The formation of a blood clot, or thrombus, is a desirable and essential response to a wound, preventing a simple injury from becoming a potentially fatal bleeding event. However, blood clots can have unwanted effects when they block normal blood flow in the body.

Warfarin is an oral anticoagulation, or blood thinning, drug given to patients to prevent potentially lethal blood clots. The safety and effectiveness of warfarin depends on maintaining the blood’s ability to coagulate within a narrow therapeutic range, which can be challenging if not actively managed. Prothrombin time, or PT, is an expression of the time it takes for blood to clot and reflects the anticoagulation effect of warfarin. The internationally recognized measurement standard for clotting time is known as PT/INR. INR is the International Normalized Ratio, which expresses PT in a common scale established by the World Health Organization. The accurate measurement of the PT/INR value is critical to ensuring the safety and effectiveness of warfarin in maintaining a patient’s blood coagulation level within a therapeutic range. The U.S. Centers for Medicare & Medicaid Services, or CMS, has observed that monthly testing is inadequate for the majority of patients on chronic warfarin therapy. Numerous studies reviewed by CMS showed that frequent self-testing through the use of a home PT/INR monitor improves a patient’s time in therapeutic range.

Based upon Medicare claims data, there were 19.7 million PT/INR tests conducted on U.S. Medicare patients in 2003, comprised of approximately 14.7 million clinical laboratory tests and 5.0 million point-of-care or patient self-tests. By contrast, there were 15.2 million tests performed in 2000, consisting of 13.4 million clinical laboratory tests, and 1.8 million point-of-care tests. The total number of PT/INR tests increased by 30% over this three-year period, with 10% growth in the laboratory testing market, as compared with 180% growth in the point-of-care and patient self-test markets.

The INRatio meter contains a heater, digital user interface, and electronic components that measure the changes in resistance or impedance in a blood sample during the coagulation process. To ensure the proper functioning of its components, the INRatio meter performs a series of self-diagnostic tests every time the device is turned on. The meter has three buttons that control all of its functions and has a prominent, easy to read screen on which instructions and results are clearly displayed. The meter has the ability to store up to 60 PT/INR test results and contains a data port for interfacing with an optional printer. The meter is powered by four AA batteries and has an optional external A/C adapter. The user can choose to display messages in any of ten languages programmed into the meter.

The INRatio disposable test strips use the Company’s proprietary electrochemical technology to measure a patient’s PT/INR value and perform two laboratory-like quality control tests on a single test strip with a single drop, or approximately 15 microliters, of blood. The two quality control tests confirm standard PT/INR readings for the normal lower range, or low control, and the therapeutic upper range, or high control. This helps ensure that the meter and test strip are functioning properly and that the patient’s PT/INR test result will be accurate. The meter and a single test strip automatically perform all three tests each time a patient’s blood sample is applied to a test strip that has been inserted into the meter. When the INRatio meter detects an unacceptable quality control test result, it does not display a potentially incorrect PT/INR test result, but rather alerts the user to the error. The Company designed its proprietary test strips with on-board quality control tests and its meter with built-in electronic diagnostic tests to help ensure the accuracy of test results and to simplify the process by eliminating the need to use specialized control test liquids and additional test strips to obtain quality control test measurements. The Company’s test strips do not require refrigeration and can be shipped and stored at room temperature for one year, which provides distribution advantages and improves patient convenience. INRatio test strips can only be used with the INRatio meter.

The Company includes all accessories needed for the use of the INRatio System in the patient self-testing and point-of-care environments, such as lancets.

Cost of goods sold increased by $1.2 million, or 144%, from $821.0 thousand in the three months ended December 31, 2003 to $2.0 million in the three months ended December 31, 2004.

Research and development expenses decreased by $79.0 thousand, or 20%, from $390.0 thousand in the three months ended December 31, 2003 to $311.0 thousand in the three months ended December 31, 2004.

Sales and marketing expenses increased by $585.0 thousand, or 58%, from $1.0 million in the three months ended December 31, 2003 to $1.6 million in the three months ended December 31, 2004.

General and administrative expenses increased by $63.0 thousand, or 22%, from $284.0 thousand in the three months ended December 31, 2003 to $347.0 thousand in the three months ended December 31, 2004.