 2006, related to federal and state taxes, compared to a provision for income taxes of $0.1 million for the three months ended June 30, 2005. Our effective tax rate for the three months ended June 30, 2006 and 2005 was 50.0% and 5.3%, respectively. We recorded a provision for income taxes of $0.5 million for the six months ended June 30, 2006, related to federal and state taxes, compared to a provision for income taxes of $0.2 million for the six months ended June 30, 2005. Our effective tax rate for the six months ended June 30, 2006 and 2005 was 50.0% and 5.3%, respectively. For the three months ended June 30, 2006 and 2005, the provision for income taxes is based on our annual effective tax rate in compliance with SFAS 109. The annual effective tax rate was calculated on the basis of our expected level of profitability that results in federal and state income taxes. To the extent our expected profitability changes during the year, the effective tax rate would be revised to reflect any changes in the projected profitability. As a result, the tax rate recorded for the three and six months ended June 30, 2006 may not be indicative of future tax rates. For the three months ended June 30, 2006, the difference between the provision for income tax that would be derived by applying the statutory rate to our income before tax and the provision actually recorded is primarily due to the impact of non-deductible 123R stock option compensation expenses. For the three months ended June 30, 2005, the difference between the provision for income tax that would be derived by applying the statutory rate to our income before tax and the provision actually recorded is primarily due to the benefit of operating loss carryforwards that reduced the provision to federal alternative minimum tax and state income tax. Excluding the effects of FAS123R, our tax rate would be closer to the statutory rate.

We account for income taxes in accordance with SFAS No. 109, “Accounting for Income Taxes,” which requires that deferred tax assets and liabilities be recognized using enacted tax rates for the effect of temporary differences between the book and tax bases of recorded assets and liabilities. SFAS No. 109 also requires that deferred tax assets be reduced by a valuation allowance if it is more likely than not that some or all of the deferred tax assets will not be realized. We evaluate quarterly the realizability of our deferred tax assets by assessing our valuation allowance and, if necessary, we adjust the amount of such allowance. The factors used to assess the likelihood of realization include our forecast of future taxable income and available tax planning strategies that could be implemented to realize the net deferred tax assets. We assessed our deferred tax assets at the end of 2005, as well as the end of the first and second quarters of 2006, and determined that it was more likely than not that we would be able to realize approximately $5,122,000 of net deferred tax assets based upon our forecast of future taxable income and other relevant factors. Changes to the realization of the net deferred tax assets would have an impact to our tax provision and in turn would affect net income.

LIQUIDITY AND CAPITAL RESOURCES

Since our inception, our operations have been primarily financed through public and private equity investments, working capital provided by our product sales, capital leases, and research and development contracts. Our cash and cash equivalents were $93.4 million as of June 30, 2006. All of our cash equivalents have original maturities of three months or less.

Our operating, investing and financing activities for the six months ended June 30, 2006 and June 30, 2005 are summarized as follows:


	Six Months Ended
	June 30,
(Dollars in thousands)	2006			2005
Net cash provided by operating activities	$	3,394		$	2,602
Net cash used in investing activities		(154	)		(117	)
Net cash provided by financing activities		395			356


Net increase in cash and cash equivalents	$	3,635		$	2,841

Operating Activities

Our operating activities generated cash of $3.4 million during the six months ended June 30, 2006, compared to generating cash of $2.6 million during the six months ended June 30, 2005. The increase of $0.8 million was primarily driven by working capital sources of cash, which included higher cash flows from the collection of accounts receivables.

Investing Activities

Our investing activities consumed cash of $0.2 million during the six months ended June 30, 2006, compared to consuming cash of $0.1 million during the six months ended June 30, 2005. Cash consumed by investing activities for both periods was related to the purchase of property and equipment.

Financing Activities

Our financing activities generated cash of $0.4 million during the six months ended June 30, 2006, compared to generating cash of $0.4 million during the six months ended June 30, 2005. Cash generated from financing activities for both periods was due to the proceeds from the exercise of employee stock options.

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

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

•		success of our product sales and related collections;

•		future expenses to expand and support our sales and marketing activities;

•		costs relating to changes in regulatory policies or laws that affect our operations;

•		maintaining and expanding our manufacturing capacity;

•		the level of investment in research and development and clinical trials required to maintain and improve our technology position;

•		costs of filing, prosecuting, defending and enforcing patent claims and other intellectual property rights; and

•		our need or decision to acquire or license businesses, products or technologies.

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

Contractual Obligations

As of June 30, 2006, we had two facility leases which include a one-year term with two one-year renewal options, as well as an operating lease for a telephone system. We had no long-term debt, capital lease obligations, long-term purchase agreements or other commitments. There have been no new contractual obligations since December 31, 2005. See Note 5 of our Notes to Financial Statements included in our annual Report on Form 10-K for the year 2005 for more detailed information.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

There have been no significant changes in our market risk compared to the disclosures in Item 7A of our Annual Report on Form 10-K for the year ended December 31, 2005.

Item 4. Controls and Procedures

Evaluation of disclosure controls and procedures. As required by Exchange Act Rule 13a-15(b), as of the end of the period covered by this Form 10-Q, we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and our Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures as defined in Rule 13a-15(e). Based upon that evaluation, our Chief Executive Officer along with our Chief Financial Officer, concluded that our disclosure controls and procedures are effective at the reasonable assurance level.

Changes in internal controls. There were no changes in our internal controls over financial reporting during the quarter ended June 30, 2006 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Limitations on Effectiveness of Disclosure Controls. We intend to review and evaluate the design and effectiveness of our disclosure controls and procedures on an ongoing basis and to correct any material deficiencies that we may discover. Our goal is to ensure that our senior management has timely access to material information that could affect our business. While we believe the present design of our disclosure controls and procedures is effective to achieve our goal, future events affecting our business may cause us to modify our disclosure controls and procedures. The effectiveness of controls cannot be absolute because the cost to design and implement a control to identify errors or mitigate the risk of errors occurring should not outweigh the potential loss caused by errors that would likely be detected by the control. Moverover, we believe that disclosure controls and procedures cannot be guaranteed to be 100% effective all of the time. Accordingly, a control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system’s objectives will be met.

PART II— OTHER INFORMATION

Item 1. Legal Proceedings

None.

Item 1A. Risk Factors

In addition to other information in this report, the following factors should be considered carefully in evaluating our company. If any of the risks or uncertainties described in this Form 10-Q or in our annual report on Form 10-K for the year ended December 31, 2005 actually occurs, our business, results of operations or financial condition could be materially adversely affected. The risks and uncertainties described in this Form 10-Q are not the only ones facing the company. Additional risks and uncertainties of which we are unaware or currently deem immaterial may also become important factors that may harm our business. The risk factors set forth below contain a number of material changes relative to those set forth in the “RISK FACTORS” section of our annual report on Form 10-K for the year ended December 21, 2005. The changes relate primarily to Gestiva, our therapeutic product candidate for the prevention of preterm birth in women who have a history of preterm delivery.

RISKS RELATING TO OUR BUSINESS

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

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

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

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

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

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

•

evidence of clinical utility;

	•		convenience and ease of use;

	•		availability of alternative and competing diagnostic products;

	•		cost-effectiveness;

	•		effectiveness of marketing, distribution and pricing strategy;

	•		publicity concerning these products or competitive products and

	•		reimbursement.

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

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

As of June 30, 2006, we had an accumulated deficit of $31.9 million. For the quarters ended June 30, 2006 and March 31, 2006, we had net income of $537,000 and $6,000, respectively. However, we may not sustain profitability and cannot guarantee losses will not occur in the future. Our quarterly revenues and operating results are difficult to predict and have in the past and may in the future fluctuate significantly from quarter to quarter due to a number of factors, many of which are outside our control. These factors include, but are not limited to:

	•		our ability to increase market acceptance of women’s health diagnostics generally and of our products in particular, as discussed under “Risk Factors — If our products do not achieve and sustain market acceptance, we may fail to generate sufficient revenue to maintain our business”;

	•		our need and ability to generate and manage growth as discussed under “Risk Factors — If we fail to properly manage our anticipated growth in the United States or abroad, we may incur significant additional costs and expenses and our operating results may suffer”;

	•		delays in, or failure of, delivery of components by our suppliers as more fully described in “Risk Factors — We rely on a limited number of suppliers, and if these suppliers fail or are unable to perform in a timely and satisfactory manner, we may be unable to manufacture our products or satisfy product demand in a timely manner, which could delay the production or sale of these products”;

	•		risks related to Gestiva described below, including those discussed under “Risk Factors— If we are unable to obtain or maintain regulatory approval for Gestiva, we will be limited in our ability to commercialize Gestiva, and our business will be harmed,” “—The market for Gestiva may be very competitive because we have no patent protection for Gestiva, and we may not obtain regulatory exclusivity for Gestiva,” and “— We rely on a limited number of suppliers, and if these suppliers fail or are unable to perform in a timely and satisfactory manner, we may be unable to manufacture our products or satisfy product demand in a timely manner, which could delay the production or sale of our products.”

	•		the quarterly variations and seasonal nature of our business, and the resulting demand for our products based on procurement cycles of our customers;

	•		changes in the manner in which our operations are regulated;

	•		the adoption of new accounting policies;

	•		increases in the length of our sales cycle;

	•		fluctuations in gross margins; and

	•		difficult political and economic conditions.

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

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

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

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

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

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

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

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

Growth of our business is likely to place a significant strain on our managerial, operational and financial resources and systems. In the United States, while we anticipate hiring additional personnel to assist in the planned expansion of sales efforts for our current products and the development of future products, we may not be able to successfully increase sales of

current products or introduce new products and meet our growth goals. The strain on our management and staff may be particularly acute as we expand into the therapeutic business as well as the diagnostic business. To manage our anticipated growth, we must attract and retain qualified personnel and manage and train them effectively. We will depend on our personnel and third parties to effectively market our products to an increasing number of hospitals, physicians and other healthcare providers. We will also depend on our personnel to develop next generation technologies. Further, our anticipated growth will place additional strain on our suppliers and manufacturers, as well as our own internal manufacturing processes, resulting in an increased need for us to carefully monitor for quality assurance. In addition, we may choose or be required to relocate or expand our manufacturing facility to accommodate potential growth in our business. Any failure by us to manage our growth effectively could have an adverse effect on our ability to achieve our revenue and profitability goals.

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

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

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

	•		the Federal Food, Drug and Cosmetic Act, which regulates the design, testing, manufacture, labeling, marketing, distribution and sale of medical devices and pharmaceuticals;

	•		the Federal Anti-Kickback Law, which prohibits the illegal inducement of referrals for which payment may be made under federal healthcare programs such as the Medicare and Medicaid Programs;

	•		Medicare laws and regulations that prescribe the requirements for coverage and payment, including the amount of such payment, and laws prohibiting false claims for reimbursement under Medicare and Medicaid;

	•		CE mark which could limit our ability to sell in Europe; and

	•		ISO 13485 which could limit our ability to sell in Canada.

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

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

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

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

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

	•		fines, injunctions and civil penalties;

	•		recall or seizure of our products;

	•		restrictions on our products or manufacturing processes, including operating restrictions, partial suspension or total shutdown of production;

	•		denial of requests for 510(k) clearances or PMAs of product candidates;

	•		withdrawal of 510(k) clearances or PMAs already granted;

	•		disgorgement of profits; and

	•		criminal prosecution.

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

Our PMA supplement seeking approval for use of our FullTerm™, The Fetal Fibronectin Test in predicting successful induction of labor has been submitted to the FDA. The FDA initially placed its review of the application on hold while a third party we have engaged conducts an audit of all of the clinical study sites because of the number of protocol deviations, in

order to confirm the accuracy of the data. The audit has been completed and we will need to submit new analyses of the data and a corrective action plan to the FDA before it will resume its review of the application. The new analyses of the data or the corrective action plan may not be acceptable to us or to the FDA and we may not continue to pursue or obtain FDA approval for this application.

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

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

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

If we are unable to obtain or maintain regulatory approval for Gestiva, we will be limited in our ability to commercialize Gestiva, and our business will be harmed.

The research, testing, manufacturing, selling and marketing of pharmaceutical product candidates are subject to extensive regulation by the FDA and other regulatory authorities in the United States and other countries, which regulations differ from country to country. Obtaining and maintaining regulatory approval typically is an uncertain process, is costly and takes many years. In addition, failure to comply with the FDA and other applicable foreign and U.S. regulatory requirements may subject us to administrative or judicially imposed sanctions. These include warning letters, civil and criminal penalties, injunctions, product seizure or detention, product recalls, total or partial suspension of production, and refusal to approve pending NDAs, or supplements to approved NDAs.

Regulatory approval of an NDA or NDA supplement is never guaranteed. Despite the time, resources and effort expended, failure can occur at any stage. The FDA has substantial discretion in the approval process for human medicines. The FDA can deny, delay or limit approval of a product candidate for many reasons including:

	•		the FDA may not find that there is adequate evidence that our product candidate is safe or effective;

	•		the FDA may not find data from the clinical or preclinical testing to be sufficient; or

	•		the FDA may not approve our or our third party manufacturers’ processes or facilities.

Future governmental action or changes in FDA policy or personnel may also result in delays or rejection of an NDA in the United States. If we receive regulatory approval for Gestiva, we will also be subject to ongoing FDA obligations and continued regulatory oversight and review, such as continued safety reporting requirements; and we may also be subject to additional FDA post-marketing obligations, such as Phase IV studies. If we are not able to maintain regulatory compliance, we may not be permitted to market Gestiva or any other therapeutic product candidates.

Any regulatory approvals that we receive for Gestiva or any other product candidates may also be subject to limitations on the indicated uses for which the medicine may be marketed or contain requirements for potentially costly post-marketing follow-up studies. In addition, if the FDA approves any of our product candidates, the labeling, packaging, adverse event reporting, storage, advertising, promotion and record-keeping for the medicine will be subject to extensive regulatory requirements. The subsequent discovery of previously unknown problems with the medicine, including adverse events of unanticipated severity or frequency, may result in restrictions on the marketing of the medicine, and could include withdrawal of the medicine from the market.

Even if we receive approval for the marketing and sale of Gestiva for the prevention of preterm birth in women who have a history of preterm delivery, it may never be accepted as a treatment for preterm birth in women who have a history of preterm delivery.

Many factors may affect the market acceptance and commercial success of Gestiva for the prevention of preterm birth in women who have a history of preterm delivery. Although there is currently no FDA-approved treatment for the prevention of preterm birth in women who have a history of preterm delivery, the comparable formulation to Gestiva, 17 alpha-hydroxyprogesterone caproate (or 17P), is available from compounding pharmacies, and there is one other company developing a different formulation of progesterone applied via a vaginal gel. Even if the FDA approves Gestiva, physicians may adopt Gestiva only if they determine, based on experience, clinical data, side effect profiles and other factors, that it is preferable to other products or treatments then in use. Acceptance of Gestiva among influential practitioners will be essential for market acceptance of Gestiva.

Other factors that may affect the market acceptance and commercial success of Gestiva include:

	•		the effectiveness of Gestiva, including any side effects, as compared to alternative treatment methods;

	•		the product labeling or product insert required by the FDA for Gestiva;

	•		the cost-effectiveness of Gestiva and the availability of insurance or other third-party reimbursement for patients using Gestiva;

	•		the timing of market entry of Gestiva relative to competitive products;

	•		the extent and success of our sales and marketing efforts; and

	•		the rate of adoption of Gestiva by physicians and by target patient population.

The failure of Gestiva to achieve market acceptance would prevent us from generating meaningful product revenue from Gestiva.

We have limited experience marketing pharmaceutical products, and will need to develop pharmaceutical sales and marketing capabilities to successfully commercialize Gestiva.

We plan to use our existing sales force to market Gestiva. However, our management and sales force have limited experience in marketing or selling pharmaceutical products. To achieve commercial success for Gestiva, we must invest considerable time and resources in educating and training our management and sales force in pharmaceutical marketing generally, and in the marketing of Gestiva specifically. However, our Gestiva sales and marketing efforts may not be successful or cost-effective. For example, in the event that the commercial launch of Gestiva is delayed due to FDA requirements or other reasons, we may make investments in Gestiva marketing and sales too early relative to the launch of Gestiva. If our Gestiva sales and marketing efforts are not successful, cost-effective and timely, our profitability may be adversely affected.

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

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

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

The extent to which any of our technologies and products achieve and sustain market acceptance will depend on numerous competitive factors, many of which are beyond our control. Competition in the medical device, diagnostic product and pharmaceutical industries is intense and has been accentuated by a rapid pace of technological development.

While no company directly competes with us in our core diagnostic markets, there are other diagnostic techniques currently in use to diagnose the likelihood of preterm birth, such as ultrasound. In addition, other companies may develop new diagnostic products or technologies that could compete with or entirely displace our products and technologies. For example, other biomarkers, including cytokines and other proteins indicative of infection, and proteomics are the subject of research that may yield new products or technologies. The effectiveness of these alternative techniques may improve with time and additional research by clinicians or manufacturers. The medical devices and diagnostic products industries include large diagnostics and life sciences companies. Most of these entities have substantially greater research and development capabilities and financial, scientific, manufacturing, marketing, sales and service resources than we do.

Gestiva, if approved for the prevention of preterm birth in women who have a history of preterm delivery, will compete with compounding pharmacies selling 17P for the prevention of preterm birth, such as Wedgewood Pharmacy. We are also aware of another company, Columbia Laboratories, that is currently enrolling patients in a clinical trial for a product candidate for the prevention of preterm birth. Any regulatory exclusivity we obtain with respect to Gestiva will not block the Columbia Laboratories product candidate, because the product candidate being developed by Columbia Laboratories contains a different active ingredient and is applied differently than Gestiva.

Some of our actual and potential competitors have more experience than we do in research and development, clinical trials, regulatory matters, manufacturing, marketing and sales.

These organizations also compete with us to:

	•		pursue acquisitions, joint ventures or other collaborations;

	•		license proprietary technologies that are competitive with our technologies;

	•		attract funding; and

	•		attract and hire scientific and other talent.

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

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

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

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

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

We rely on a limited number of suppliers for both raw materials and components necessary for the manufacture of our diagnostic products, including our FullTerm™, The Fetal Fibronectin Test and TLi_IQ^® System. We acquire all of these components, assemblies and raw materials on a purchase-order basis, which means that the supplier is not required to supply us with specified quantities over a certain period of time or to set aside part of its inventory for our forecasted requirements. If we need alternative sources for key components, assemblies or raw materials for any reason, such components, assemblies or raw materials may not be immediately available. If alternative suppliers are not immediately available, we will have to identify and qualify alternative suppliers, and delivery of such components, assemblies or raw materials may be delayed. Consequently, if we do not forecast properly, or if our suppliers are unable or unwilling to supply us in sufficient quantities or on commercially acceptable terms, we may not have access to sufficient quantities of these components, assemblies and raw materials on a timely basis and may not be able to satisfy product demand. We may not be able to find an adequate alternative supplier if required, in a reasonable time period, or on commercially acceptable terms, if at all. Our inability to obtain a supplier for the manufacture of our products may force us to curtail or cease operations, which would have a material adverse effect on our product sales and profitability. We also relied upon a fulfillment provider to process orders for our products, coordinate invoicing and collections, as well as ship our products to customers in the United States through September 30, 2005. In the fourth quarter of 2005, we transferred the fulfillment operation back to Adeza. Any problems with this transition may have a material adverse effect on our product sales and profitability.

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

We have no manufacturing capabilities for Gestiva and we may depend on third parties who are single source suppliers to manufacture Gestiva. If these suppliers are unable to continue manufacturing Gestiva and we are unable to obtain supply from alternative sources, our business will be harmed.

We currently have no experience in, and we do not own facilities for, nor do we plan to develop our own facilities for, manufacturing Gestiva. To date, our need for Gestiva has been limited to the amounts required in connection with our Gestiva NDA submission, which includes stability studies related to Gestiva. We have obtained our supply of Gestiva pursuant to a clinical supply agreement with a contract manufacturer, and we have obtained our supply of the active pharmaceutical ingredient in Gestiva on a purchase order basis. We do not intend to establish our own manufacturing facilities for Gestiva, and we are in the process of negotiating commercial supply agreements with the contract manufacturer and the supplier of the active ingredient. If we are successful in negotiating commercial supply agreements with those parties, each of them may be a single source supplier to us. In the event we are unable, for whatever reason, to obtain Gestiva or the active pharmaceutical ingredient in Gestiva in quantities sufficient for commercialization, we may not be able to identify alternate manufacturers able to meet our needs on commercially reasonable terms and in a timely manner, or at all. If we are unable, for whatever reason, to obtain sufficient quantities of Gestiva from our contract manufacturers, we may not be able to manufacture in a timely manner, if at all.

If our third party manufacturers of Gestiva fail to comply with FDA regulations or otherwise fail to meet our requirements, our product development and commercialization efforts may be delayed.

We depend on third party manufacturers to supply Gestiva. Our suppliers and manufacturers must comply with the FDA’s current Good Manufacturing Practices, or cGMP, regulations and guidelines. Our suppliers and manufacturers may encounter difficulties in achieving quality control and quality assurance and may experience shortages of qualified personnel.

Their failure to follow cGMP or other regulatory requirements and to document their compliance with cGMP may lead to significant delays in the availability of products for commercial use or clinical study or the termination or hold on a clinical study, or may delay or prevent filing or approval of marketing applications for Gestiva.

Failure of our third party suppliers and manufacturers or us to comply with applicable regulations could result in sanctions being imposed on us, including fines, injunctions, civil penalties, failure of regulatory authorities to grant marketing approval of our products, delays, suspension or withdrawal of approvals, license revocation, seizures or recalls of products, operating restrictions and criminal prosecutions, any of which could harm our business. If the operations of any current or future supplier or manufacturer were to become unavailable for any reason, commercialization of Gestiva could be delayed and our revenue from product sales could be reduced.

If we use a different third-party manufacturer to produce commercial quantities of Gestiva than we used for the studies we conducted in connection with the Gestiva NDA submission, the FDA may require us to conduct a study to demonstrate that the product used in our studies are equivalent to the final commercial product. If we are unable to establish that the product is equivalent, or if the FDA disagrees with the results of our study, commercial launch of Gestiva would be delayed.

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

Our international sales totaled $0.3 million for the three months ended June 30, 2006, $0.2 million for the three months ended March 31, 2006, $1.0 million in the years ended December 31, 2005 and 2004, and $0.8 million in the year ended December 31, 2003. Our international sales currently depend upon the marketing efforts of and sales by certain distributors in Europe, Australia, the Pacific Rim region and South America. In most instances, our distribution arrangements are governed by short-term purchase orders. We also rely upon certain of these distributors to assist in obtaining product registration and reimbursement approvals in certain international markets, and we may not be able to engage qualified distributors in our targeted markets. The distributors that we are able to obtain may not perform their obligations. If a distributor fails to invest adequate resources and support in promoting our products and training physicians, hospitals and other healthcare providers in the proper techniques for using our products or in awareness of our products, or if a distributor ceases operations, we would likely be unable to achieve significant sales in the territory represented by the distributor. If we decide to market new products abroad, we will likely need to educate our existing or new distributors about these new products and convince them to distribute the new products. If these distributors are unwilling or unable to market and sell our products, we may experience delayed or reduced market acceptance and sales of our products outside the United States. Our failure to engage adequate distributors, or the failure of the distributors to perform their obligations as expected, may harm our ability to effectively market our products and our business.

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

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

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

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

	•		failure of our products to perform as expected;

	•		a perception that our products are difficult to use; and

	•		litigation concerning the performance of our products.

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

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

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

If we or others identify side effects after our therapeutic products are on the market, we may be required to perform lengthy additional clinical trials, change the labeling of our products or withdraw our products from the market, any of which would hinder or preclude our ability to generate revenues.

If we or others identify side effects after any of our therapeutic products are on the market:

	•		regulatory authorities may withdraw their approvals;

	•		we may be required to reformulate our products, conduct additional clinical trials, make changes in labeling of our products or implement changes to or obtain re-approvals of our manufacturing facilities;

	•		we may experience a significant drop in the sales of the affected products;

	•		our reputation in the marketplace may suffer; and

	•		we may become the target of lawsuits, including class action lawsuits.

Any of these events could harm or prevent sales of the affected products or could increase the costs and expenses of commercializing and marketing these products.

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

Our success depends, in large part, on the efforts and abilities of Emory Anderson, who is our President and Chief Executive Officer, Dr. Durlin Hickok, who is our Vice President, Medical Affairs, Dr. Robert Hussa, our Vice President,

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

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

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

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

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

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

If we become aware of potential business combination candidates to our business, which could include license, co-promote, joint venture, and other types of arrangements, we may decide to combine with such businesses or acquire their assets in the future. We have acquired businesses or product lines in the past. For example, we acquired exclusive rights to the SalEst Test in 2003. While we have not encountered such difficulties following our prior acquisitions, business combinations generally involve a number of additional difficulties and risks to our business, including:

	•		failure to integrate management information systems, personnel, research and development and marketing, operations, sales and support;

	•		potential loss of key current employees or employees of the other company;

	•		disruption of our ongoing business and diversion of management’s attention from other business concerns;

	•		potential loss of the other company’s customers;

	•		failure to develop further the other company’s technology successfully;

	•		unanticipated costs and liabilities; and

	•		other accounting consequences.

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

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

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

	•		the level of research and development investment required to maintain and improve our technology position;

	•		costs of filing, prosecuting, defending and enforcing patent claims and other intellectual property rights;

	•		the success of our product sales and related collections;

	•		our need or decision to acquire or license businesses, products or technologies;

	•		maintaining or expanding our manufacturing or commercialization capacity;

	•		greater than expected costs associated with Gestiva;

	•		competing technological and market developments; and

	•		costs relating to changes in regulatory policies or laws that affect our operations.

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

RISKS RELATING TO OUR INTELLECTUAL PROPERTY

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

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

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

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

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

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

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

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

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

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

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

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

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

	•		we may become involved in time-consuming and expensive litigation, even if the claim is without merit;

	•		we may become liable for substantial damages for past infringement if a court decides that our technologies infringe upon a competitor’s patent;

	•		a court may prohibit us from selling or licensing our product without a license from the patent holder, which may not be available on commercially acceptable terms, if at all, or which may require us to pay substantial royalties or grant cross-licenses to our patents; and

	•		we may have to redesign our product so that it does not infringe upon others’ patent rights, which may not be possible or could require substantial funds or time.

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

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

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

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

	•		divert existing management, scientific and financial resources;

	•		subject us to significant liabilities;

	•		allow our competitors to market competitive products without obtaining a license from us;

	•		cause product shipment delays and lost sales;

	•		require us to enter into royalty or licensing agreements, which may not be available on terms acceptable to us, if at all; or

	•		force us to discontinue selling or modify our products, or to develop new products.

The market for Gestiva may be very competitive because we have no patent protection for Gestiva, and we may not obtain regulatory exclusivity for Gestiva.

There is no United States patent covering either the formulation of 17P, or the use of 17P for the prevention of preterm birth in women who have a history of preterm delivery. Accordingly, we currently have no patent protection with respect to Gestiva and do not expect to obtain patent protection for Gestiva.

We will have marketing exclusivity for Gestiva only if we obtain either Orphan Drug designation or three year regulatory exclusivity for Gestiva. The FDA Orphan Drug designation is reserved for promising new therapies being developed to treat life-threatening or very serious diseases that affect fewer than 200,000 people in the U.S. The Orphan Drug Act guarantees market exclusivity from any other companies, other than potentially compounding pharmacies which are not regulated by the FDA, for the FDA approved indication for seven years to the first sponsor that obtains market approval for an orphan-designated product. There can be no assurance that our Orphan Drug designation request will be approved.

If the FDA approves the Gestiva NDA but does not approve our Orphan Drug application for Gestiva, we may be granted regulatory exclusivity for three years from approval of the Gestiva NDA because the use of 17P for the prevention of preterm birth in women who have a history of preterm delivery would be a new indication of a previously approved active ingredient. An award of three years of exclusivity to a drug product means that the FDA cannot approve an application submitted under Section 505(b)(2) of the Federal Food, Drug and Cosmetic Act or an abbreviated new drug application for the same product for the same indication for three years. To obtain three-year exclusivity, the NDA covering a subject drug must include reports of new clinical investigations conducted by the sponsor that are essential to FDA approval of the new indication or dosage form. As we may not meet the guidelines for obtaining exclusivity there can be no assurance that we will receive three years of exclusivity.

Gestiva, if approved for the prevention of preterm birth in women who have a history of preterm delivery, will compete with compounding pharmacies selling 17P for the prevention of preterm birth, and, possibly, another company that is developing a product candidate for the prevention of preterm birth. Our present and potential competitors include large compounding pharmacies and major pharmaceutical companies which have considerably greater financial, technical and marketing resources than we do.

Because we have no patent covering the composition of 17P or the use of 17P for the prevention of preterm birth in women who have a history of preterm delivery, if an NDA covering the use of 17P for another indication is approved by the FDA, physicians could prescribe 17P labeled for other indications for patients at risk for preterm birth in women who have a history of preterm delivery. Monitoring and ensuring that patients who have a history of preterm delivery receive Gestiva rather than another form of 17P may be difficult and costly.

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

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

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

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

protected by patent and other intellectual property rights owned by third parties. If we are unable to obtain rights to use necessary third-party intellectual property under commercially reasonable terms, or at all, we may be unable to develop these products, and this could harm our ability to expand our commercial product offerings and to generate additional revenue from these products.

RISKS RELATING TO OUR COMMON STOCK

If we are unable to timely satisfy regulatory requirements relating to internal controls, our stock price could suffer.

Section 404 of the Sarbanes-Oxley Act of 2002 requires that certain companies perform a comprehensive evaluation of their internal control over financial reporting. At the end of each year, we must perform an evaluation of our internal control over financial reporting, include in our annual report the results of the evaluation, and have our independent auditors attest to such evaluation. If we fail to complete future evaluations on time, or if our independent auditors cannot attest to our future evaluations, we could fail to meet our regulatory reporting requirements and be subject to regulatory scrutiny and a loss of public confidence in our internal controls, which could have an adverse effect on our stock price.

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

Our executive officers, directors and principal stockholders, and entities affiliated with them, beneficially owned in the aggregate approximately 32% of our common stock as of June 30, 2006. This significant concentration of share ownership may adversely affect the trading price of our common stock because investors often perceive disadvantages in owning stock in companies with controlling stockholders. These stockholders, acting together, have the ability to exert substantial influence over all matters requiring approval by our stockholders, including the election and removal of directors and any proposed merger, consolidation or sale of all or substantially all of our assets. In addition, they could dictate the management of our business and affairs. This concentration of ownership could have the effect of delaying, deferring or preventing a change in control of us or impeding a merger or consolidation, takeover or other business combination that could be favorable to our stockholders.

The future sale of our securities could dilute our common stockholders’ investments and negatively affect our stock price.

If our common stockholders sell substantial amounts of common stock in the public market, or the market perceives that such sales may occur, the market price of our common stock could fall. The holders of a substantial number of shares of our common stock, subject to some conditions, could require us to file registration statements covering their shares or to include their shares in registration statements that we may file for ourselves or other stockholders. Furthermore, if we were to include in a company-initiated registration statement shares held by those holders pursuant to the exercise of their registration rights, the sale of those shares could impair our ability to raise needed capital by depressing the price at which we could sell our common stock. If we issue equity or debt securities to raise additional funds, our existing stockholders may experience dilution and the new equity or debt securities may have rights, preferences and privileges senior to those of our existing stockholders. Furthermore, we may enter into financing transactions at prices that represent a substantial discount to market price. Raising funds through the issuance of equity securities will dilute the ownership of our existing stockholders. A negative reaction by investors and securities analysts to any sale of debt or our equity securities could result in a decline in the trading price of our common stock.

The price and volume of our common stock experience fluctuations, which could lead to costly litigation for us.

Our stock price has been volatile. From December 10, 2004, the date of our initial public offering, through June 30, 2006, our stock has traded as high as $23.35 and as low as $10.97. The market price of our common stock may fluctuate substantially due to a variety of factors, including:

	•		media reports and publications and announcements about women’s health and cancer diagnostic products or new cancer treatments or innovations that could compete with our products;

	•		new regulatory pronouncements, changes in regulatory guidelines, such as adverse changes in reimbursement for women’s health and cancer diagnostic products, and the timing of regulatory approvals concerning the products in our pipeline;

	•		market conditions or trends related to the medical devices and diagnostic products industries or the market in general;

	•		changes in financial estimates or recommendations by securities analysts;

	•		the seasonal nature of our revenues and expenses;

	•		analysts’ perceptions of our ability to compete successfully in both the diagnostic and therapeutic businesses;

	•		variations in our quarterly operating results; and

	•		changes in accounting principles.

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

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

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

	•		authorizing the issuance without further approval of “blank check” preferred stock that could be issued by our board of directors to increase the number of outstanding shares and thwart a takeover attempt;

	•		prohibiting cumulative voting in the election of directors, which would otherwise allow less than a majority of stockholders to elect director candidates;

	•		limiting the ability to remove directors;

	•		limiting the ability of stockholders to call special meetings of stockholders;

	•		prohibiting stockholder action by written consent, thereby requiring all stockholder actions to be taken at a meeting of stockholders; and

	•		establishing advance notice requirements for nominations for election to the board of directors or for proposing matters that can be acted upon by stockholders at stockholder meetings.

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

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

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

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

On December 10, 2004, we completed an initial public offering of 3,750,000 shares of our common stock. The common stock sold in the offering was registered under the Securities Act of 1933, as amended, on the Registration Statement on Form S-1 (Reg. No. 333-118012) that was declared effective by the SEC on December 9, 2004. The offering commenced on December 10, 2004. On December 21, 2004, the underwriters in the offering exercised their over-allotment option to purchase an additional 562,500 shares of our common stock to cover over-allotments. All 4,312,500 of the shares sold in the offering were sold at the initial public offering price of $16.00 per share. After deducting underwriting discounts and commissions and offering expenses, we received net proceeds form the offering of approximately $61.9 million.

During the six months ended June 30, 2006, we spent (i) approximately $13.4 million of the proceeds from the offering on sales and marketing efforts, (ii) approximately $3.3 million on research and development activities related to product development, clinical trials and regulatory approvals for additional indications for our Fetal Fibronectin Test, and (iii) approximately $4.5 million on other general corporate purposes. The remaining proceeds from the offering have been placed in temporary investments of marketable securities for future use as needed.

Item 3. Defaults upon Senior Securities

None.

Item 4. Submission of Matters to a Vote of Security Holders

(a)		The Company held its annual meeting of stockholders on June 6, 2006.

(b)		Votes regarding the election of our directors for terms expiring at our 2006 annual meeting of stockholders:


Term expiring in 2006	For		Withheld
Andrew E. Senyei, MD		15,762,958		78,356
Michael P. Downey		15,788,593		52,721

The above directors constitute our Class II directors.

Our board is composed of the elected Class II directors and the following continuing directors:

Emory V. Anderson
Nancy D. Burrus
Kathleen D. LaPorte
Craig C. Taylor
C. Gregory Vontz

Ms. Burrus subsequently resigned from our board of directors effective July 31, 2006.

(c)

Votes on the proposal to ratify the appointment of Ernst & Young LLP as the Company’s Registered Public Accounting firm for the 2006 fiscal year were as follows:


			Abstentions and broker
For	Against		non-votes
15,834,947		4,387		1,980

Item 5. Other Information

Gestiva™

General. We have submitted a New Drug Application, or NDA, with the FDA for Gestiva™, our product candidate to prevent preterm birth in women with a history of preterm birth.

Clinical Study. Our NDA submission includes data from a randomized, double-blind, placebo-controlled clinical study conducted by the National Institute of Child Health and Human Development, or NICHD, and published in the New England Journal of Medicine in 2003. Data from this study demonstrated a 34% reduction in the rate of preterm birth in women who have a history of preterm delivery among women who were treated with the active ingredient in Gestiva, an injectable long-acting form of a naturally occurring progesterone known as 17 alpha-hydroxyprogesterone caproate, or 17P, as compared to placebo. NICHD, which is one of the National Institutes of Health, used 17P in a multi-center trial that enrolled 463 women with a prior history of preterm birth. Patients were enrolled at 16 to 21 weeks of gestation and randomly assigned to receive weekly injections of 17P or placebo. The most common side effects were local injection-site reactions. Treatment continued until delivery or 36 weeks of gestation, resulting in a reduction in the preterm birth rate of 34% among women treated with 17P. In addition, infants born to women treated with 17P had significantly lower rates of necrotizing enterocolitis, intraventricular hemorrhage, supplemental oxygen need, and days of respiratory therapy.

Priority Review. On June 5, 2006, we announced that our Gestiva NDA was granted priority review status by the FDA. A priority review designation set a six month goal date, which will be October 20, 2006, for FDA response to the NDA. Priority review is granted by the FDA if the subject drug product, if approved, would be a significant improvement compared to marketed approved products in the treatment, diagnosis, or prevention of a disease. At present, no drug product is approved by the FDA for the prevention of preterm birth in women who have a history of preterm delivery. There is no effective NDA covering 17P for any indication. 17P was previously approved and marketed for various indications such as uterine cancer. Currently, the only commercially available source of 17P is compounding pharmacies, which are not required to follow strict FDA guidelines covering manufacturing, product quality and labeling.

Orphan Drug Designation; Regulatory Exclusivity. We have submitted an application to the FDA requesting Orphan Drug designation for Gestiva. The FDA Orphan Drug designation is reserved for promising new therapies being developed to treat life-threatening or very serious diseases that affect fewer than 200,000 people in the U.S. The Orphan Drug Act guarantees market exclusivity from any other companies, other than potentially compounding pharmacies which are not regulated by the FDA for the FDA approved indication for seven years to the first sponsor that obtains market approval for an orphan-designated product. There can be no assurance that our Orphan Drug designation request will be approved.

Marketing. If Gestiva is approved for marketing in the United States, we plan to use our existing sales force to market the product.

Manufacturing. To date, our need for Gestiva has been limited to the amounts required in connection with our Gestiva NDA submission, which includes, among others, stability and toxicology studies related to Gestiva. We have obtained our supply of Gestiva pursuant to a clinical supply agreement with a contract manufacturer, and we have obtained our supply of the active pharmaceutical ingredient in Gestiva on a purchase order basis. We do not intend to establish our own manufacturing facilities for Gestiva, and we are in the process of negotiating commercial supply agreements with the contract manufacturer and the supplier of the active ingredient. If we are successful in negotiating commercial supply agreements with those parties, each of them may be a single source supplier to us. In the event we are unable, for whatever reason, to obtain Gestiva or the active pharmaceutical ingredient in Gestiva, we may not be able to identify alternate manufacturers able to meet our needs on commercially reasonable terms and in a timely manner, or at all.

Intellectual Property. There is no United States patent covering either the formulation of 17P, or the use of 17P for the prevention of preterm birth in women who have a history of preterm delivery. Accordingly, we currently have no patent protection with respect to Gestiva. We will have marketing exclusivity for Gestiva only if we obtain either Orphan Drug designation or three year regulatory exclusivity, as described above under “Orphan Drug Designation; Regulatory Exclusivity”.

Competition. Gestiva, if approved for the prevention of preterm birth in women who have a history of preterm delivery, will compete with compounding pharmacies selling 17P for the prevention of preterm birth, such as Wedgewood Pharmacy. We are also aware of another company, Columbia Laboratories, that is developing a product candidate for the prevention of preterm birth and is currently enrolling patients in a clinical trial. Any regulatory exclusivity we obtain with respect to Gestiva will not block the Columbia Laboratories product candidate, because the product candidate being developed by Columbia Laboratories is a vaginal gel formulation with progesterone. In addition, other forms of progesterone administration could be developed. Our present and potential competitors include large compounding pharmacies and major pharmaceutical companies which have considerably greater financial, technical and marketing resources than we do.

As noted above, although we may receive regulatory exclusivity for the use of 17P for the prevention of preterm birth in women who have a history of preterm delivery, we do not have a patent covering the composition of 17P or the use of 17P for the prevention of preterm birth in women who have a history of preterm delivery. If an NDA covering the use of 17P for another indication is approved by the FDA, physicians could prescribe 17P labeled for other indications for patients at risk for preterm birth. Monitoring and ensuring that patients who have a history of preterm delivery receive Gestiva rather than another form of 17P may be difficult and costly.

United States Government Regulation. Prescription pharmaceutical products and product candidates such as Gestiva are subject to extensive pre- and post-market regulation, including regulations that govern the testing, manufacturing, safety, efficacy, labeling, storage, distribution, record keeping, advertising, and promotion of the products under the Federal Food, Drug and Cosmetic Act. The process of complying with federal and state statutes and regulations in order to obtain the necessary approvals and subsequently complying with federal and state statutes and regulations involves significant time and expense.

The Gestiva NDA must be approved by the FDA prior to commercialization. The FDA reviews all NDAs submitted before it accepts them for filing. The Gestiva NDA has been accepted for filing. When the agency accepts an NDA for filing, the FDA may grant marketing approval, request additional information or deny the application if it determines that the application does not meet regulatory approval criteria. The FDA may seek the input and recommendations of a public advisory committee of outside experts in its review of an NDA. On July 18, 2006, we announced that our Gestiva NDA will be reviewed by the Reproductive Health Drugs Advisory Committee to the FDA on August 29, 2006. Advisory Committee recommendations are not binding and FDA approval may not be granted on a timely basis, or at all.

If the FDA approves an NDA, the subject drug becomes available for physicians to prescribe in the United States. Once approved, the FDA may withdraw the product approval if compliance with pre- and post-market regulatory standards is not maintained. The drug developer must submit periodic reports to the FDA. Adverse experiences with the product must be reported to the FDA and could result in the imposition of marketing restrictions through labeling changes or product removal. Product approvals may be withdrawn if problems with safety or efficacy occur after the product reaches the marketplace. In addition, the FDA may require post-marketing studies, referred to as Phase 4 studies, to monitor the long term safety and effectiveness of approved products in larger populations, and may limit further marketing of the product based on the results of these post-market studies.

Facilities used to manufacture drugs are subject to periodic inspection by the FDA and other authorities where applicable, and must comply with current Good Manufacturing Practices regulations, or cGMP. Failure to comply with the statutory and regulatory requirements subjects the manufacturer to possible legal or regulatory action, such as suspension of manufacturing, seizure of product or voluntary recall of a product.

With respect to post-market product advertising and promotion, the FDA imposes a number of complex regulations on entities that advertise and promote pharmaceuticals, which include, among others, standards and regulations for direct-to-consumer advertising, off-label promotion, industry sponsored scientific and educational activities, and promotional activities involving the Internet. The FDA has very broad enforcement authority under the Federal Food, Drug and Cosmetic Act, and failure to abide by these regulations can result in penalties including the issuance of a warning letter directing a company to correct deviations from FDA standards, a requirement that future advertising and promotional materials be pre-cleared by the FDA, and state and federal civil and criminal investigations and prosecutions.

In addition to studies requested by the FDA after approval, a drug developer may conduct other trials and studies to explore use of the approved product for treatment of new indications. The purpose of these trials and studies and related publications is to broaden the application and use of the drug and its acceptance in the medical community. Data supporting the use of a drug for these new indications must be submitted to the FDA in a new or supplemental NDA that must be approved by the FDA before the drug can be marketed for the new indications. Even if the Gestiva NDA is approved, other drug developers may conduct trials on 17P for preterm birth in women who have a history of preterm delivery or other indications.

Regulatory Approvals outside the United States. We have not started the regulatory approval process for Gestiva in any jurisdiction other than the United States and we are unable to estimate when, if ever, we will commence the regulatory approval process in any foreign jurisdiction. We will have to complete an approval process similar to the U.S. approval process in foreign target markets for Gestiva before we can commercialize it in those countries. The approval procedure and the time required for approval vary from country to country and can involve additional testing. Foreign approvals may not be granted on a timely basis, or at all. Regulatory approval of prices is required in most countries other than the United States. The prices approved may be too low to generate an acceptable return to us.

Quest Diagnostics

We have entered into an arrangement with Quest Diagnostics Incorporated, the nation’s leading provider of diagnostic testing, information and services, whereby Quest Diagnostics is offering national reference laboratory service for FullTerm™, The Fetal Fibronectin Test, to physicians and obstetric healthcare professionals. Through its network of laboratories and patient service centers, Quest Diagnostics will collect fetal fibronectin test samples directly from physicians’ offices and clinics throughout the United States.

Item 6. Exhibits


Exhibit
number		Description
31.1		Certificate pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended of Emory V. Anderson.

31.2		Certificate pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended of Mark D. Fischer-Colbrie.

32.1		Certificate pursuant to 18 U.S.C. Section 1350 of Emory V.Anderson.

32.2		Certificate pursuant to 18 U.S.C. Section 1350 of Mark D. Fischer-Colbrie.

Signatures

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on this 7th day of August 2006.


	ADEZA BIOMEDICAL CORPORATION
	By:	/s/ Emory V. Anderson
		Emory V. Anderson
		President and Chief Executive Officer


	By:	/s/ Mark D. Fischer-Colbrie
		Mark D. Fischer-Colbrie
		Vice President, Finance and Administration and Chief Financial Officer

EXHIBIT INDEX


Exhibit
number		Description
31.1		Certificate pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended of Emory V. Anderson.

31.2		Certificate pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended of Mark D. Fischer-Colbrie.

32.1		Certificate pursuant to 18 U.S.C. Section 1350 of Emory V. Anderson.

32.2		Certificate pursuant to 18 U.S.C. Section 1350 Mark D. Fischer-Colbrie.


Delaware		77-0054952
(State or Other Jurisdiction of		(I.R.S. Employer
Incorporation or Organization)		Identification Number)


1240 Elko Drive, Sunnyvale, California		94089
(Address of principal executive offices)		(zip code)


	June 30,			December 31,
	2006			2005
	(Unaudited)			(1)
ASSETS
Current assets:
Cash and cash equivalents	$	93,357		$	89,722
Accounts receivable, net		9,173			9,182
Inventories		965			849
Prepaid expenses and other current assets		504			292
Current deferred tax asset		4,929			4,929

Total current assets		108,928			104,974

Property and equipment, net		419			348
Noncurrent deferred tax asset		193			193
Intangible assets, net		104			128


Total assets	$	109,644		$	105,643


LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	2,287		$	1,994
Accrued compensation		2,588			2,216
Accrued royalties		1,411			1,427
Other accrued liabilities		1,813			1,246
Taxes payable		1,284			1,322
Deferred revenue		32			33

Total current liabilities		9,415			8,238

Stockholders’ equity:
Common stock, $0.001 par value; 100,000 shares authorized; 17,482 and 17,376 shares issued and outstanding at June 30, 2006 and December 31, 2005, respectively		17			17
Additional paid-in capital		132,096			132,432
Deferred compensation		—			(2,604	)
Accumulated other comprehensive income		13			—
Accumulated deficit		(31,897	)		(32,440	)

Total stockholders’ equity		100,229			97,405


Total liabilities and stockholders’ equity	$	109,644		$	105,643


	Six Months Ended
	June 30,
	2006			2005
Cash flows from operating activities:
Net income	$	543		$	3,285
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		107			94
Stock-based compensation expense		1,873			483
Changes in operating assets and liabilities:
Accounts receivable		9			(1,463	)
Inventories		(116	)		(181	)
Prepaid expenses and other assets		(199	)		(30	)
Accounts payable		293			(375	)
Accrued compensation		372			(316	)
Accrued royalties		(16	)		200
Other accrued liabilities		529			901
Deferred revenue		(1	)		4


Net cash provided by operating activities		3,394			2,602


Cash flows from investing activities:
Purchases of property and equipment		(154	)		(117	)

Net cash used in investing activities		(154	)		(117	)


Cash flows from financing activities:
Net proceeds from issuances of common stock		395			356

Net cash provided by financing activities		395			356


Net increase in cash and cash equivalents		3,635			2,841
Cash and cash equivalents at beginning of period		89,722			80,118

Cash and cash equivalents at end of period	$	93,357		$	82,959


Supplemental cash flow information
Cash paid for income taxes	$	94		$	252


	As of		As of
	June 30,		December 31,
	2006		2005
Raw materials	$	527	$	386
Work in process		259		197
Finished goods		179		266


	$	965	$	849


þ		Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.


o		Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.


	Page
PART I— FINANCIAL INFORMATION

Item 1. Condensed Financial Statements
Condensed Balance Sheets as of June 30, 2006 and December 31, 2005		3
Condensed Statements of Income for the three and six months ended June 30, 2006 and 2005		4
Condensed Statements of Cash Flows for the six months ended June 30, 2006 and 2005		5
Notes to Condensed Financial Statements		6
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		13
Item 3. Quantitative and Qualitative Disclosures About Market Risk		21
Item 4. Controls and Procedures		21

PART II — OTHER INFORMATION

Item 1. Legal Proceedings		22
Item 1A. Risk Factors		22
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		40
Item 3. Defaults upon Senior Securities		40
Item 4. Submission of Matters to a Vote of Security Holders		40
Item 5. Other Information		41
Item 6. Exhibits		43
Signatures		44
Exhibit Index		45
EXHIBIT 31.1
EXHIBIT 31.2
EXHIBIT 32.1
EXHIBIT 32.2

•		The TLi_IQ^® System and FullTerm™, The Fetal Fibronectin Test, which are used to assess the risk of preterm birth in pregnant women.

•		The E-tegrity^® Test, which is used to determine the feasibility of embryo implantation in patients with infertility who are candidates for in vitro fertilization (“IVF”).