CHOLESTECH CORPORATION, S-3, 1998-04-29

CHOLESTECH CORPORATION
S-3, 1998-04-29
ELECTROMEDICAL & ELECTROTHERAPEUTIC APPARATUS

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<PAGE> 1

AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 29, 1998

REGISTRATION NO. 333-
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------

FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------

CHOLESTECH CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
------------------------

<TABLE>
<S> <C> <C>
CHOLESTECH CORPORATION 94-3065493
CALIFORNIA 3347 INVESTMENT BOULEVARD (I.R.S. EMPLOYER
(STATE OR OTHER JURISDICTION OF HAYWARD, CALIFORNIA 94545 IDENTIFICATION NUMBER)
INCORPORATION OR ORGANIZATION) (510) 732-7200
</TABLE>

(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER OF REGISTRANT'S PRINCIPAL
EXECUTIVE OFFICES)

WARREN E. PINCKERT II
PRESIDENT AND CHIEF EXECUTIVE OFFICER
CHOLESTECH CORPORATION
3347 INVESTMENT BOULEVARD
HAYWARD, CALIFORNIA 94545
(510) 732-7200
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE OF PROCESS)

COPIES TO:

<TABLE>
<S> <C>
ROBERT P. LATTA, ESQ. JULIA L. DAVIDSON, ESQ.
CHRIS F. FENNELL, ESQ. SUZANNE SAWOCHKA HOOPER, ESQ.
WILSON SONSINI GOODRICH & ROSATI COOLEY GODWARD LLP
PROFESSIONAL CORPORATION FIVE PALO ALTO SQUARE
650 PAGE MILL ROAD PALO ALTO, CA 94306-2155
PALO ALTO, CA 94304 (650) 843-5000
(650) 493-9300
</TABLE>

APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after the effective date of this Registration Statement.
------------------------

If the only securities being registered on this Form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box. [ ]

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

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

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

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

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

CALCULATION OF REGISTRATION FEE

<TABLE>
<S> <C> <C> <C>
=======================================================================================================================
PROPOSED MAXIMUM
TITLE OF EACH CLASS OF AMOUNT TO AGGREGATE OFFERING AMOUNT OF
SECURITIES TO BE REGISTERED BE REGISTERED PRICE(1) REGISTRATION FEE
- -----------------------------------------------------------------------------------------------------------------------
Common Stock, no par value(2)............ 3,450,000 $56,278,125 $16,602
=======================================================================================================================
</TABLE>

(1) Estimated solely for the purpose of computing the amount of the registration
fee pursuant to Rule 457(o) under the Securities Act of 1933, as amended,
based upon the average of the high and low sales prices as reported on the
Nasdaq National Market on April 27, 1998.

(2) Includes Preferred Share Purchase Rights which, prior to the occurrence of
certain events, will not be exercisable or evidenced separately from the
Common Stock.
------------------------

THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.

================================================================================
<PAGE> 2

INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.

SUBJECT TO COMPLETION -- DATED APRIL 29, 1998

PROSPECTUS
- --------------------------------------------------------------------------------

3,000,000 Shares

LOGO
Common Stock
- --------------------------------------------------------------------------------

All of the 3,000,000 shares of common stock, no par value (the "Common Stock"),
offered hereby (the "Offering") are being sold by Cholestech Corporation
("Cholestech" or the "Company"). The Common Stock is included for quotation in
The Nasdaq Stock Market's National Market (the "Nasdaq National Market") under
the symbol "CTEC." On April 28, 1998, the last reported sales price for the
Common Stock on the Nasdaq National Market was $16.625 per share. See "Price
Range of Common Stock."

SEE "RISK FACTORS" ON PAGES 7 TO 17 FOR A DISCUSSION OF CERTAIN MATERIAL FACTORS
THAT SHOULD BE CONSIDERED IN CONNECTION WITH AN INVESTMENT IN THE COMMON STOCK
OFFERED HEREBY.
- --------------------------------------------------------------------------------

THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.

<TABLE>
<S> <C> <C> <C>
=====================================================================================================================
Underwriting
Price to Discounts and Proceeds to
Public Commissions(1) Company(2)
- ---------------------------------------------------------------------------------------------------------------------
Per Share.............................. $ $ $
- ---------------------------------------------------------------------------------------------------------------------
Total(3)............................... $ $ $
=====================================================================================================================
</TABLE>

(1) The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as
amended (the "Securities Act"). See "Underwriting."

(2) Before deducting expenses payable by the Company estimated to be $500,000.

(3) The Company has granted to the several Underwriters a 30-day over-allotment
option to purchase up to 450,000 additional shares of the Common Stock on
the same terms and conditions as set forth above. If all such additional
shares are purchased by the Underwriters, the total Price to Public will be
$ , the total Underwriting Discounts and Commissions will be $
and the total Proceeds to Company will be $ . See "Underwriting."
- --------------------------------------------------------------------------------

The shares of Common Stock are offered by the several Underwriters, subject to
delivery by the Company and acceptance by the Underwriters, to prior sale and to
withdrawal, cancellation or modification of the offer without notice. Delivery
of the shares of Common Stock to the Underwriters is expected to be made through
the facilities of the Depository Trust Company, New York, New York on or about
, 1998.

PRUDENTIAL SECURITIES INCORPORATED
VECTOR SECURITIES INTERNATIONAL, INC.

EVEREN SECURITIES, INC.

, 1998
<PAGE> 3

[ARTWORK]

CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN
TRANSACTIONS THAT STABILIZE, MAINTAIN, OR OTHERWISE AFFECT THE
PRICE OF THE COMMON STOCK, INCLUDING PURCHASES OF THE COMMON STOCK
TO STABILIZE ITS MARKET PRICE, PURCHASES OF THE COMMON STOCK TO
COVER SOME OR ALL OF A SHORT POSITION IN THE COMMON STOCK
MAINTAINED BY THE UNDERWRITERS AND THE IMPOSITION OF PENALTY BIDS.
FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING."

IN CONNECTION WITH THE OFFERING, CERTAIN UNDERWRITERS (AND SELLING
GROUP MEMBERS, IF ANY) OR THEIR RESPECTIVE AFFILIATES MAY ENGAGE
IN PASSIVE MARKET MAKING TRANSACTIONS IN THE COMMON STOCK ON THE
NASDAQ STOCK MARKET IN ACCORDANCE WITH RULE 103 OF REGULATION M.
SEE "UNDERWRITING."

Cholestech, Cholestech L-D-X and the Cholestech logo are
registered trademarks of the Company. This Prospectus also
includes trademarks of companies other than the Company.
<PAGE> 4

PROSPECTUS SUMMARY

The following summary is qualified in its entirety by the more detailed
information, including information under "Risk Factors" and the Financial
Statements and Notes thereto, appearing elsewhere in this Prospectus. Unless
otherwise indicated, the information contained in this Prospectus, including
financial information, share and per share data, assumes that the Underwriters'
over-allotment option will not be exercised. See "Underwriting."

The Company develops, manufactures and markets the Cholestech L-D-X System
(the "L-D-X System") which performs near-patient diagnostic screening and
therapeutic monitoring for the management of prevalent chronic diseases
(preventive care testing). The L-D-X System is capable of measuring multiple
analytes simultaneously with a single drop of whole blood within five minutes.
The Company currently markets the L-D-X System, including the L-D-X Analyzer and
a variety of single use test cassettes, to the physician office laboratory
("POL"), pharmacy and health promotion markets in the United States and
internationally. The Company's current products measure and monitor blood
cholesterol, related lipids and glucose, and are used to perform preventive care
testing of patients who have or may have cardiovascular disease or diabetes. In
January 1996, the L-D-X Analyzer and the Company's total cholesterol ("TC"),
high density lipoprotein ("HDL"), calculated low density lipoprotein ("LDL"),
triglycerides and glucose tests were granted waived status under the Clinical
Laboratory Improvement Amendments of 1988 as amended ("CLIA"), the first such
waivers granted under CLIA's ease of use, accuracy and precision guidelines.
These CLIA waivers enable health care providers to use the L-D-X System in
preventive care settings without the additional operating costs and extensive
regulatory requirements associated with CLIA compliance. The Company believes
that the L-D-X System is the only simultaneous, multi-analyte testing device
which is classified as waived under CLIA. Further, the Company believes that the
waived status, technological flexibility, ease of use, accuracy, rapid results
and low operating costs of the L-D-X System provide it with competitive
advantages.

In 1996, the diagnosis, treatment and monitoring of chronic diseases
accounted for approximately $358 billion of health care expenditures in the
United States. The most prevalent chronic diseases include, among others,
cardiovascular disease, diabetes and osteoporosis. The American Heart
Association estimates that more than 58 million people suffer from
cardiovascular disease alone, the leading cause of death of adults in the United
States, resulting in over one million deaths in 1995. While drug therapy is
necessary for the overall management of chronic diseases, diagnostic screening,
proper therapeutic monitoring and compliance with prescribed drug therapy are
also important components of an effective program to manage chronic diseases.
Diagnostic screening aids in the early identification of patients who would
benefit from drug therapy. Effective administration of drug therapies often
requires careful therapeutic monitoring of drug impact on body chemistry to
ensure proper drug dosages, monitor improvement and reduce the risk of side
effects. Moreover, ongoing compliance with drug therapy is crucial for effective
drug treatment and reduces the risk to patients of adverse acute events. Studies
indicate that more than 50% of all patients who have received prescription
medication for the treatment of a chronic disease discontinue the therapy within
one year.

Recognizing the benefits of effective chronic disease management, health
care providers and pharmaceutical companies are increasingly conducting
preventive care testing by providing diagnostic screening and therapeutic
monitoring that yield rapid results in settings closer to the patient. Due to
its ease of use and CLIA waived status, the L-D-X System overcomes certain
technological and regulatory hurdles that the Company believes have previously
inhibited the growth of preventive care testing. The L-D-X System enables
qualified health care providers to perform preventive care testing and determine
the need for alternative or additional tests, diagnose diseases, counsel
patients and begin treatment in a single visit. In addition, using the L-D-X
System allows health care providers to capture testing revenues that previously
flowed to clinical and hospital laboratories as well as revenues from
identifying patients who otherwise might not know they are at risk of chronic
disease. The Company believes the L-D-X System provides easier access to testing
sites and rapid patient feedback on therapy effectiveness, both of which
contribute to improved drug therapy compliance. The Company believes that such
improved compliance will provide significant incentives for pharmaceutical
companies to support the L-D-X System. The Company has entered into an agreement
with Parke-Davis to provide L-D-X Systems to physicians conducting a Phase IV
clinical trial of the lipid lowering drug Lipitor. In addition, the Company is
participating with Merck & Co., Inc. ("Merck") and the American Pharmaceuti-

3
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cal Association (the "APhA") in Project ImPACT, a two year study designed to
demonstrate the ability of pharmacists to improve patient outcomes by expanding
the pharmacist's role in chronic disease management to include monitoring the
effectiveness of drug therapies and providing counseling to patients.

The Cholestech L-D-X System is an easy to use, multi-analyte testing system
consisting of a proprietary telephone sized L-D-X Analyzer and a line of single
use, credit card sized test cassettes. The L-D-X System provides precise and
accurate results within five minutes that are comparable to results obtained
from testing with larger, more complex bench top and laboratory based analyzers.
The modular and flexible architecture of the L-D-X System places much of the
testing technology in the single use cassettes and system software, which
decreases the development costs and the time to market for new cassette tests.
Changes that cannot be captured on the cassette's magnetic strip can be
accomplished by changes to the L-D-X Analyzer's removable read only memory
("ROM") software pack. This flexible design is intended to enable health care
providers to perform a variety of tests using the same L-D-X Analyzer and take
advantage of new tests and other product upgrades without having to purchase a
new L-D-X Analyzer.

The Company intends to further penetrate the POL, pharmacy and health
promotion markets, both in the United States and internationally, by increasing
the installed base of L-D-X Analyzers. POLs, pharmacies and health promotion
sites account for an aggregate of approximately 225,000 potential testing sites
in the United States. The Company plans to continue to cultivate strategic
relationships with distribution partners and intends to leverage the customer
bases, marketing power and distribution networks of these partners to accelerate
market penetration. The Company also intends to leverage its installed base by
increasing the number and type of tests run on each L-D-X Analyzer. The Company
is developing additional test cassettes which will enable it to provide a
broader line of products for preventive care testing in its target markets.
These cassettes include tests for blood urea nitrogen ("BUN") and creatinine
used to measure kidney damage, alanine aminotransferase ("ALT") used to monitor
the impact and potential adverse side effects on the liver from lipid lowering
therapies, and a test for bone resorption used to monitor loss of bone mass
resulting from osteoporosis.

The Company was incorporated under the laws of the state of California on
February 2, 1988. The Company's principal executive offices are located at 3347
Investment Boulevard, Hayward, California 94545, and its telephone number is
(510) 732-7200.

4
<PAGE> 6

THE OFFERING

<TABLE>
<S> <C>
Common Stock Offered Hereby........................... 3,000,000 shares
Common Stock to be Outstanding after the 14,402,084 shares
Offering(1).........................................
Use of Proceeds....................................... For capital expenditures, research and
development, expansion of sales and
marketing capabilities and other
working capital and general corporate
purposes. See "Use of Proceeds."
Nasdaq National Market Symbol......................... CTEC
</TABLE>

- ---------------

(1) Based upon shares outstanding as of March 31, 1998. Excludes: (i) 1,295,665
shares of Common Stock issuable upon exercise of options outstanding as of
March 31, 1998, with a weighted average exercise price of $5.41 per share;
(ii) 1,100,495 shares of Common Stock reserved for future issuance under the
Company's employee stock plans; and (iii) an aggregate of up to $750,000 of
Common Stock that may be purchased by Metra Biosystems, Inc. at the then
current market price upon achievement by the Company of certain milestones.
See "Management's Discussion and Analysis of Financial Condition and Results
of Operations," "Business -- Strategic Relationships" and Notes 5 and 6 of
Notes to Financial Statements.

RISK FACTORS

Investors should consider the material risk factors involved in conjunction
with an investment in the Common Stock and the impact to investors from various
events that could adversely affect the Company's business. See "Risk Factors."

5
<PAGE> 7

SUMMARY FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,(1)
-----------------------------------------------
1994 1995 1996 1997 1998
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues......................................... $ 3,029 $ 4,038 $ 6,873 $12,861 $21,664
Cost of products sold............................ 5,434 4,035 4,481 6,957 10,513
------- ------- ------- ------- -------
Gross profit (loss).............................. (2,405) 3 2,392 5,904 11,151
------- ------- ------- ------- -------
Operating expenses:
Sales and marketing........................... 3,168 2,870 3,305 4,108 5,380
Research and development...................... 2,263 757 731 1,341 2,224
General and administrative.................... 1,438 1,663 1,246 1,537 2,087
------- ------- ------- ------- -------
Total operating expenses................. 6,869 5,290 5,282 6,986 9,691
------- ------- ------- ------- -------
Income (loss) from operations.................... (9,274) (5,287) (2,890) (1,082) 1,460
Interest income, net............................. 364 243 144 273 569
------- ------- ------- ------- -------
Income (loss) before taxes....................... (8,910) (5,044) (2,746) (809) 2,029
Provision for income taxes....................... -- -- -- -- 41
------- ------- ------- ------- -------
Net income (loss)................................ $(8,910) $(5,044) $(2,746) $ (809) $ 1,988
======= ======= ======= ======= =======
Net income (loss) per share:
Basic......................................... $ (1.14) $ (0.63) $ (0.34) $ (0.08) $ 0.18
======= ======= ======= ======= =======
Diluted....................................... $ (1.14) $ (0.63) $ (0.34) $ (0.08) $ 0.17
======= ======= ======= ======= =======
Shares used to compute net income (loss) per
share(2):
Basic......................................... 7,791 7,954 8,042 10,382 11,289
======= ======= ======= ======= =======
Diluted....................................... 7,791 7,954 8,042 10,382 11,905
======= ======= ======= ======= =======
</TABLE>

<TABLE>
<CAPTION>
MARCH 31, 1998
---------------------
AS
ACTUAL ADJUSTED(3)
------- -----------
<S> <C> <C>
BALANCE SHEET DATA:
Cash, cash equivalents and marketable securities.......... $14,751 $61,134
Working capital........................................... 17,662 64,045
Total assets.............................................. 25,788 72,171
Long term obligations..................................... -- --
Accumulated deficit....................................... (48,483) (48,483)
Shareholders' equity...................................... 21,446 67,829
</TABLE>

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(1) The Company's fiscal year is a 52-53 week period ending on the last Friday
in March, and its first three fiscal quarters end on the Friday nearest the
end of the calendar quarter. All fiscal years referenced in this Prospectus
consisted of 52 weeks, except fiscal 1995, which consisted of 53 weeks. For
convenience, the Company has indicated in this Prospectus that its fiscal
year ends on March 31 and refers to the fiscal years ending March 29, 1996,
March 28, 1997 and March 27, 1998 as fiscal 1996, fiscal 1997 and fiscal
1998, respectively.

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

(3) Adjusted to reflect the sale of the 3,000,000 shares of Common Stock offered
by the Company hereby at an assumed public offering price of $16.625 per
share, and after deducting underwriting discounts and commissions and the
estimated expenses of the Offering. See "Use of Proceeds" and
"Capitalization."

6
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RISK FACTORS

An investment in the shares of Common Stock offered by this Prospectus
involves a high degree of risk. Prospective investors should carefully consider
the following risk factors, in addition to the other information set forth in
this Prospectus, in connection with an investment in the shares of Common Stock
offered hereby.

This Prospectus, including the information incorporated by reference
herein, includes "forward looking statements" within the meaning of Section 27A
of the Securities Act and Section 21E of the Securities Exchange Act of 1934, as
amended (the "Exchange Act"). All of the statements contained in this
Prospectus, other than statements of historical fact, should be considered
forward looking statements, including, but not limited to, those concerning the
Company's strategies, objectives and plans for expansion of its operations,
products and services and growth in demand for the Cholestech L-D-X System.
There can be no assurance that these expectations will prove to have been
correct. Certain important factors that could cause actual results to differ
materially from the Company's expectations (the "Cautionary Statements") are
disclosed in this Prospectus, including, without limitation, in this "Risk
Factors" section. All subsequent written and oral forward looking statements by
or attributable to the Company or persons acting on its behalf are expressly
qualified in their entirety by such Cautionary Statements. Prospective investors
are cautioned not to place undue reliance on these forward looking statements,
which speak only as of the date hereof and are not intended to give any
assurance as to future results. The Company undertakes no obligation to publicly
release any revisions to these forward looking statements to reflect events or
circumstances after the date hereof or to reflect the occurrence of
unanticipated events.

UNCERTAINTY OF MARKET ACCEPTANCE OF THE L-D-X SYSTEM. The Cholestech L-D-X
System, including the L-D-X Analyzer (the Company's only product platform) and
single use test cassettes, will continue to account for substantially all of the
Company's revenues for the foreseeable future. In order for the Company to
increase revenues, sustain profitability and maintain positive cash flows from
operations, the L-D-X System must continue to gain market acceptance among
health care providers, particularly physician office laboratories ("POLs") and
pharmacies, to which the Company has made only limited sales to date.
Physicians, pharmacists and other health care providers are not likely to use
the L-D-X System unless they determine that it is an attractive alternative to
other means of diagnostic screening or therapeutic monitoring of chronic
diseases. Such determination will depend, in part, upon the L-D-X System's
accuracy, ease of use, rapid test time, reliability and cost effectiveness, as
well as the availability and amount of third party reimbursement. Even if the
advantages of the L-D-X System in diagnosing and monitoring patients with
chronic diseases are established, health care providers may elect not to
purchase and use the L-D-X System for any number of reasons. For example,
physicians and other health care providers may not change their established
means of having such tests performed or may not make the necessary investment to
purchase the L-D-X Analyzer. In addition, the growing prevalence of managed care
may adversely affect the POL market. A growing number of physicians are salaried
employees and have no financial incentive to perform testing. Many managed care
organizations have contracts with laboratories which require participating or
employed physicians to send patient specimens to contracted laboratories.
Finally, physicians are under growing pressure by Medicare and other third party
payors to limit their testing to "medically necessary" tests. Market acceptance
of the L-D-X System by pharmacists will in part depend on the continued
availability and amount of reimbursement to them for performing tests on the
L-D-X System. Even if the Company is successful in continuing to place L-D-X
Analyzers at POLs, pharmacies and other near-patient testing sites, there can be
no assurance that placement of L-D-X Analyzers will result in sustained demand
for the Company's single use test cassettes. As a result, there can be no
assurance that demand for the L-D-X System will be sufficient to sustain
revenues and profits from operations. Because the L-D-X System currently
represents the Company's sole product focus, the Company could be required to
cease operations if the L-D-X System does not achieve and maintain a significant
level of market acceptance. See "Business -- Market Overview," "-- Products and
Products Under Development," "-- Sales and Marketing" and "-- Third Party
Reimbursement."

HISTORY OF LOSSES; UNCERTAINTY OF FUTURE PROFITABILITY; FLUCTUATIONS IN
OPERATING RESULTS. Historically, the Company has experienced significant
operating losses and negative cash flows from operations and, as of March 31,
1998, had an accumulated deficit of $48.5 million. The Company's first
profitable quarter was the first quarter of fiscal 1998, and its first
profitable year was fiscal 1998. The Company's ability to maintain its
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<PAGE> 9

recent profitability and positive cash flows from operations will depend, in
part, upon continued commercialization of existing product offerings, of which
there can be no assurance. The Company's ability to maintain profitability and
positive cash flows from operations will also depend upon the level and timing
of research and development expenditures and the Company's ability to complete
the development of and successfully introduce and market additional tests.

The Company may experience significant fluctuations in revenues and results
of operations on a quarter to quarter basis in the future. Quarterly operating
results will fluctuate due to numerous factors, including: (i) the timing and
level of market acceptance of the L-D-X System; (ii) the timing of the
introduction and availability of new tests; (iii) the timing and level of
expenditures associated with development activities; (iv) the timing and level
of expenditures associated with expansion of sales and marketing activities and
overall operations; (v) the Company's ability to cost-effectively expand
cassette manufacturing capacity and maintain consistently acceptable yields in
the manufacture of cassettes; (vi) variations in manufacturing efficiencies;
(vii) the timing of establishment of strategic distribution arrangements and the
success of the activities conducted under such arrangements; (viii) changes in
demand for its products based on changes in third party reimbursement,
competition, changes in government regulation and other factors; (ix) the timing
of significant orders from and shipments to customers; (x) product pricing and
discounts; (xi) variations in the mix of products sold; and (xii) general
economic conditions. These factors are difficult to forecast, and these or other
factors could have a material adverse effect on the Company's business,
financial condition and results of operations. Fluctuations in quarterly demand
for the Company's products may adversely affect the continuity of the Company's
manufacturing operations, increase uncertainty in operational planning and/or
affect cash flows from operations. The Company's expenses are based in part on
the Company's expectations as to future revenue levels and to a large extent are
fixed in the short term. As a result, if actual revenues do not meet
expectations, the Company's ability to adjust spending levels in the short term
will be limited and its business, financial condition and results of operations
could be materially adversely affected. In addition, as a result of these
fluctuations, it is likely that in some future period the Company's results will
not meet the expectations of public market security analysts or investors. In
such event, the trading price of the Common Stock could be materially adversely
effected. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations."

DEPENDENCE ON DEVELOPMENT, INTRODUCTION AND MARKET ACCEPTANCE OF NEW
TESTS. The Company is at various stages of development of tests designed to
extend the capabilities of the L-D-X System. The Company believes that its
revenue growth and future operating results will depend, in part, upon its
ability to complete development of and successfully introduce these new tests.
The Company will be required to undertake time-consuming and costly development,
sales and marketing, manufacturing and other activities, as well as seek
regulatory approval for these new tests. There can be no assurance that the
Company will not experience difficulties that could delay or prevent the
successful development, introduction and marketing of these new tests, that
regulatory clearance or approval of any new tests will be granted by the United
States Food and Drug Administration (the "FDA") or the Center for Disease
Controls and Prevention (the "CDC") (for CLIA waived status) on a timely basis,
or at all, that the new tests will adequately meet the requirements of the
applicable market or achieve market acceptance or that the Company will be able
to achieve and maintain cost efficient, high volume manufacturing capacity for
any new tests. In July 1997, the FDA approved the Company's request for
clearance to market the Company's blood urea nitrogen and creatinine
("BUN/Creatinine") single use test cassette pursuant to Section 510(k)
("510(k)") of the Food, Drug and Cosmetic Act of 1938, as amended (the "FDC
Act"). In September 1997, the Company submitted to the CDC a request for CLIA
waiver for the use of the BUN/Creatinine test cassette with the L-D-X System.
The CDC has not yet acted upon the Company's request. In order to successfully
commercialize the BUN/Creatinine test cassette or other future tests in the
United States, the Company believes it is critical to obtain waived status under
CLIA, as to which there can be no assurance. In order to successfully
commercialize any new tests, including the BUN/Creatinine test cassette, the
Company will be required to establish and maintain reliable, cost-efficient,
high-volume manufacturing capacity for such tests. The Company has in the past
encountered difficulties in scaling up production of new test cassettes,
including problems involving production yields, quality control and assurance,
variations and impurities in the raw materials and performance of the
manufacturing equipment.
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<PAGE> 10

In May 1996, the Company entered into a development, marketing and
licensing agreement with Metra Biosystems to develop an immunoassay cassette
incorporating Metra Biosystems' bone resorption technology to be used on the
L-D-X System. Metra Biosystems is obligated to purchase $750,000 of additional
shares of Common Stock at the then current market price upon the completion of
specified milestones by the Company unless Metra Biosystems exercises its right
to terminate the agreement, which it may do at any time. There can be no
assurance that Metra Biosystems will not terminate the agreement or that Metra
Biosystems will purchase any additional Common Stock. If the Company is unable,
for technological or other reasons, to complete the development, introduction
and scale up of manufacturing of any new tests, if the Company fails to obtain
regulatory approval for any such tests on a timely basis or if such new tests do
not achieve a significant level of market acceptance, the Company's business,
financial condition and results of operations would be materially adversely
affected. See "Business -- Products and Products Under Development,"
"-- Manufacturing" and "-- Government Regulation."

RISKS ASSOCIATED WITH CASSETTE MANUFACTURING. The Company internally
manufactures all of the single use test cassettes that are used with the L-D-X
Analyzer. The manufacture of the test cassettes is a highly complex and precise
process. Such manufacturing is sensitive to a wide variety of factors, including
raw material variations and impurities, manufacturing process variances,
manufacturing equipment performance and manufacturing environment contaminants.
The Company has in the past experienced lower than expected manufacturing yields
that have adversely affected gross margins and delayed product shipments. To the
extent that the Company does not maintain acceptable manufacturing yields of
test cassettes or experiences product shipment delays, the Company's business,
financial condition and results of operations would be materially adversely
affected. The Company's cassette manufacturing lines would be costly and time
consuming to repair or replace if their operation were interrupted. As the
Company's production levels have increased, the Company has been required to use
its machinery more hours per day and the down time resulting from equipment
failure has increased. The custom nature of much of the Company's manufacturing
equipment increases the time required to remedy equipment failures and replace
equipment. Furthermore, the Company has a limited number of employees dedicated
to the operation and maintenance of the cassette manufacturing equipment, the
loss of whom could impact the Company's ability to effectively operate and
service such equipment. The interruption of cassette manufacturing operations or
the loss of employees dedicated to the cassette manufacturing facility could
have a material adverse effect on the Company's business, financial condition
and results of operations. The Company manufactures all of the cassettes at its
Hayward, California manufacturing facility, and any prolonged inability to
utilize such facility as a result of earthquake, fire or otherwise would have a
material adverse effect on the Company's business, financial condition and
results of operations.

The Company believes that it will be required to expand its manufacturing
capacity for new and existing test cassettes. The Company currently operates two
manufacturing lines for dry chemistry cassettes. The Company is currently
planning and building a third manufacturing line that the Company anticipates
will become operational in fiscal 2000. There can be no assurance that such
expansion of cassette manufacturing capacity can be completed in a timely
fashion, if ever, or that the Company would not need to increase manufacturing
capacity sooner. In addition, the custom nature of much of the Company's
manufacturing equipment increases the time required to expand manufacturing
capacity. The Company also will be required to build a new cassette
manufacturing line in order to manufacture the immunoassay test cassettes under
development. To date, the Company has not developed the processes and production
equipment necessary for an immunoassay cassette manufacturing line. Failure to
expand manufacturing capacity for dry chemistry tests or to successfully develop
an immunoassay cassette manufacturing line and achieve acceptable yields could
lead to an inability to satisfy customer orders and could have a material
adverse effect on the Company's business, financial condition and results of
operations. See "Business -- Manufacturing."

DEPENDENCE ON SUPPLIERS. Single source vendors currently provide certain
subassemblies, components and raw materials used in the manufacture of the
Company's products. Any supply interruption in a single source subassembly,
component or raw material could have a material adverse effect on the Company's
ability to manufacture products until a new source of supply is identified and
qualified. There can be no assurance that the Company will be successful in
qualifying additional sources of supply on a timely basis or at all, and

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<PAGE> 11

failure to do so could have a material adverse effect on the Company's business,
financial condition and results of operations. In addition, an uncorrected
impurity or supplier's variation in a raw material, either unknown to the
Company or incompatible with the Company's manufacturing process, could have a
material adverse effect on the Company's ability to manufacture products.
Because the Company is a small customer of many of its suppliers and purchases
its subassemblies, components and materials on a purchase order basis, rather
than pursuant to long term commitments, there can be no assurance that the
Company's suppliers will devote adequate resources to supplying the Company's
needs. Any interruption or reduction in the future supply of any subassemblies,
components or raw materials currently obtained from single or limited sources
could have a material adverse effect on the Company's business, financial
condition and results of operations. See "Business -- Manufacturing."

NEED TO MANAGE EXPANDING OPERATIONS. If the Company is successful in
achieving and maintaining market acceptance for the L-D-X System, the Company
will be required to expand its operations, particularly in the areas of sales
and marketing and manufacturing. As the Company expands its operations in these
areas, such expansion will likely result in new and increased responsibilities
for management personnel and place significant strain upon the Company's
management, operating and financial systems and resources. To accommodate any
such growth and compete effectively, the Company will be required to implement
and improve its information systems, procedures and controls, and to expand,
train, motivate and manage its work force. There can be no assurance that the
Company's personnel, systems, procedures and controls will be adequate to
support the Company's future operations. Any failure to implement and improve
the Company's operational, financial and management systems or to expand, train,
motivate or manage employees as required by future growth, if any, could have a
material adverse effect on the Company's business, financial condition and
results of operations. See "Business -- Employees" and "Management."

LIMITED SALES, MARKETING AND DISTRIBUTION EXPERIENCE; DEPENDENCE ON THIRD
PARTY DISTRIBUTORS. In order for the Company to increase revenues and sustain
profitability, the L-D-X System must achieve a significant degree of market
acceptance among health care providers and third party payors. The Company has
only limited experience in marketing and selling to the therapeutic monitoring
market in the United States and relies on third party distributors in this
market. There can be no assurance that the Company will be able to maintain its
existing distribution relationships. The Company also will be required to enter
into additional distribution arrangements in order to achieve broader
distribution of its products, particularly into the pharmacy market. There can
be no assurance that the Company will be able to enter into and maintain such
arrangements on a timely basis, if at all. The Company is dependent upon such
distributors to assist it in promoting market acceptance of the L-D-X System. It
is uncertain whether distributors will devote the resources necessary to provide
effective sales and marketing support to the Company. In addition, the Company's
distributors may give higher priority to the products of other medical
suppliers, thus reducing their efforts to sell the Company's products. If the
Company is unable to establish appropriate arrangements with distributors, or if
any of the Company's distributors do not promote, market and sell the L-D-X
Analyzer and single use test cassettes, the Company's business, financial
condition and results of operations could be materially adversely affected. See
"Business -- Sales and Marketing" and "-- Strategic Relationships."

UNCERTAINTY RELATING TO THIRD PARTY REIMBURSEMENT. In the United States,
health care providers that purchase products such as the L-D-X System generally
rely on third party payors, including private health insurance plans, federal
Medicare, state Medicaid and managed care organizations, to reimburse all or
part of the cost of the procedure in which the product is being used. The
Company's ability to commercialize its products successfully in the United
States will depend in part on the extent to which reimbursement for the costs of
tests performed with the L-D-X System and related treatment will be available
from government health authorities, private health insurers and other third
party payors. Third party payors can affect the pricing or the relative
attractiveness of the Company's products by regulating the maximum amount of
reimbursement provided for testing services. Reimbursement is currently not
available for certain uses of the Company's products in particular
circumstances. Tests performed in the health promotion market are generally not
subject to reimbursement. Third party payors are increasingly scrutinizing and
challenging the prices charged for medical products and services. Decreases in
reimbursement amounts for tests performed using the Company's products may
decrease the amounts that physicians and other practitioners are able to

10
<PAGE> 12

charge patients, which in turn may adversely affect the Company's ability to
sell its products on a profitable basis. In addition, certain health care
providers are moving toward a managed care system in which such providers
contract to provide comprehensive health care for a fixed cost per patient.
Managed care providers are attempting to control the cost of health care by
authorizing fewer elective procedures, such as the screening of blood for
chronic diseases. The Company is unable to predict what changes will be made in
the reimbursement methods utilized by third party payors. Inability of health
care providers to obtain reimbursement from third party payors, or changes in
government and third party payors' policies toward reimbursement of tests
employing the Company's products could have a material adverse effect on the
Company's business, financial condition and results of operations. Additionally,
the Company believes that the overall escalating cost of medical products and
services has led to and will continue to lead to increased pressures on the
health care industry, both domestic and international, to reduce the cost of
products and services, including products offered by the Company. Market
acceptance of the Company's products in international markets is also dependent,
in part, upon the availability of reimbursement within prevailing health care
payment systems. Reimbursement and health care payment systems in international
markets vary significantly by country and include both government sponsored
health care and private insurance. There can be no assurance that third party
reimbursement and coverage will be available or adequate in either United States
or international markets, that current reimbursement amounts will not be
decreased in the future or that future legislation, regulation, or reimbursement
policies of third party payors will not otherwise adversely affect demand for
the Company's products or the Company's ability to sell its products on a
profitable basis, any of which could have a material adverse affect on the
Company's business, financial condition and results of operations. See
"Business -- Third Party Reimbursement."

Political, economic and regulatory influences are pushing the health care
industry in the United States to fundamental change. The Company anticipates
that Congress, state legislatures and the private sector will continue to review
and assess alternative health care delivery and payment systems. Potential
approaches that have been considered include mandated basic health care
benefits, controls on health care spending through limitations on the growth of
private health insurance premiums and Medicare and Medicaid spending, the
creation of large insurance purchasing groups, price controls and other
fundamental changes to the health care delivery system. Legislative debate is
expected to continue in the future, and market forces are expected to demand
reduced costs. The Company cannot predict what impact the adoption of any
federal or state health care reform measures, future private sector reform or
market forces may have on its business.

GOVERNMENT REGULATION. The manufacture and sale of diagnostic products,
including the L-D-X System, are subject to extensive regulation by numerous
governmental authorities, principally the FDA and corresponding state and
foreign regulatory agencies. The Company will not be able to commence marketing
or commercial sales in the United States of any of the new tests it is
developing until it receives clearance or approval from the FDA. The process of
obtaining FDA and other required regulatory clearances and approvals is lengthy,
expensive and uncertain. As a result, there can be no assurance that any of the
Company's new tests under development, even if successfully developed, will ever
obtain such clearance or approval. Additionally, certain material changes to
medical products already cleared or approved by the FDA are also subject to
further FDA review and clearance or approval. The loss of previously obtained
clearances, or failure to comply with existing or future regulatory
requirements, could have a material adverse effect on the Company's business,
financial condition and results of operations. The L-D-X Analyzer and all
existing test cassettes required clearance pursuant to a 510(k) clearance.
Medical devices are subject to continual review, and later discovery of
previously unknown problems with a cleared product may result in restrictions on
the product's marketing or withdrawal of the product from the market. In
general, the Company intends to develop and market tests that will require
510(k) clearance. It generally takes from four to twelve months from the date of
submission to obtain 510(k) clearance, but it may take longer. The Company does
not believe that its products under development will require submission of a
pre-market approval ("PMA") application. However, if a future product were to
require submission of a PMA application, regulatory approval of such product
would involve a much longer and more costly process than a 510(k) clearance and
would involve the submission of extensive supporting data and clinical
information. A PMA application may be submitted to the FDA only after clinical
trials and the required patient follow-up for a particular test are successfully
completed. Upon filing of a PMA application, the FDA commences a review process
that generally takes one
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<PAGE> 13

to three years from the date on which the PMA application is accepted for
filing, but may take significantly longer. There can be no assurance that the
Company's products under development will require only 510(k) clearance rather
than the more lengthy and costly PMA approval. A requirement that the Company
file a PMA application for any new test would significantly delay the Company's
ability to market such test and significantly increase the costs of development.

The European Union ("EU") has promulgated rules that require that devices
such as those developed, manufactured and sold by the Company receive the right
to affix the CE mark, a symbol of adherence to applicable EU medical device
directives, Quality System Regulations ("QSR," the successor regulations to
current Good Manufacturing Practice ("cGMP") regulations) and ISO9001/EN46001
standards. The Company's products will be covered by the In Vitro Diagnostics
Directive that has not been published or adopted. The Company has completed all
the testing necessary to comply with applicable safety regulations to be
eligible for self-certification relative to those regulations. While the Company
intends to satisfy the requisite policies and procedures that will permit it to
affix the CE mark to its products, there can be no assurance that the Company
will be successful in meeting the EU certification requirements, and failure to
receive the right to affix the CE mark will prohibit the Company from selling
its products in EU member countries and could have a material adverse effect on
the Company's business, financial condition and results of operations.

The use of the Company's products and those of its competitors is also
affected by federal and state regulations, which provide for regulation of
laboratory testing, as well as by the laws and regulations of foreign countries.
The scope of these regulations includes quality control, proficiency testing,
personnel standards and inspections. For example, in the United States, CLIA
categorizes tests as "waived," or as being "moderately complex" or "highly
complex" on the basis of specific criteria. In January 1996, the L-D-X Analyzer
and the TC, HDL, triglycerides and glucose tests in any combination were
classified as waived under CLIA. In order to successfully commercialize the
tests that are currently under development, the Company believes that it will be
critical to obtain waived classification for such tests under CLIA. There can be
no assurance that any new tests developed by the Company, including the
BUN/Creatinine test cassette, will qualify for CLIA waived classification. Any
failure of the new tests to obtain waived status under CLIA will adversely
impact the Company's ability to commercialize such tests, which could have a
material adverse effect on the Company's business, financial condition and
results of operations. In addition, there can be no assurance that any future
amendment of CLIA or the promulgation of additional regulations impacting
laboratory testing will not have an adverse effect on the Company's ability to
market the L-D-X System. For example, if CLIA regulations were modified in a
manner that reduced regulatory requirements and burdens faced by competitive
products, certain competitive advantages of the L-D-X System's waived status
could be reduced or eliminated.

The Company's manufacturing processes, as well as, in certain instances,
those of its contract manufacturers, are subject to stringent federal, state and
local regulations governing the use, generation, manufacture, storage, handling
and disposal of certain materials and wastes. The Company and its contract
manufacturers must economically manufacture products in compliance with federal,
state and foreign regulations regarding the manufacture of health care products
and diagnostic devices, including QSR, and other foreign regulations and state
and local health, safety and environmental regulations, which include testing,
control and documentation requirements. Failure to comply with QSR,
ISO9001/EN46001 requirements and other applicable regulatory requirements by the
Company and in certain ISO9001/EN46001 certification regulations circumstances,
its contract manufacturers, including marketing products for unapproved uses,
could result in, among other things, warning letters, fines, injunctions, civil
penalties, recall or seizure of products, total or partial suspension of
production, refusal of the government to grant pre-market clearance or
pre-market approval for devices, withdrawal of approvals and criminal
prosecution. Changes in existing regulations or adoption of new governmental
regulations or policies could prevent or delay regulatory approval of the
Company's products. There can be no assurance that the Company will not be
required to incur significant costs in the future in complying with
manufacturing and environmental regulations. See "Business -- Government
Regulation."

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<PAGE> 14

DEPENDENCE ON PROPRIETARY TECHNOLOGY; UNCERTAINTY OF PATENT AND PROPRIETARY
TECHNOLOGY PROTECTION; DEPENDENCE ON LICENSING OF TECHNOLOGY FROM THIRD
PARTIES. The Company's ability to compete effectively will depend in part on its
ability to develop and maintain the proprietary aspects of its technology and
operate without infringing the proprietary rights of others. The Company has
nine United States patents and has filed patent applications relating to its
technology internationally under the Patent Cooperation Treaty and individual
patent applications. There can be no assurance that any of the Company's pending
patent applications will result in the issuance of any patents, or that, if
issued, any such patents will offer protection against competitors with similar
technology. There can be no assurance that any patents issued to the Company
will not be challenged, invalidated or circumvented in the future or that the
rights created thereunder will provide a competitive advantage. In addition,
there can be no assurance that competitors, many of which have substantially
greater resources than the Company and have made substantial investments in
competing technologies, will not seek to apply for and obtain patents covering
technologies that are more effective than the Company's technologies, that would
render the Company's technologies or products obsolete or uncompetitive or that
would prevent, limit or interfere with the Company's ability to make, use or
sell its products either in the United States or in international markets.

The medical products industry has been characterized by extensive
litigation regarding patents and other intellectual property rights. There can
be no assurance that the Company will not in the future become subject to patent
infringement claims and litigation or interference proceedings conducted in the
United States Patent and Trademark Office ("USPTO") to determine the priority of
inventions. The defense and prosecution of intellectual property suits, USPTO
interference proceedings and related legal and administrative proceedings are
both costly and time consuming. Litigation may be necessary to enforce any
patents issued to the Company, to protect trade secrets or know-how owned by the
Company or to determine the enforceability, scope and validity of the
proprietary rights of others. Any litigation or interference proceedings will
result in substantial expense to the Company and significant diversion of effort
by the Company's technical and management personnel. An adverse determination in
litigation or interference proceedings to which the Company may become a party
could subject the Company to significant liabilities to third parties or require
the Company to seek licenses from third parties which may not be available on
commercially reasonable terms or at all.

The Company's current products incorporate technologies which are the
subject of patents issued to, and patent applications filed by, others. The
Company has obtained licenses for certain of these technologies and may be
required to obtain licenses for others. There can be no assurance that the
Company will be able to obtain licenses for technology patented by others on
commercially reasonable terms, or at all, that it will be able to develop
alternative approaches if unable to obtain licenses or that the Company's
current and future licenses will be adequate for the operation of the Company's
business. The failure to obtain such licenses or identify and implement
alternative approaches could have a material adverse effect on the Company's
business, financial condition and results of operations.

The Company also relies upon trade secrets, technical know-how and
continuing invention to develop and maintain its competitive position, and no
assurance can be given that others will not independently develop substantially
equivalent proprietary information and techniques or otherwise gain access to
the Company's trade secrets or disclose such technology, or that the Company can
meaningfully protect its right to its trade secrets, any of which could have a
material adverse effect on the Company's business, financial condition and
results of operations. See "Business -- Patents and Proprietary Technology."

HIGHLY COMPETITIVE INDUSTRY; RAPID TECHNOLOGICAL CHANGE. The markets for
diagnostic screening and therapeutic monitoring in which the Company operates
are intensely competitive. The Company's competition consists mainly of clinical
and hospital laboratories, as well as manufacturers of bench top analyzers. In
order to achieve market acceptance for the L-D-X System, the Company will be
required to demonstrate that the L-D-X System is an attractive alternative to
bench top analyzers as well as to clinical and hospital laboratory laboratories.
This will require physicians to change their established means of having such
tests performed. There can be no assurance that the L-D-X System will be able to
compete with these other testing services and analyzers. In addition, companies
having a significant presence in the market for therapeutic monitoring, such as
Abbott Laboratories, Clinical Diagnostic Systems, a division of Johnson &
Johnson and formerly a
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<PAGE> 15

division of Eastman Kodak Company, and Boehringer Mannheim GmbH, a subsidiary of
Roche Holdings Ltd. ("Boehringer Mannheim"), have developed or are developing
analyzers designed for near-patient testing. These competitors have
substantially greater financial, technical, research and other resources and
larger, more established marketing, sales, distribution and service
organizations than the Company. In addition, such competitors offer broader
product lines than the Company, have greater name recognition than the Company,
and offer discounts as a competitive tactic. In addition, several smaller
companies are currently making or developing products that compete or will
compete with those of the Company.

The Company expects that its competitors will compete intensely to maintain
and increase market share and seek to develop similar multi-analyte tests that
qualify for CLIA waiver. There can be no assurance that these competitors will
not succeed in obtaining CLIA waived status for their products or in developing
or marketing technologies or products that are more effective and commercially
attractive than the Company's current or future products, or that would render
the Company's technologies and products obsolete or noncompetitive. The
Company's current and future products must compete effectively with the existing
and future products of the Company's competitors primarily on the basis of ease
of use, breadth of tests available, market presence, cost effectiveness,
precision, accuracy, immediacy of results and the ability to perform tests near
the patient, to test multiple analytes from a single sample and to conduct tests
without a skilled technician or pre-treating blood. There can be no assurance
that the Company will have the financial resources, technical expertise or
marketing, distribution or support capabilities to compete successfully in the
future or, if the Company does have such resources and capabilities, that it
will employ them successfully. See "Business -- Products and Products Under
Development" and "-- Competition."

DEPENDENCE ON ATTRACTION AND RETENTION OF KEY EMPLOYEES. The Company's
success depends in significant part upon the continued service of certain key
scientific, technical, regulatory and managerial personnel, and its continuing
ability to attract and retain additional highly qualified personnel in those
areas. Competition for such personnel is intense, and there can be no assurance
that the Company will be able to retain such personnel or that it can attract or
retain other highly qualified personnel in the future, including key sales and
marketing personnel. The loss of key personnel or the inability to hire or
retain qualified personnel could have a material adverse effect upon the
Company's business, financial condition and results of operations.

RISK OF PRODUCT LIABILITY; PRODUCT LIABILITY INSURANCE MAY BE INSUFFICIENT
OR UNAVAILABLE. Sale of the Company's products entails risk of product liability
claims. The medical testing industry has historically been litigious, and the
Company faces financial exposure to product liability claims in the event that
use of its products results in personal injury or improper diagnosis. The
Company also faces the possibility that defects in the design or manufacture of
its products might necessitate a product recall. There can be no assurance that
the Company will not experience losses due to product liability claims or
recalls in the future. The Company currently maintains product liability
insurance, but there can be no assurance that the coverage limits of the
Company's insurance policies will be adequate. Such insurance is expensive and
difficult to obtain, and no assurance can be given that product liability
insurance can be maintained in the future on acceptable terms, in sufficient
amounts to protect the Company against losses due to product liability, or at
all. Inability to maintain insurance at an acceptable cost or to otherwise
protect against potential product liability could prevent or inhibit the
continued commercialization of the Company's products. In addition, a product
liability claim in excess of relevant insurance coverage or a product recall
could have a material adverse effect on the Company's business, financial
condition and results of operations. See "Business -- Product Liability and
Insurance."

YEAR 2000 COMPLIANCE RISKS. The L-D-X System contains software that may be
used to integrate test results with an end user's medical records systems. It is
likely that, commencing in the year 2000, the functionality of certain medical
records systems will be adversely affected when one or more component products
of such systems are unable to process four digit characters representing years
and, therefore, the medical records system would not be in "Year 2000
compliance." Although the Company believes its products are in Year 2000
compliance, there can be no assurance that the Company's products will be able
to function properly when integrated with other vendors' non-compliant component
products. The inability of the L-D-X System to properly manage and manipulate
data related to the Year 2000 could result in a material adverse
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<PAGE> 16

effect on the Company's business, financial condition and results of operations,
including increased warranty costs, customer satisfaction issues and potential
lawsuits. Although the Company believes its products are Year 2000 compliant,
the Company anticipates that substantial litigation may be brought against
vendors of all component products that operate in connection with medical
records systems, including those component products provided by the Company. The
Company believes that any such claims, with or without merit, could have a
material adverse effect on the Company's business, financial condition and
results of operations. In addition, parties with whom the Company does business
may not be in Year 2000 compliance, which could have a material adverse effect
on the Company's business, financial condition and results of operations.

The Company has identified Year 2000 dependencies in its internal
information systems and has implemented changes to such systems to make them
Year 2000 compliant. While the Company currently expects that the Year 2000 will
not pose significant operational problems, delays in the implementation of new
information systems, or a failure to fully identify all Year 2000 dependencies
in the Company's systems could have material adverse consequences, including
delays in the delivery or sale of the Company's products.

POSSIBLE FUTURE CAPITAL REQUIREMENTS; UNCERTAINTY OF ADDITIONAL
FUNDING. The Company intends to expend substantial funds for capital
expenditures related to expansion of its manufacturing capacity, research and
development, including expansion of its product line and enhancement of its
current products, expansion of sales and marketing activities and other working
capital and general corporate purposes. Although the Company believes that the
net proceeds of the Offering, together with the Company's cash, cash
equivalents, marketable securities, cash flow anticipated to be generated by
future operations and available bank borrowings under an existing line of
credit, will be sufficient to meet its capital requirements for the foreseeable
future, there can be no assurance that the Company will not require additional
financing. For example, the Company may be required to expend greater than
anticipated funds if unforeseen difficulties arise in expanding manufacturing
capacity for existing cassettes or in the course of completing required
additional development, obtaining necessary regulatory approvals, obtaining
waived status under CLIA or introducing or scaling up manufacturing for new
tests. The Company's future liquidity and capital requirements will depend upon
numerous additional factors, including: the costs and timing of expansion of
manufacturing capacity; the number and type of new tests the Company seeks to
develop; the success of these development efforts; the costs and timing of
expansion of sales and marketing activities; the extent to which the Company's
existing and new products gain market acceptance; competing technological and
market developments; the progress of commercialization efforts of the Company's
distributors; the costs involved in preparing, filing, prosecuting, maintaining
and enforcing patent claims and other intellectual property rights; developments
related to regulatory and third party reimbursement matters and CLIA; and other
factors. In the event that additional financing is needed, the Company may seek
to raise additional funds through public or private financing, collaborative
relationships or other arrangements. Any additional equity financing may be
dilutive to shareholders, and debt financing, if available, may involve
restrictive covenants. Collaborative arrangements, if necessary to raise
additional funds, may require the Company to relinquish its rights to certain of
its technologies, products or marketing territories. The failure of the Company
to raise capital on acceptable terms when needed could have a material adverse
effect on the Company's business, financial condition and results of operations.
There can be no assurance that such financing, if required, will be available on
satisfactory terms, or at all. See "Use of Proceeds" and "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources."

SHARES ELIGIBLE FOR FUTURE SALE. Upon the completion of the Offering, the
Company will have outstanding 14,402,084 shares (14,852,084 shares if the
Underwriters' over-allotment option is exercised in full) of Common Stock, of
which 14,292,112 shares will be freely tradable without restriction after taking
into consideration the Lock-Up Agreements described below.

or other such similar securities of the Company for a period of 90 days after
the date of this Prospectus without the prior written consent of Prudential
Securities Incorporated, on behalf of the Underwriters, other than Common Stock
issued by the Company in connection with the exercise of outstanding securities,
options granted by the Company pursuant to its 1997 Stock Incentive Program and
common stock issuable pursuant to such options and securities issued by the
Company pursuant to the 1992 Employee Stock Purchase Plan. In addition,
directors and officers may transfer securities of the Company either during
their respective lifetimes or on death by gift, will or intestacy to their
respective immediate families or to a trust the beneficiaries of which are
exclusively such directors and officers and/or a member or members of their
respective immediate families, provided, however, that in any such case, it
shall be a condition to the transfer that the transferee execute an agreement
stating that the transferee is receiving and holding such securities subject to
the provisions of such Lock-Up Agreement, and there shall be no further transfer
of such securities except in accordance with such Lock-Up Agreement. Prudential
Securities Incorporated may, in its sole discretion, at any time and without
notice, release all or any portion of the shares of Common Stock subject to such
lock-up agreements. In addition, as of the date of this Prospectus, there are
outstanding options to purchase a total of approximately 1,295,665 shares of the
Common Stock under the Company's stock option plans. Sales of substantial
amounts of such shares in the public market or the prospect of such sales could
adversely affect the market price of the Common Stock. Sale of such shares in
the future could adversely affect the prevailing market price of the Common
Stock. No prediction can be made as to the impact, if any, that future sales of
shares or the availability of shares for sale will have on the market price of
the Common Stock. See "Underwriting."

ANTI-TAKEOVER PROVISIONS. The Company's Board of Directors (the "Board")
has the authority to issue up to 5,000,000 shares of preferred stock and to
determine the rights, preferences, privileges and restrictions of such shares
without any further vote or action by the Company's shareholders. To date, the
Board has designated 25,000 shares as Series A Participating Preferred Stock
("Series A Preferred") in connection with the Company's Preferred Share Purchase
Rights Plan. The issuance of preferred stock under certain circumstances could
have the effect of delaying or preventing a change in control of the Company or
otherwise adversely affecting the rights of the holders of Common Stock.

Pursuant to the Company's Preferred Shares Rights Agreement (the "Rights
Agreement") each share of Common Stock carries a right (a "Right") which
entitles the registered holder to purchase from the Company one-thousandth of a
share of Series A Preferred at an exercise price of $44.00 (the "Purchase
Price"), subject to adjustment. The Rights are designed to protect and maximize
the value of the outstanding equity interests in the Company in the event of an
unsolicited attempt by an acquiror to take over the Company, in a manner or on
terms not approved by the Board. The Rights have been declared by the Board in
order to deter coercive tactics, including a gradual accumulation of shares in
the open market, of a 15% or greater position to be followed by a merger or a
partial or two-tier tender offer that does not treat all shareholders equally.
The Rights should not interfere with any merger or other business combination
approved by the Board. However, the Rights may have the effect of rendering more
difficult or discouraging an acquisition of the Company deemed undesirable by
the Board. The Rights may cause substantial dilution to a person or group
attempting to acquire the Company on terms or in a manner not approved by the
Board, except pursuant to an offer conditioned upon the negation, purchase or
redemption of the Rights.

POTENTIAL VOLATILITY OF STOCK PRICE. The market price of the Common Stock,
like that of the common stock of many other medical products and technology
companies, has in the past been, and is likely in the future to continue to be,
highly volatile. Factors such as fluctuations in the Company's operating
results, announcements of technological innovations or new commercial products
by the Company or its competitors, government regulation, changes in the current
structure of the health care financing and payment systems and developments in
or disputes regarding patent or other proprietary rights may have a significant
effect on the market price of the Common Stock. Moreover, the stock market has
from time to time experienced extreme price and volume fluctuations, which have
particularly affected the market prices for medical products and high technology
companies and which have often been unrelated to the operating performance of
such companies. These broad market fluctuations, as well as general economic,
political and market conditions, may adversely affect the market price of the
Common Stock. In the past, following periods of volatility in the market price
of a company's stock, securities class action suits have been filed against the
issuing company.

16
<PAGE> 18

There can be no assurance that such litigation will not occur in the future with
respect to the Company. Such litigation could result in substantial costs and a
diversion of management's attention and resources, which could have a material
adverse effect on the Company's business, financial condition and results of
operations. Any adverse determination in such litigation could also subject the
Company to significant liabilities.

ABSENCE OF DIVIDENDS. The Company has never declared or paid any cash
dividends since its inception. The Company currently expects to retain future
earnings, if any, to finance the growth and development of its business and,
therefore, does not anticipate declaring or paying any cash dividends in the
foreseeable future.

17
<PAGE> 19

USE OF PROCEEDS

The net proceeds to the Company from the sale of the 3,000,000 shares of
Common Stock offered hereby are estimated to be approximately $46.4 million
($53.4 million if the Underwriters' over-allotment option is exercised in full)
at an assumed public offering price of $16.625 per share, after deducting
underwriting discounts and commissions and the estimated expenses of the
Offering.

Approximately $10.0 million of the net proceeds of the Offering will be
used for expansion of manufacturing capacity in fiscal 1999. The balance of the
net proceeds will be used for research and development, including expansion of
the Company's product line as well as enhancement of existing products,
expansion of sales and marketing capabilities, other capital expenditures and
working capital and general corporate purposes. The Company may also use a
portion of the net proceeds for the acquisition of technologies, businesses or
products that are complementary to those of the Company, although no such
acquisitions are planned or being negotiated as of the date of this Prospectus,
and no portion of the net proceeds has been allocated for any specific
acquisition. Pending such uses, the net proceeds of the Offering will be
invested in short term, interest bearing, investment grade securities or
guaranteed obligations of the United States government.

The actual amount expended and timing of the use of net proceeds of the
Offering for each purpose may vary significantly depending upon many factors,
including: the costs and timing of expansion of manufacturing capacity; the
number and type of new tests the Company seeks to develop; the success of these
development efforts; the costs and timing of expansion of sales and marketing
activities; the extent to which the Company's existing and new products gain
market acceptance; competing technological and market developments; the progress
of commercialization efforts of the Company's distributors; the costs involved
in preparing, filing, prosecuting, maintaining and enforcing patent claims and
other intellectual property rights; developments related to regulatory and third
party reimbursement matters and CLIA; and other factors. The Company's
management will retain broad discretion as to the allocation of a significant
portion of the net proceeds of the Offering.

DIVIDEND POLICY

The Company has never declared or paid any cash dividends since its
inception. The Company currently expects to retain future earnings, if any, to
finance the growth and development of its business and, therefore, does not
anticipate declaring or paying any cash dividends in the foreseeable future.

PRICE RANGE OF COMMON STOCK

The Common Stock is included for quotation in the Nasdaq National Market
under the symbol "CTEC." The following table sets forth, for the periods
indicated, the high and low sales prices per share of Common Stock.

<TABLE>
<CAPTION>
HIGH LOW
------ ------
<S> <C> <C>
FISCAL YEAR 1997
First Quarter............................................ $ 7.50 $ 5.25
Second Quarter........................................... 6.63 4.13
Third Quarter............................................ 6.13 4.88
Fourth Quarter........................................... 6.50 4.88
FISCAL YEAR 1998
First Quarter............................................ $ 6.25 $ 4.75
Second Quarter........................................... 12.25 5.63
Third Quarter............................................ 15.38 9.00
Fourth Quarter........................................... 16.13 10.75
FISCAL YEAR 1999
First Quarter (through April 28, 1998)................... $17.88 $14.63
</TABLE>

On April 28, 1998, the last reported sales price of the Common Stock on the
Nasdaq National Market was $16.625 per share, and as of March 31, 1998, the
number of holders of record of the Common Stock was 274.

18
<PAGE> 20

CAPITALIZATION

The following table sets forth the capitalization of the Company at March
31, 1998 and as adjusted to reflect the sale of the 3,000,000 shares of Common
Stock offered hereby at an assumed public offering price of $16.625 per share,
and after deducting underwriting discounts and commissions and the estimated
expenses of the Offering. The information set forth below should be read in
conjunction with the Company's Financial Statements and the Notes thereto
included elsewhere in this Prospectus.

<TABLE>
<CAPTION>
MARCH 31, 1998
----------------------
ACTUAL AS ADJUSTED
-------- -----------
(IN THOUSANDS)
<S> <C> <C>
Long term liabilities....................................... $ -- $ --
-------- --------
Shareholders' equity:
Preferred Stock, no par value; 5,000,000 shares
authorized; no shares issued and outstanding, actual
and as adjusted........................................ -- --
Common Stock, no par value; 25,000,000 shares authorized;
11,402,084 shares issued and outstanding, actual;
14,402,084 shares issued and outstanding, as
adjusted(1)............................................ 69,880 116,263
Unrealized gains on investments........................... 49 49
Accumulated deficit....................................... (48,483) (48,483)
-------- --------
Total shareholders' equity........................... 21,446 67,829
-------- --------
Total capitalization.............................. $ 21,446 $ 67,829
======== ========
</TABLE>

- ---------------
(1) Excludes: (i) 1,295,665 shares of Common Stock issuable upon exercise of
options outstanding as of March 31, 1998, with a weighted average exercise
price of $5.41 per share; (ii) 1,100,495 shares of Common Stock reserved for
future issuance under the Company's employee stock plans; and (iii) an
aggregate of up to $750,000 of Common Stock that may be purchased by Metra
Biosystems at the then current market price upon achievement by the Company
of certain milestones. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations," "Business -- Strategic
Relationships" and Notes 5 and 6 of Notes to Financial Statements.

19
<PAGE> 21

SELECTED FINANCIAL DATA

The following selected financial data should be read in conjunction with
the Company's Financial Statements and Notes thereto and "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
included elsewhere in this Prospectus. The statement of operations data set
forth below for the fiscal years ended March 31, 1996, 1997 and 1998 and the
balance sheet data as of March 31, 1997 and 1998 are derived from financial
statements of the Company that have been audited by Price Waterhouse LLP,
independent accountants, and are included elsewhere in this Prospectus. The
statement of operations data for the fiscal years ended March 31, 1994 and 1995
and the balance sheet data as of March 31, 1994, 1995 and 1996 are derived from
financial statements of the Company that have been audited by Price Waterhouse
LLP and are not included herein. The historical results are not necessarily
indicative of results to be expected in future periods.

<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
----------------------------------------------------
1994 1995 1996 1997 1998
-------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues.................................. $ 3,029 $ 4,038 $ 6,873 $ 12,861 $ 21,664
Cost of products sold..................... 5,434 4,035 4,481 6,957 10,513
-------- -------- -------- -------- --------
Gross profit (loss)....................... (2,405) 3 2,392 5,904 11,151
-------- -------- -------- -------- --------
Operating expenses:
Sales and marketing.................... 3,168 2,870 3,305 4,108 5,380
Research and development............... 2,263 757 731 1,341 2,224
General and administrative............. 1,438 1,663 1,246 1,537 2,087
-------- -------- -------- -------- --------
Total operating expenses............. 6,869 5,290 5,282 6,986 9,691
-------- -------- -------- -------- --------
Income (loss) from operations............. (9,274) (5,287) (2,890) (1,082) 1,460
Interest income, net...................... 364 243 144 273 569
-------- -------- -------- -------- --------
Income (loss) before taxes................ (8,910) (5,044) (2,746) (809) 2,029
Provision for income taxes................ -- -- -- -- 41
-------- -------- -------- -------- --------
Net income (loss)......................... $ (8,910) $ (5,044) $ (2,746) $ (809) $ 1,988
======== ======== ======== ======== ========
Net income (loss) per share:
Basic.................................. $ (1.14) $ (0.63) $ (0.34) $ (0.08) $ 0.18
======== ======== ======== ======== ========
Diluted................................ $ (1.14) $ (0.63) $ (0.34) $ (0.08) $ 0.17
======== ======== ======== ======== ========
Shares used to compute net income (loss)
per share(1):
Basic.................................. 7,791 7,954 8,042 10,382 11,289
======== ======== ======== ======== ========
Diluted................................ 7,791 7,954 8,042 10,382 11,905
======== ======== ======== ======== ========
</TABLE>

<TABLE>
<CAPTION>
MARCH 31,
----------------------------------------------------
1994 1995 1996 1997 1998
-------- -------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash, cash equivalents and marketable
securities............................. $ 11,058 $ 5,230 $ 4,111 $ 14,009 $ 14,751
Working capital........................... 9,239 5,929 4,442 16,124 17,662
Total assets.............................. 15,685 10,041 9,645 21,087 25,788
Long term obligations..................... 54 44 810 -- --
Accumulated deficit....................... (41,872) (46,916) (49,662) (50,471) (48,483)
Shareholders' equity...................... 13,412 8,513 5,982 18,703 21,446
</TABLE>

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

20
<PAGE> 22

MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion contains forward looking statements that involve
risks and uncertainties. The Company's actual results could differ materially
from those anticipated in these forward looking statements as a result of
certain factors discussed below, including under "General" and "Quarterly
Results of Operations," as well as in "Risk Factors." These forward looking
statements include, but are not limited to, the statement under "General"
regarding the Company's expectation of continuing to incur negative cash flows,
the statement under "Revenues" regarding the Company's expectation that
international revenues may increase in dollar amount but decrease as a
percentage of total revenues, the statement under "Sales and Marketing"
regarding the Company's expectation that sales and marketing expenses will
increase, the statement under "Research and Development" regarding the
development of new test cassettes and the Company's anticipation that research
and development expenditures will increase, and the statement in the third
paragraph under "Liquidity and Capital Resources" regarding the length of time
that the Company's resources will be sufficient to meet its capital
requirements.

GENERAL

The Company develops, manufactures and markets the Cholestech the L-D-X
System which performs near-patient diagnostic screening and therapeutic
monitoring for the management of prevalent chronic diseases (preventive care
testing). The L-D-X System is capable of measuring multiple analytes
simultaneously with a single drop of whole blood within five minutes. The
Company currently markets the L-D-X System, including the L-D-X Analyzer and a
variety of single use test cassettes, to the physician office laboratory (POL),
pharmacy and health promotion markets, in the United States and internationally.
Despite recording net income in fiscal 1998, the Company has experienced
significant operating losses prior to fiscal 1998 and, as of March 31, 1998, had
an accumulated deficit of $48.5 million. The L-D-X System, including the L-D-X
Analyzer (the Company's only product platform) and single use test cassettes,
will continue to account for substantially all of the Company's revenues for the
foreseeable future. In order for the Company to increase revenues, sustain
profitability and maintain positive cash flows from operations, the L-D-X System
must continue to gain market acceptance among health care providers,
particularly POLs and pharmacies, to which the Company has made only limited
sales to date. The Company is developing certain additional tests designed to
extend the capabilities of the L-D-X System. The Company believes that its
future growth will depend, in part, upon its ability to complete development of
and successfully introduce these new tests. The Company may incur negative cash
flows from operations as it expands manufacturing capacity for existing and new
test cassettes, increases product research and development efforts for new test
cassettes, and expands sales and marketing activities and pursues regulatory
clearances and approvals. The development and commercialization of new tests
will require additional development, sales and marketing, manufacturing and
other expenditures. The required level and timing of such expenditures will have
an impact on the Company's ability to maintain profitability and positive cash
flows from operations. The Company expects its product mix to change from time
to time, and these changes will affect the Company's revenues and operating
results. For example, the Company has recently entered the POL and pharmacy
markets. In its limited experience, the Company generally has found that these
markets use a higher proportion of lipid profiles for therapeutic monitoring
purposes, which test cassettes typically have higher selling prices and
associated gross margins than the Company's other tests. However, the Company
has also experienced a relatively lower rate of testing per day in these markets
than in the diagnostic screening market.

RESULTS OF OPERATIONS

Fiscal 1998 and Fiscal 1997

Revenues. The Company's revenues increased 68.4% to $21.7 million in fiscal
1998 from $12.9 million in fiscal 1997. The increase in revenues reflected
increased unit sales of single use test cassettes and L-D-X Analyzers to health
care providers in the POL, pharmacy and health promotion markets.

International revenues represented 14.2% and 9.7% of revenues in fiscal
1998 and fiscal 1997, respectively. The Company expects that the dollar amount
and proportion of international revenues may fluctuate from period to period.

21
<PAGE> 23

Cost of Products Sold. Cost of products sold includes direct labor, direct
material, overhead and royalties. Cost of products sold increased 51.1% to $10.5
million in fiscal 1998 from $7.0 million in fiscal 1997, primarily as a result
of increased unit sales of single use test cassettes and L-D-X Analyzers. Gross
margin was 51.5% and 45.9% in fiscal 1998 and 1997, respectively. The
improvement in gross margin was primarily attributable to increased volume of
single use test cassettes manufactured and sold without corresponding percentage
increases in manufacturing costs, improving the absorption of manufacturing
overhead and reducing unit costs.

The Company has licensed certain technology used in the manufacturing of
certain of its products. A related agreement, which expires in 2006, requires
the Company to pay a royalty of 2.0% on net sales of the applicable products.
Total royalty expense in fiscal 1998 and 1997 was $562,000 and $551,000,
respectively, and such amounts were charged to cost of products sold.

Sales and Marketing. Sales and marketing expense includes salaries,
commissions, bonuses, expenses for outside services related to marketing
programs and travel expenses. Sales and marketing expense increased 31.0% to
$5.4 million in fiscal 1998 from $4.1 million in fiscal 1997. This increase was
primarily attributable to continued expansion of the Company's domestic sales
and marketing programs, increased expenses related to greater penetration of the
POL and pharmacy markets and the initiation of an employee cash bonus program.
Sales and marketing expense fell to 24.8% of revenues in fiscal 1998 from 31.9%
in fiscal 1997, primarily due to higher revenues which more than offset
increased sales and marketing expenditures. The Company anticipates that the
dollar amount of sales and marketing expense will increase in future periods as
the Company continues to expand sales and marketing activities, particularly in
the POL and pharmacy markets.

Research and Development. Research and development expense includes
salaries, bonuses, expenses for outside services, supplies and amortization of
capital equipment. Research and development expense increased 65.8% to $2.2
million in fiscal 1998 from $1.3 million in fiscal 1997. This increase was
primarily attributable to continued development of new single use test cassettes
and a related increase in headcount. Research and development expense as a
percentage of revenues remained relatively constant at 10.3% in fiscal 1998
compared to 10.4% in fiscal 1997. The Company is currently developing additional
tests for diagnostic screening and therapeutic monitoring of osteoporosis, liver
damage, cardiovascular disease and diabetes. These new tests are in various
stages of development, and the Company will be required to undertake time
consuming and costly development activities and seek regulatory approval for
these new tests before such tests can be marketed. The Company believes that
revenue growth, if any, and future operating results will depend, in part, upon
completing development of and successfully introducing these tests. The Company
currently anticipates that the dollar amount of research and development expense
will increase significantly in future periods as costs associated with product
development and manufacturing scale up efforts for new cassettes are incurred.

General and Administrative. General and administrative expense includes
compensation, benefits and expenses for outside services. General and
administrative expense increased 35.8% to $2.1 million in fiscal 1998 from $1.5
million in fiscal 1997. This increase resulted primarily from professional
services and the initiation of an employee cash bonus program. General and
administrative expenses fell to 9.6% of revenues in fiscal 1998 from 12.0% in
fiscal 1997 due to higher revenues which more than offset increased general and
administrative expenditures.

Interest Income. Interest income reflects income from the investment of
cash balances and marketable securities. Interest income rose 10.4% to $571,000
in fiscal 1998 from $517,000 in fiscal 1997. This increase was primarily the
result of higher average amounts invested in cash equivalents and marketable
securities in fiscal 1998 over fiscal 1997.

Interest Expense. Interest expense is incurred on capital lease financings.
Interest expense fell to $2,000 in fiscal 1998 from $244,000 in fiscal 1997.
This decline resulted primarily from lower outstanding balances under capital
leases in fiscal 1998 and a prepayment penalty of $112,000 incurred when the
Company retired its long term debt in the second quarter of fiscal 1997.

Income Taxes. The Company has significant net operating loss carryforwards
("NOLs") and tax credit carryforwards. The $41,000 provision for income taxes in
fiscal 1998 represented the estimated federal and state alternative minimum tax
payable, reduced for the utilization of NOLs and tax credit carryforwards,
resulting in an effective tax rate for fiscal 1998 of 2.0%. Management expects
to utilize NOL and other tax carryforward amounts

22
<PAGE> 24

to the extent income is earned in fiscal 1999 and beyond. Therefore, the
Company's effective tax rate should continue to be substantially less than the
applicable statutory rates. As of March 31, 1998, the Company had NOL
carryforwards available to reduce future taxable income for federal and state
income tax purposes of $44.4 million and $18.8 million, respectively.
Additionally, the Company had research and development credit carryforwards
available to reduce income taxes for federal and state income tax purposes of
$1.6 million and $589,000, respectively. The Company has historically
experienced significant operating losses and operates in an industry subject to
rapid technological changes. Therefore, management believes there is sufficient
uncertainty regarding the Company's ability to generate future taxable income
and utilize these NOL and tax credit carryforwards such that a full valuation
allowance for deferred tax assets was required at March 31, 1998.

As a result of a change in ownership which occurred in May 1990, there is
an annual limitation of approximately $1.5 million for federal and state income
tax purposes on the combined use of approximately $6.1 million of federal NOLs
and the use of $550,000 of federal and state tax credit carryforwards.
Additionally, as a result of the Company's public offering in December 1992,
NOLs and tax credit carryforwards incurred prior to December 1992 are subject to
an annual limitation of $5.5 million for federal and state income tax purposes
on the combined use of $26.2 million of federal and $4.5 million of state NOLs,
and the use of $1.2 million of federal and $379,000 of state tax credit
carryforwards. If the amounts of these limitations are not utilized in a
particular year, the amount not utilized increases the limitation in the
subsequent year.

Fiscal 1997 and Fiscal 1996

Revenues. The Company's revenues increased 87.1% to $12.9 million in fiscal
1997 from $6.9 million in fiscal 1996. The increase in revenues reflected
increased unit sales of single use test cassettes and L-D-X Analyzers to health
care providers in the POL and health promotion markets. International revenues
represented 9.7% and 19.3% of revenues in fiscal 1997 and fiscal 1996,
respectively.

Cost of Products Sold. Cost of products sold increased 55.3% to $7.0
million in fiscal 1997 from $4.5 million in fiscal 1996, primarily as a result
of increased unit sales of single use test cassettes and L-D-X Analyzers. Gross
margin was 45.9% and 34.8% in fiscal 1997 and 1996, respectively. The
improvement in gross margin was primarily attributable to improved cassette
manufacturing yields and growth in the volume of single use test cassettes and
L-D-X Analyzers sold, without corresponding percentage increases in
manufacturing costs.

Sales and Marketing. Sales and marketing expense increased 24.3% to $4.1
million in fiscal 1997 from $3.3 million in fiscal 1996. This increase was
primarily attributable to continued expansion of the Company's domestic sales
and marketing organization, the launch of sales and marketing efforts directed
at the POL market, increased commissions associated with increased revenues and,
to a lesser extent, participation in domestic conferences and trade shows. Sales
and marketing expense fell to 31.9% of revenues in fiscal 1997 from 48.1% in
fiscal 1996 due to higher revenues which more than offset increased sales and
marketing expenditures.

Research and Development. Research and development expense increased 83.4%
to $1.3 million in fiscal 1997 from $731,000 in fiscal 1996. This increase was
primarily attributable to continued development of new single use test cassettes
and a related increase in headcount. Research and development expense as a
percentage of revenues decreased slightly to 10.4% in fiscal 1997 from 10.6% in
fiscal 1996 due to higher revenues which more than offset increased research and
development expenditures.

General and Administrative. General and administrative expense increased
23.4% to $1.5 million in fiscal 1997 from $1.2 million in fiscal 1996. The
increase resulted primarily from higher professional fees relating to
recruitment of key personnel, legal fees relating to business development
efforts and an increased investment in the Company's information systems.
General and administrative expenses fell to 12.0% of total revenues in fiscal
1997 from 18.1% in fiscal 1996 due to higher revenues which more than offset
increased general and administrative expenditures.

Interest Income. Interest income rose 82.0% to $517,000 in fiscal 1997 from
$284,000 in fiscal 1996. This increase was primarily the result of higher
average amounts invested in cash equivalents and marketable securities resulting
from the investment of the proceeds of the Company's June 1996 public offering.

Interest Expense. Interest expense increased 74.3% to $244,000 in fiscal
1997 from $140,000 in fiscal 1996. The increase in interest expense in fiscal
1997 resulted primarily from a prepayment penalty of $112,000 incurred when the
Company retired its long term debt in the second quarter of fiscal 1997.

23
<PAGE> 25

QUARTERLY RESULTS OF OPERATIONS

The following table presents unaudited quarterly results of operations, in
dollar amounts and as a percentage of revenues for the last eight quarters, that
have been derived from the unaudited condensed financial statements of the
Company. The information has been prepared by the Company on a basis consistent
with the Company's audited financial statements and includes all adjustments,
consisting only of normal recurring adjustments, which management considers
necessary for a fair presentation of the information for the periods presented.

<TABLE>
<CAPTION>
FISCAL 1997 FISCAL 1998
------------------------------------- --------------------------------------
FIRST SECOND THIRD FOURTH FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER
------- ------- ------- ------- ------- ------- ------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues........................ $2,760 $ 3,056 $ 3,169 $ 3,876 $ 4,203 $ 5,412 $ 5,649 $ 6,400
Cost of products sold........... 1,646 1,624 1,669 2,018 1,996 2,705 2,718 3,094
------ ------- ------- ------- ------- ------- ------- --------
Gross profit.................... 1,114 1,432 1,500 1,858 2,207 2,707 2,931 3,306
------ ------- ------- ------- ------- ------- ------- --------
Operating expenses:
Sales and marketing........... 962 1,015 1,038 1,093 1,256 1,394 1,411 1,319
Research and development...... 208 289 387 457 505 555 539 625
General and administrative.... 347 387 415 388 446 484 529 628
------ ------- ------- ------- ------- ------- ------- --------
Total operating
expenses............... 1,517 1,691 1,840 1,938 2,207 2,433 2,479 2,572
------ ------- ------- ------- ------- ------- ------- --------
Income (loss) from operations... (403) (259) (340) (80) 0 274 452 734
Interest income (expense),
net........................... (8) 22 177 82 122 172 145 130
------ ------- ------- ------- ------- ------- ------- --------
Income (loss) before taxes...... (411) (237) (163) 2 122 446 597 864
Provision for income taxes...... -- -- -- -- 3 9 13 16
------ ------- ------- ------- ------- ------- ------- --------
Net income (loss)............... $ (411) $ (237) $ (163) $ 2 $ 119 $ 437 $ 584 $ 848
====== ======= ======= ======= ======= ======= ======= ========
Net income (loss) per share:
Basic......................... $(0.05) $ (0.02) $ (0.01) $ 0.00 $ 0.01 $ 0.04 $ 0.05 $ 0.08
====== ======= ======= ======= ======= ======= ======= ========
Diluted....................... $(0.05) $ (0.02) $ (0.01) $ 0.00 $ 0.01 $ 0.04 $ 0.05 $ 0.07
====== ======= ======= ======= ======= ======= ======= ========
Shares used to compute net
income (loss) per share(1):
Basic......................... 8,162 10,969 11,177 11,218 11,226 11,260 11,308 11,362
====== ======= ======= ======= ======= ======= ======= ========
Diluted....................... 8,162 10,969 11,177 11,423 11,599 11,806 12,098 12,117
====== ======= ======= ======= ======= ======= ======= ========
AS A PERCENTAGE OF REVENUES:
Revenues........................ 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of products sold........... 59.6 53.1 52.7 52.1 47.5 50.0 48.1 48.3
------ ------- ------- ------- ------- ------- ------- --------
Gross profit.................... 40.4 46.9 47.3 47.9 52.5 50.0 51.9 51.7
------ ------- ------- ------- ------- ------- ------- --------
Operating expenses:
Sales and marketing........... 34.9 33.2 32.7 28.2 29.9 25.8 25.0 20.6
Research and development...... 7.5 9.5 12.2 11.8 12.0 10.3 9.5 9.8
General and administrative.... 12.6 12.7 13.1 10.0 10.6 8.9 9.4 9.8
------ ------- ------- ------- ------- ------- ------- --------
Total operating
expenses............... 55.0 55.4 58.0 50.0 52.5 45.0 43.9 40.2
------ ------- ------- ------- ------- ------- ------- --------
Income (loss) from operations... (14.6) (8.5) (10.7) (2.1) 0.0 5.0 8.0 11.5
Interest income (expense),
net........................... (0.3) 0.7 5.6 2.1 2.9 3.2 2.6 2.0
------ ------- ------- ------- ------- ------- ------- --------
Income (loss) before taxes...... (14.9) (7.8) (5.1) 0.0 2.9 8.2 10.6 13.5
Provision for income taxes...... -- -- -- -- 0.1 0.2 0.2 0.3
------ ------- ------- ------- ------- ------- ------- --------
Net income (loss)............... (14.9) (7.8) (5.1) 0.0 2.8 8.0 10.4 13.2
====== ======= ======= ======= ======= ======= ======= ========
</TABLE>

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

During the eight quarters that comprised fiscal 1997 and 1998, revenues
grew as a result of increased unit sales of single use test cassettes and L-D-X
Analyzers. Although cost of products sold increased in absolute dollars, gross
margin rose from 40.4% in the first quarter of fiscal 1997 to 52.5% in the first
quarter of fiscal 1998. Gross margin fell to 50.0% in the second quarter of
fiscal 1998 due primarily to the impact of the Company's agreement with
Parke-Davis to provide L-D-X Analyzers and test cassettes to physicians
participating in the Phase IV clinical trial of the lipid lowering drug,
Lipitor. Gross margins improved to 51.9% and 51.7% in the third and fourth
quarters of fiscal 1998, respectively.

24
<PAGE> 26

Operating results for any quarter are not necessarily indicative of results
for any subsequent period. The Company's quarterly operating results have been
and will continue to be subject to variations as a result of a number of
factors, such as: (i) the timing and level of market acceptance of the L-D-X
System; (ii) the timing of the introduction and availability of new tests; (iii)
the timing and level of expenditures associated with development activities;
(iv) the timing and level of expenditures associated with expansion of sales and
marketing activities and overall operations; (v) the Company's ability to cost
effectively expand cassette manufacturing capacity and maintain consistently
acceptable yields in the manufacture of cassettes; (vi) variations in
manufacturing efficiencies; (vii) the timing of establishment of strategic
distribution arrangements and the success of the activities conducted under such
arrangements; (viii) changes in demand for its products based on changes in
third party reimbursement, competition, changes in government regulation and
other factors; (ix) the timing of significant orders from and shipments to
customers; (x) product pricing and discounts; (xi) variations in the mix of
products sold; and (xii) general economic conditions. These factors are
difficult to forecast, and these or other factors could have a material adverse
effect on the Company's business, financial condition and results of operations.
Fluctuations in quarterly demand for the Company's products may adversely affect
the continuity of the Company's manufacturing operations, increase uncertainty
in operational planning and/or affect cash flows from operations. The Company's
expenses are based in part on the Company's expectations as to future revenue
levels and to a large extent are fixed in the short term. As a result, if actual
revenues do not meet expectations, the Company's ability to adjust spending
levels in the short term will be limited and its business, financial condition
and results of operations could be materially adversely affected.

LIQUIDITY AND CAPITAL RESOURCES

The Company has financed its operations primarily through the sale of
equity securities and, more recently, from positive cash flows from operations.
From inception to March 31, 1998, the Company raised $69.0 million in net
proceeds from equity financings. As of March 31, 1998, the Company had $14.8
million of cash, cash equivalents and short-term marketable securities. In
addition to these amounts, the Company has available a $3.0 million revolving
bank line of credit agreement. While the agreement is in effect, the Company is
required to deposit assets with a collective value, as defined in the line of
credit agreement, equivalent to no less than 100% of the outstanding principal
balance. Amounts outstanding under the line of credit bear interest at the
bank's prime rate. The line of credit agreement expires on November 30, 1998. As
of March 31, 1998, there were no borrowings outstanding under the line of
credit.

Net cash provided by operating activities was $2.1 million during fiscal
1998, compared to net cash used in operating activities of $1.0 million during
fiscal 1997. In fiscal 1998, an improvement in operating results was the primary
factor contributing to cash provided by operating activities. In fiscal 1997,
the net loss and increases in accounts receivable and inventory were the primary
factors contributing to cash used in operating activities. Net cash used in
investing activities of $3.7 million in fiscal 1998 and $5.2 million in fiscal
1997 resulted from the Company's net purchases of marketable securities and
property and equipment. Net cash provided by financing activities in fiscal 1998
of $666,000 reflected the issuance of Common Stock pursuant to the employee
stock purchase plan and the stock incentive program. Net cash provided by
financing activities in fiscal 1997 of $11.9 million, reflected the issuance of
Common Stock, primarily pursuant to the Company's June 1996 public offering,
partially offset by repayment of short term bank borrowings and long term debt.
The Company intends to expend substantial funds for capital expenditures related
to expansion of its manufacturing capacity, research and development, including
expansion of its product line and enhancement of its current products, expansion
of sales and marketing activities and other working capital and general
corporate purposes. Although the Company believes that the net proceeds of the
Offering, together with the Company's cash, cash equivalents, marketable
securities, cash flows anticipated to be generated by future operations and
available bank borrowings under an existing line of credit, will be sufficient
to meet its capital requirements for the foreseeable future, there can be no
assurance that the Company will not require additional financing. For example,
the Company may be required to expend greater than anticipated funds if
unforeseen difficulties arise in expanding manufacturing capacity for existing
cassettes or in the course of completing required additional development,
obtaining necessary regulatory approvals, obtaining waived status under CLIA or
introducing or scaling up manufacturing for new tests. The Company's future
liquidity and
25
<PAGE> 27

capital requirements will depend upon numerous additional factors, including:
the costs and timing of expansion of manufacturing capacity; the number and type
of new tests the Company seeks to develop; the success of these development
efforts; the costs and timing of expansion of sales and marketing activities;
the extent to which the Company's existing and new products gain market
acceptance; competing technological and market developments; the progress of
commercialization efforts of the Company's distributors; the costs involved in
preparing, filing, prosecuting, maintaining and enforcing patent claims and
other intellectual property rights; developments related to regulatory and third
party reimbursement matters and CLIA; and other factors. In the event that
additional financing is needed, the Company may seek to raise additional funds
through public or private financing, collaborative relationships or other
arrangements. Any additional equity financing may be dilutive to shareholders,
and debt financing, if available, may involve restrictive covenants.
Collaborative arrangements, if necessary to raise additional funds, may require
the Company to relinquish its rights to certain of its technologies, products or
marketing territories. The failure of the Company to raise capital on acceptable
terms when needed could have a material adverse effect on the Company's
business, financial condition and results of operations. See "Risk
Factors -- Possible Future Capital Requirements; Uncertainty of Additional
Funding" and "Use of Proceeds."

New Accounting Pronouncements. In June 1997, the Financial Accounting
Standards Board ("FASB") issued Statement of Financial Accounting Standards
("SFAS") No. 130, "Reporting Comprehensive Income." SFAS No. 130 establishes
standards for the reporting and display of comprehensive income and its
components in a full set of general purpose financial statements that is
displayed with the same prominence as other financial statements for fiscal
years beginning after December 15, 1997. Comprehensive income, as defined,
includes all changes in equity (net assets) during a period from non-owner
sources, including unrealized gains and losses on available-for-sale securities.
Reclassification of financial statements for earlier periods is required. The
Company will adopt SFAS No. 130 in fiscal 1999 and does not expect such adoption
to have a material impact on its financial condition or results of operations.

In June 1997, FASB issued SFAS No. 131, "Disclosures About Segments of an
Enterprise and Related Information." This statement establishes standards for
the way companies report information about operating segments in annual
financial statements for fiscal years beginning after December 15, 1997. It also
establishes standards for related disclosures about products and services,
geographic areas and major customers. The Company will adopt SFAS No. 131 in
fiscal 1999. Because SFAS No. 131 only addresses disclosure and reporting
issues, its adoption will not have a material impact on the Company's financial
statements.

26
<PAGE> 28

BUSINESS

GENERAL

The Company develops, manufactures and markets the Cholestech L-D-X System
which performs near-patient diagnostic screening and therapeutic monitoring for
the management of prevalent chronic diseases (preventive care testing). The
L-D-X System is capable of measuring multiple analytes simultaneously with a
single drop of whole blood within five minutes. The Company currently markets
the L-D-X System, including the L-D-X Analyzer and a variety of single use test
cassettes, to the physician office laboratory (POL), pharmacy and health
promotion markets in the United States and internationally. The Company's
current products measure and monitor blood cholesterol and related lipids, as
well as triglycerides and glucose, and are used to perform preventive care
testing of patients who have or may have cardiovascular disease or diabetes. In
January 1996, the L-D-X Analyzer and the Company's TC, HDL, calculated LDL,
triglycerides and glucose tests were granted waived status under CLIA, the first
such waiver granted under CLIA's ease of use, accuracy and precision guidelines.
These CLIA waivers allow health care providers to use the L-D-X System in
preventive care settings without the additional operating costs and extensive
regulatory requirements associated with CLIA compliance. The Company believes
that the L-D-X System is the only simultaneous, multi-analyte testing device
which is classified as waived under CLIA. Further, the Company believes that the
waived status, technological flexibility, ease of use, accuracy, rapid results
and low operating costs of the L-D-X System provide it with competitive
advantages.

MARKET OVERVIEW

In 1996, the diagnosis, treatment and monitoring of chronic diseases
accounted for approximately $358 billion of health care expenditures in the
United States. Chronic diseases are long lasting or frequently recurring
illnesses that, due to their protracted and serious nature, are costly to treat
and monitor. The most prevalent chronic diseases include, among others,
cardiovascular disease, diabetes and osteoporosis (loss of bone mass). The
American Heart Association estimates that more than 58 million people suffer
from cardiovascular disease, the leading cause of death of adults in the United
States, resulting in over one million deaths in 1995. High levels of cholesterol
have been linked by conclusive evidence to cardiovascular disease, and National
Cholesterol Education Program ("NCEP") data indicate that more than 50% of the
adult population in the United States has high or borderline high cholesterol
levels. Diabetes is estimated to afflict more than 16 million persons in the
United States, over a third of whom have not been identified as being diabetic,
and often results in a number of short term and long term complications such as
nerve damage, kidney disease and retinal damage. Cardiovascular disease and
renal failure are the most prevalent causes of death among diabetics. According
to the National Osteoporosis Foundation, osteoporosis is a threat to over 28
million persons in the United States. The estimated annual cost of treating
osteoporosis related fractures in the United States is $14 billion.

Pharmaceutical companies have focused considerable resources on developing
drugs for the treatment of cardiovascular disease, diabetes, osteoporosis and
other chronic diseases. While drug therapy is necessary for the overall
management of chronic diseases, diagnostic screening, proper therapeutic
monitoring and compliance with drug therapy are also important components of an
effective program to manage chronic diseases. Widespread diagnostic screening
for chronic diseases aids in the early identification of patients who would
benefit from drug therapy. Effective administration of drug therapies often
requires careful therapeutic monitoring of drug impact on body chemistry to
ensure proper drug dosages, monitor improvement and reduce the risk of side
effects. Moreover, ongoing compliance with drug therapy is necessary for
effective treatment and reduces the risk to patients of adverse acute events.
Studies show that noncompliance with drug therapy is a major health care problem
that may be responsible for almost 10% of all hospital admissions, 23% of all
nursing home admissions and the loss of 20 million work days each year.

Traditionally, diagnostic screening and therapeutic monitoring have been
performed primarily in clinical and hospital laboratories. However, testing in
these settings may limit the effectiveness of chronic disease management because
reporting of test results is delayed and in some cases never occurs. Delayed
test results postpone a physician's opportunity to consult with patients and
administer proper therapy. Inconvenient
27
<PAGE> 29

testing sites and delayed reporting may result in failure to identify those who
are at risk and may contribute to reduced compliance. Studies indicate that more
than 50% of all patients prescribed medication for the treatment of a chronic
disease discontinue the therapy. In addition, evidence suggests that improved
access to diagnostic screening and therapeutic monitoring could result in
increased therapy compliance, improved patient outcomes and cost savings to the
health care system.

Recognizing the benefits of effective chronic disease management, health
care providers and pharmaceutical companies are increasingly conducting
preventive care testing by providing diagnostic screening and therapeutic
monitoring that yield rapid test results in settings closer to the patient.
These settings include POLs, pharmacies and health promotion sites. POLs are
operated by physicians or groups of physicians. Pharmacy sites, including
independent and retail chain pharmacies, have begun positioning themselves to
respond to the trend toward preventive care testing by shifting from a product
oriented approach to a more patient focused approach. Health promotion sites
include a variety of locations such as corporate wellness programs, fitness
centers, health promotion service providers, community health centers, public
health programs, the United States military and other independent screeners. In
addition to improving patient care and outcomes, preventive care testing in
these near-patient sites allows health care providers to capture testing revenue
that previously flowed to clinical and hospital laboratories as well as revenues
from identifying patients who otherwise might not know they are at risk for a
chronic disease.

<TABLE>
<S> <C>
- ----------------------------------------------------------
PREVENTIVE CARE TESTING MARKETS
- ----------------------------------------------------------
APPROXIMATE
MARKETS NUMBER OF SITES
POL 88,000
Pharmacy 53,000
Health Promotion 84,000
- -------------------------------- ------------------------
Total 225,000
- ----------------------------------------------------------
</TABLE>

Despite the potential benefits, growth of preventive care testing has been
limited by both technological constraints and regulatory issues, particularly in
the POL and pharmacy markets. The technological obstacles result partly from the
fact that effective management of chronic diseases requires health care
providers to test for multiple analytes because certain chronic diseases are
often manifested in a combination of substances. The broader the range of tests
a system can perform, the more effective it will be in managing an array of
chronic diseases, which are often interrelated. Testing devices capable of
performing multiple tests have traditionally been complex and difficult to
operate, making them currently ineligible for waived status under CLIA.
Laboratories conducting non-waived tests are subject to higher registration
fees, federal inspections and personnel and quality assurance requirements.
These regulatory requirements can significantly increase the cost of performing
non-waived tests, making diagnostic screening and therapeutic monitoring
uneconomical in near-patient settings.

THE CHOLESTECH SOLUTION

The L-D-X System overcomes both the technological and regulatory hurdles
that the Company believes have inhibited the growth and broader acceptance of
preventive care testing for effective management of chronic diseases. The L-D-X
System is an easy to use, multi-analyte testing system consisting of a
proprietary, telephone sized L-D-X Analyzer and a line of single use, credit
card sized test cassettes. The L-D-X System enables health care providers to
perform diagnostic screening and therapeutic monitoring on a single drop of
whole blood within five minutes. The L-D-X System performs a variety of
different tests, several of which can be run simultaneously with a single
cassette. The Company's current cassette products are designed to measure and
monitor blood cholesterol and related lipids, as well as triglycerides and
glucose for the treatment of cardiovascular disease and diabetes. The L-D-X
System provides precise and accurate results comparable to results obtained from
testing with larger, more complex bench top and laboratory based analyzers.
Based on its precision, accuracy and ease of use, the L-D-X System was granted a
CLIA waiver in

28
<PAGE> 30

1996. In addition to these factors and its simultaneous multi-analyte testing
capability, the L-D-X System provides the following benefits and advantages:

- - Improved Access to Testing. Ease of use and CLIA waived status allow the
L-D-X System to be used economically in many preventive care settings that
are more accessible to patients than clinical and hospital laboratories. The
L-D-X System's rapid test results allow health care providers to determine
the need for alternative or additional tests, diagnose diseases, counsel
patients and begin treatment in a single visit. The Company believes that
more convenient testing will increase the frequency of diagnostic testing and
may lead to earlier identification of patients at risk for or suffering from
chronic diseases.

- - Improved Therapy Compliance. Studies have shown that easier access to testing
sites may improve drug therapy compliance. Used in preventive care settings,
the L-D-X System makes therapeutic monitoring more convenient for patients.
Also, the L-D-X System provides patients with feedback on therapy
effectiveness within five minutes. The Company believes that both of these
benefits contribute to increased patient compliance with drug therapy. The
Company believes that the potential for increased drug sales from improved
compliance represents a significant incentive for pharmaceutical companies to
support the L-D-X System.

- - Benefits to Health Care Providers and Third Party Payors. Physicians,
pharmacists and other health care providers who use the L-D-X System to
perform preventive care testing may be able to capture revenue from these
tests that otherwise would flow to clinical and hospital laboratories, as
well as revenues from identifying patients who otherwise might not know they
are at risk of chronic disease. The Company believes preventive care testing
with the L-D-X System will also result in more economical provision of
testing services than in traditional clinical or hospital laboratories and
increase patient satisfaction. Additionally, the Company believes improved
patient outcomes resulting from earlier diagnosis and improved drug
compliance will reduce costs associated with the treatment of chronic
diseases.

- - Multiple and Flexible Testing Capabilities. Effective management of chronic
diseases often requires testing of multiple analytes. The CLIA waived L-D-X
System performs multiple tests simultaneously, enabling more efficient
testing required for chronic disease management. The modular and flexible
architecture of the L-D-X System places much of the testing technology in the
single use test cassettes and system software, which decreases the
development costs and the time to market for new tests added to the L-D-X
System. This architecture facilitates the Company's continued enhancement of
the L-D-X System's multi-analyte testing capabilities.

STRATEGY

The Company's objective is to become the leading provider of preventive
care testing devices for the management of prevalent chronic diseases. The
Company's strategy for achieving this objective includes the following principal
elements:

- - Increase Market Penetration. The Company intends to further penetrate the
POL, pharmacy and health promotion markets for diagnostic screening and
therapeutic monitoring by increasing the installed base of L-D-X Analyzers.
The Company has implemented marketing programs to increase awareness of the
advantages of the L-D-X System among health care providers and third party
payors. In addition, the Company has entered into strategic relationships
with major pharmaceutical companies to promote diagnostic screening and
therapeutic monitoring with the L-D-X System as critical components of
chronic disease management.

- - Leverage Installed Base of L-D-X Analyzers. The Company intends to leverage
its installed base of L-D-X Analyzers by increasing both the type and number
of tests run on each L-D-X Analyzer. The Company is developing additional
tests for the L-D-X Analyzer to offer health care providers a broader array
of tests to better manage targeted chronic diseases. The Company is also
implementing a marketing effort to place L-D-X Analyzers with health care
providers that are potential high volume users of the Company's test
cassettes.

29
<PAGE> 31

- - Maintain Competitive Advantage. The Company plans to leverage its development
experience and capabilities to maintain its competitive advantage by
continuing to develop new tests and test types (e.g. immunoassay) that are
compatible with the L-D-X Analyzer and are CLIA waived. The Company also plans
to develop improvements to the L-D-X Analyzer and incorporate new technologies
into the L-D-X System. In addition, the Company plans to leverage its
operational know-how and increase manufacturing volume to achieve economies of
scale, thereby maintaining the cost advantage of the L-D-X System.

- - Further Develop Strategic Relationships. The Company has established and
intends to further develop strategic relationships to create new products and
to improve penetration of its target markets. In particular, the Company
intends to further its alliances with major pharmaceutical companies and other
health care companies to position the L-D-X System as the preferred testing
system for chronic disease management. For example, the Company is
participating with Merck and Parke-Davis in programs to improve patient
compliance with drug therapy through therapeutic monitoring.

- - Expand Distribution Relationships. The Company intends to augment its direct
sales and marketing efforts by continuing to establish relationships with
select third party distributors and major pharmacy chains to strategically
access the POL, pharmacy and health promotion markets in the United States and
internationally. The Company is currently pursuing additional domestic
distribution agreements similar to its existing agreements with PSS and
General Medical.

PRODUCTS AND PRODUCTS UNDER DEVELOPMENT

OVERVIEW OF THE L-D-X SYSTEM

The L-D-X System is an easy to use, multi-analyte testing system consisting
of a telephone sized analyzer, a printer and a variety of single use, credit
card sized test cassettes. The L-D-X System enables health care providers to
perform individual tests or combinations of tests with a single drop of whole
blood within five minutes. No special training is required to operate the L-D-X
System and the sample does not need to be pre-treated. To run a test, the health
care provider pricks the patient's finger, transfers a drop of blood to the
cassette's sample well, inserts the cassette into the L-D-X Analyzer's cassette
drawer and presses the "run" button. All further steps are performed by the
L-D-X System, which produces results comparable in precision and accuracy to
results from larger, more expensive bench top and laboratory instruments that
are not CLIA waived.

The L-D-X System includes software that performs cardiac risk assessments
using risk factor parameters developed from the Framingham study (a long term
study of cholesterol levels and cardiovascular disease), TC and HDL test results
and other cardiac risk factors that the health care provider enters into the
L-D-X Analyzer.

The design of the L-D-X System incorporates as much proprietary technology
as possible into the test cassettes and maintains the L-D-X Analyzer as a
platform that can be easily adapted as new tests and other product upgrades are
introduced. As health care providers perform different tests, encoding on the
cassette's magnetic stripe communicates test specific and calibration
information to the L-D-X Analyzer. Changes that cannot be captured on the
cassette's magnetic stripe can be accomplished by changes to the L-D-X
Analyzer's removable ROM software pack. This flexible design enables health care
providers to perform a variety of tests using the same L-D-X Analyzer and to
take advantage of new tests and other product upgrades without having to
purchase a new L-D-X Analyzer.

30
<PAGE> 32

The following table summarizes the Company's current products and products
under development:

<TABLE>
<S> <C> <C>
- ------------------------------------------------------------------------------------------------------------------

PRODUCT TARGETED DISEASE STATE REGULATORY STATUS
- ------------------------------------------------------------------------------------------------------------------
INSTRUMENT
L-D-X Analyzer -- FDA cleared; CLIA waived
- ------------------------------------------------------------------------------------------------------------------

CASSETTE PRODUCTS
CURRENT

TC Cardiovascular disease FDA cleared; CLIA waived

TC and HDL Cardiovascular disease FDA cleared; CLIA waived

Lipid Profile (TC/HDL/ Cardiovascular disease FDA cleared; CLIA waived
calculated LDL/Triglycerides)

TC and Glucose Cardiovascular disease; Diabetes FDA cleared; CLIA waived

TC/HDL/Glucose Cardiovascular disease; Diabetes FDA cleared; CLIA waived

Lipid Profile plus Glucose Cardiovascular disease; Diabetes FDA cleared; CLIA waived
- ------------------------------------------------------------------------------------------------------------------

UNDER DEVELOPMENT(1)

BUN/Creatinine Kidney disorder FDA cleared; applied for CLIA
waiver

Alanine Aminotransferase (ALT) Liver damage Not yet filed or applied

Bone Resorption Osteoporosis Not yet filed or applied
- ------------------------------------------------------------------------------------------------------------------

IN FEASIBILITY STUDIES(2)

Glycated Hemoglobin Diabetes Not yet filed or applied

Creatinine Kinase Cardiovascular disease Not yet filed or applied

Lipoprotein(a) (Lp(a)) Cardiovascular disease Not yet filed or applied
- ------------------------------------------------------------------------------------------------------------------
(1) Products under development are those in the prototype stage, meaning that cassette shelf life is being
evaluated, the test is being evaluated in-house against samples designed to mimic the range of real patient
samples, pilot manufacturing equipment is being developed and/or the Company has applied for CLIA.
(2) Products in feasibility studies are those for which a theoretical design for the product has been developed
and test chemistry is being evaluated in the laboratory.
- ------------------------------------------------------------------------------------------------------------------
</TABLE>

L-D-X ANALYZER

The L-D-X Analyzer is a four channel, reflectance photometer that measures
the amount of light reflected from the reaction surfaces of a test cassette and
incorporates a microprocessor with on-board software. The L-D-X Analyzer
contains a drawer for insertion of the cassette, three buttons for user
activation and a liquid crystal display to present the test results. Utilizing
the information and instructions encoded on the cassette's magnetic stripe, the
L-D-X Analyzer's built-in microprocessor regulates the reaction conditions,
controls the optical measurements of analyte concentrations on the cassette's
reaction pads, executes the required calculations and, within five minutes,
displays the quantitative results on the liquid crystal display. The results are
displayed as a numerical value of the level of the analyte tested and can be
transferred to a printer, computer or computer network.

The software calculates the numeric values of the test results and is
contained in a removable ROM software pack mounted in an access well on the
bottom of the L-D-X Analyzer. The Company will continue to upgrade the software
as new products are developed, allowing health care providers to easily replace
the existing ROM pack with a new ROM pack containing upgraded software. The
Company has made available to existing users a new ROM pack containing its
cardiac risk assessment software, as well as a new ROM pack

31
<PAGE> 33

reflecting certain changes required to receive the CLIA waiver. The L-D-X
Analyzer, together with printer, accessories and starter pack, currently has a
list price of $1,795.

CASSETTE PRODUCTS

The Company's line of single use test cassettes for the L-D-X System
incorporates patented technology for distributing precisely measured plasma to
multiple reaction pads for simultaneous testing. Each cassette consists of three
parts: a main body that contains the sample well into which the blood sample is
dispensed; a reaction bar where plasma is transferred for analysis; and a
magnetic stripe encoded with test instructions and lot specific calibration
information for the various chemistries on the reaction pads. Capillary action
draws a drop of whole blood through a separation medium within the cassette,
stopping the cellular components of the blood while transferring a small volume
of plasma to the cassette's reaction pads. When the plasma contacts the reaction
pads, the dry chemistry reacts with the analytes in the plasma, producing color.
The intensity of color developed indicates the concentration of the analytes in
the plasma. The magnetic stripe contains information needed by the L-D-X
Analyzer to convert the reflected color reading into a concentration level for
the accurate measurement of the analytes being tested. This automatic process
frees the health care provider from having to interpret any color reaction,
relate a reading to a separate chart or input calibration information. The
Company's available test cassettes range in current list price from $3.95 to
$10.95.

Current Cassette Products

The Company's current cassette products are designed to measure and monitor
blood cholesterol, related lipids and glucose for the treatment of
cardiovascular disease and diabetes. Lipids travel in the blood within water
soluble particles called lipoproteins. These lipid carriers include VLDL (very
low density lipoproteins), LDL (low density lipoproteins) and HDL (high density
lipoproteins). HDL particles circulate in the blood and can pick up cholesterol
from arteries and carry it to the liver for elimination from the body. HDL is
sometimes called "good cholesterol" because of this function. The development of
cardiovascular disease has been associated with three lipoprotein abnormalities:
(i) high levels of LDL; (ii) high levels of VLDL; and (iii) low levels of HDL.
LDL, the major carrier of cholesterol and VLDL, a major carrier of triglycerides
in the blood, have been shown to be associated with deposits of plaque on the
arterial wall. High levels of triglycerides can also lead to development of such
plaque. Accumulation of this plaque leads to narrowing of arteries and increases
the likelihood of cardiovascular disease.

In response to conclusive evidence relating high TC to heart disease, the
National Institutes of Health ("NIH") in 1985 launched NCEP, a nationwide effort
to reduce the prevalence of high blood cholesterol. NCEP data indicate that more
than 50% of the adult population in the United States has high or borderline
high TC. In 1988, NCEP issued guidelines for the testing of all adults over 20
years of age for high blood cholesterol, and more extensive lipid monitoring and
treatment for those found to be in high risk categories. Testing guidelines were
subsequently expanded to include children over the age of two with a family
history of high blood cholesterol or cardiovascular disease and to include, in
certain circumstances, a lipid profile consisting of TC, HDL, LDL and
triglycerides. Since NCEP initiated its guidelines, the market for cholesterol
and other lipid tests has experienced significant growth.

Diabetes is a complex disorder of carbohydrate, fat and protein metabolism.
It is manifested by a relative or absolute deficiency of insulin, the hormone
that facilitates and controls the use of glucose by the body. Insulin deficiency
leads to an impaired tolerance to glucose, which leads to a number of short term
and long term complications such as nerve damage, kidney disease and retinal
damage. The most prevalent causes of death among diabetics are cardiovascular
disease and renal failure. It is estimated that diabetes afflicts more than 16
million persons in the United States, over a third of whom have not been
identified as being diabetic. Diagnostic screening for these patients who have
asymptomatic diabetes is important because proper treatment will help minimize
the long term complications of the disease.

- - TC. This stand alone test for measuring total cholesterol was the Company's
first test, developed in conjunction with NCEP guidelines issued in 1988. The
TC test is used primarily at health promotion sites for diagnostic screening.
Current NCEP screening guidelines recommend additional testing for HDL.

32
<PAGE> 34

TC and HDL Panel. The TC and HDL panel addresses current NCEP guidelines
regarding the diagnosis of cardiovascular disease by testing both TC and HDL. As
a result, the Company believes the TC and HDL panel is particularly useful in
diagnostic screening applications. This panel also calculates the ratio of TC to
HDL, a recognized measure of cholesterol induced cardiac risk. The Company
believes that it provides the only HDL cholesterol test that is performed on a
single drop of whole blood.

Lipid Profile. The Company offers a lipid profile cassette which directly
measures TC, HDL and triglycerides. In addition, the lipid profile cassette
calculates estimated values for LDL and the ratio of TC to HDL. The lipid
profile cassette thus performs each test identified by NCEP guidelines as
important in the diagnostic screening and ongoing therapeutic monitoring of
individuals who have high LDL levels or who exhibit two or more other
cardiovascular disease risk factors. NCEP guidelines recommend that health care
providers perform three lipid profiles, each one week apart, prior to initiating
lipid lowering drug therapy.

TC and Glucose Panel, TC/HDL/Glucose Panel and Lipid Profile Plus Glucose
Panel. Recognizing the relationship between diabetes and abnormal lipid levels,
the Company developed a glucose test for the L-D-X System and combined it with
each of its three lipid related test panels. The resulting panels address the
need for the diagnostic screening and therapeutic monitoring of patients with
diabetes, whether or not they are aware they are diabetic, as well as of
individuals who may be at risk of cardiovascular disease.

Cassette Products Under Development

A key component of the Company's strategy is to leverage the technological
flexibility of the L-D-X System to develop single use test cassettes that
address chronic diseases and markets the Company believes provide attractive
commercial opportunities. The Company is in various stages of development of new
cassettes that would expand its product line for preventive care testing in the
POL, pharmacy and health promotion markets. The Company may develop additional
tests depending on the progress of its existing development efforts and
available resources.

For certain future tests, the Company will be required to modify the design
of its existing dry chemistry cassette. For example, the immunoassay test
cassettes currently under development require the use of antibodies bound to the
reaction membrane and a wash step which removes unbound reactants that would
interfere with the test. The immunoassay cassette will have the same external
dimensions as existing dry chemistry cassettes, but will require the Company to
develop new technologies that would allow the L-D-X Analyzer to perform an
immunoassay test. The Company believes that, if the immunoassay cassette is
successfully developed, the L-D-X Analyzer will be the only near-patient
instrument capable of performing both dry chemistry and immunoassay based tests
on a single platform.

BUN/Creatinine. The Company has developed a renal function panel that
includes tests for BUN (blood urea nitrogen) and creatinine primarily for the
POL market. The Company believes that these tests are among the most commonly
ordered whole blood tests in physician offices. The BUN/Creatinine panel is
designed to assist physicians in managing the health of patients at risk of
renal failure, including patients suffering from diabetes. BUN elevations occur
in chronic renal disease, as well as in urinary tract obstruction. BUN is also
useful in monitoring hemodialysis and other therapies. Creatinine is another
measure of renal function and is usually tested for in combination with BUN. In
addition, creatinine is used as an indicator of renal blood flow, which may have
become reduced due to congestive heart failure or dehydration. Low levels of
creatinine may also result from decreased hepatic function in advanced liver
disease. The Company received 510(k) clearance to market the BUN/Creatinine
panel in July 1997 and has submitted an application to the CDC for CLIA waived
status.

Alanine Aminotransferase (ALT). Patients undergoing certain drug therapies
must be monitored for increases in certain enzymes that are associated with
liver damage. The use of an ALT test combined with the Company's lipid profile
would allow health care providers to monitor, in the POL and pharmacies, both
the impact of and potential adverse side effects on the liver from lipid
lowering therapies. The ALT test could also be used as a screening device to
diagnose hepatitis C. The Company has determined the technological feasibility
of combining on one cassette the ALT test with the lipid profile and is
evaluating other potential uses of the test.
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Bone Resorption. Osteoporosis is the most widespread form of bone disease
and is characterized by low bone mass and structural deterioration of bone
tissue. This low bone mass can lead to a weakening of bones, making them more
prone to fractures. Biological markers of bone resorption are secreted in urine,
and it has been shown that the level of secretion correlates to the amount of
bone loss. The measured levels of these markers have also been shown to be
responsive to osteoporosis therapies such as hormone replacement therapy.
According to the National Osteoporosis Foundation, this disease is a threat to
over 28 million persons in the United States and over 200 million people
worldwide. In the United States, approximately 1.5 million osteoporosis related
fractures occur each year, resulting in an estimated annual treatment cost of
$14 billion.

The Company has entered into an agreement with Metra Biosystems to develop
and market Metra Biosystem's Pyrilinks-D immunoassay and other technologies
related to bone resorption for use on the L-D-X System. The Company is in the
prototype stage of developing this urine based immunoassay test for the
therapeutic monitoring of osteoporosis. See "-- Strategic Relationships."

Cassette Products in Feasibility Studies

Glycated Hemoglobin. Glycated hemoglobin measurement is used by health care
providers to assess a diabetic's long term compliance with prescribed diet and
insulin usage. A relatively high percentage of hemoglobin to glucose indicates
poor patient compliance, which can lead to severe health problems. The American
Diabetes Association ("ADA") recommends at least semi-annual measurement of
glycated hemoglobin for all individuals with diabetes. The Company received a
"Small Business Innovative Research" grant of $100,000 from the United States
Department of Health and Human Services to further develop this test on the
L-D-X System.

Creatinine Kinase. This test measures creatinine kinase and is used to
determine whether a patient is having or has recently suffered a heart attack
and, if so, the severity of the attack. When a patient experiences a heart
attack, creatinine kinase is released into the bloodstream by the heart muscle.
The Company is working with Unitika Ltd. ("Unitika") to determine the
feasibility of incorporating this test on the L-D-X System. Unitika is the
largest supplier of creatinine kinase tests in Japan. The existing creatinine
kinase tests are primarily performed in clinical and hospital laboratories, and
consequently, results are often delayed. The Company plans to develop a
creatinine kinase test that can be performed in preventive care settings with
more rapid results.

Lipoprotein(a). Lp(a) is a component of LDL that has been determined to be
a risk factor for cardiovascular disease. The Company has licensed from a third
party the rights to a technology for measuring Lp(a) and has royalty sharing
obligations related to revenues from Lp(a) tests. The Company has licensed
rights to this technology to Genzyme Corporation for clinical laboratory testing
of Lp(a).

To complete its product development programs, particularly with respect to
immunoassay tests, the Company may be required to develop new technologies,
processes and production equipment and may also be required to retain additional
scientific, engineering and manufacturing staff. There can be no assurance that
the Company will be successful in developing any of the tests described above,
or even if successfully developed, that such tests will receive regulatory
clearance or that the Company will be able to successfully manufacture or market
such tests. The Company intends to design and develop most of these products so
as to be eligible for 510(k) clearance and waivers under CLIA, although there
can be no assurance that the Company's products under development will obtain
such clearance or waivers. See "Risk Factors -- Dependence on Development,
Introduction and Market Acceptance of New Tests" and "-- Government Regulation."

STRATEGIC RELATIONSHIPS

The Company has established and continually seeks to develop strategic
relationships which it believes will enhance the commercialization of its
products. In particular, the Company intends to enter into additional alliances
with major pharmaceutical and other companies that will enhance the Company's
market positioning and its product offerings. The Company's current strategic
relationships are described below.

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Merck and APhA (Project ImPACT)

In January 1996, the APhA announced Project ImPACT (Improve Persistence And
Compliance to Therapy), a joint effort between the APhA, Merck and the Company.
The goal of this project is to demonstrate the ability of pharmacists to improve
patient outcomes by expanding the pharmacist's role in chronic disease
management to include monitoring the therapeutic effectiveness of medications
and providing counseling services to patients. The Company and the APhA believe
that utilizing pharmacists to provide such services may result in both direct
and indirect cost savings to patients and third party payors, as well as provide
economic incentives for pharmacists. The Company supplied L-D-X Systems to
monitor patients in this pharmacy based cholesterol management project. As of
December 31, 1997, Project ImPACT had monitored approximately 700 patients at 29
community based pharmacies across the country for a period of at least 18
months. The full results of the study are expected to be publicly released in
September 1998.

Preliminary results of Project ImPACT were published by the APhA in a
December 1997 newsletter. The newsletter contained preliminary comments from the
29 participating pharmacists and highlighted the project's effects on therapy
compliance. Prior research shows that 50% of patients drop out of lipid lowering
drug programs within the first year of treatment. The Company believes that the
potential for increased drug sales from improved compliance represents a
substantial incentive for pharmaceutical companies to support the L-D-X System
and preventive care testing capabilities.

In addition to its participation in Project ImPACT, the Company has a
nonexclusive agreement with Merck to place L-D-X Systems in pharmacies selected
by Merck. There are no minimum purchase requirements under this agreement, which
expires in December 1999.

Parke-Davis

The Company is currently collaborating on two projects with Parke-Davis, a
major pharmaceutical manufacturer.

Lipitor Trial. The Company has entered into an agreement with Parke-Davis
to provide L-D-X Systems to physicians conducting Phase IV clinical trials of
the lipid lowering drug Lipitor (the "Lipitor Trial"). Parke-Davis and Pfizer
Inc. ("Pfizer") have an agreement to jointly market Lipitor. The Company has
sold 1,000 L-D-X Analyzers and 30,000 lipid profiles test cassettes to
Parke-Davis pursuant to the agreement. Parke-Davis and Pfizer placed the L-D-X
Systems with a targeted group of physicians who frequently test for and treat
abnormal cholesterol and related lipid levels. The Lipitor Trial involves up to
8,068 patients whose treatment with Lipitor is being studied over a three month
period. The participating physicians will retain the L-D-X Analyzers as part of
their compensation for participating in the Lipitor Trial.

Professional Golf Association ("PGA") Tour Screenings. Parke-Davis,
Cambridge Health Partners and the Lipid Nurse Taskforce are collaborating to
provide free diagnostic screening using the L-D-X System and promote cholesterol
awareness at 10 PGA tour events in 1998.

Metra Biosystems

In May 1996, the Company entered into a development, marketing and
licensing agreement with Metra Biosystems to develop an immunoassay test
cassette incorporating Metra Biosystems' bone resorption technology to be used
on the L-D-X Analyzer. Pursuant to the agreement, Metra Biosystems purchased
$250,000 of Common Stock. Metra Biosystems is obligated to purchase $750,000 of
additional shares of Common Stock upon the completion of specified milestones by
the Company unless Metra Biosystems exercises its right to terminate the
agreement, which it may do at any time. The per share purchase price will be
equal to the volume weighted average per share price of the Common Stock for the
five days prior to the completion of the applicable milestone. The Company has
granted Metra Biosystems registration rights in connection with its purchase of
Common Stock.

In connection with the development of the immunoassay test cassette, Metra
Biosystems granted Cholestech a nonexclusive, royalty bearing license to use,
make, sell, offer to sell, import or distribute the resulting test to assess
bone resorption, a gauge of the effectiveness of treatments of certain metabolic
diseases
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and disorders, and certain future products worldwide. The Company will pay
royalties to Metra Biosystems on the bone resorption product and on products
that stem from work done in the course of the collaboration but do not
incorporate any of Metra Biosystems' proprietary technology. The parties will
negotiate royalties on future Metra Biosystems products as appropriate. Under
the agreement, the Company will market the immunoassay test through its existing
distribution channels in the United States. The Company and Metra Biosystems
will work together to market and distribute the tests internationally.

There can be no assurance that the Company will be successful in developing
a bone resorption test or any other product under this agreement, that this
agreement will not expire prior to its term, or that even if any products are
developed, they will be successfully marketed. See "Risk Factors -- Dependence
on Development, Introduction and Market Acceptance of New Tests."

The Company expects to enter into additional strategic agreements in the
future to develop, commercialize and sell its current and future products. There
can be no assurance that the Company will be able to negotiate acceptable
agreements in the future, or that such relationships will be successful. In
addition, there can be no assurance that the Company's strategic partners will
not pursue alternative competing technologies or products.

SALES AND MARKETING

The Company's sales and marketing strategy is to increase penetration into
the POL, pharmacy and health promotion markets for preventive care testing and
leverage its installed base of L-D-X Analyzers through increased cassette
utilization. The Company plans to dedicate a significant portion of its sales
and marketing efforts to educate current and potential owners of L-D-X Systems
about the clinical and economic benefits of near-patient diagnostic screening
and therapeutic monitoring with the L-D-X System and about new test cassettes as
they become available for distribution. The sales and marketing efforts of the
Company are conducted by teams focused on each of the major markets for the
Company's products, including POLs, pharmacies and health promotion sites, as
well as on the international market. Each team consists of a market manager, a
national account manager, regional sales managers and technical support
representatives. The Company also plans to continue to cultivate strategic
relationships with development partners, pharmaceutical companies and
distributors. The Company intends to leverage the technology, customer bases,
marketing power and distribution networks of these partners to accelerate market
penetration and cassette usage.

POL. The POL market consists of approximately 88,000 sites registered with
HCFA, approximately 35,000 of which are registered to perform only CLIA waived
tests. The Company has entered into nonexclusive distribution agreements with
two national medical products distributors, PSS and General Medical, which
together have more than 1,300 sales professionals who focus on the POL market.
The Company is seeking to expand the number of distributors of the L-D-X System
targeting this market. The Company and its distributors are focusing their sales
and marketing efforts on physicians whose practices include a high incidence of
the chronic diseases targeted by the Company's test cassettes, including
cardiologists, lipid clinicians, internists and family practitioners. The
Company intends to evaluate this strategy periodically as it gains more
experience in the POL market and introduces new products.

Pharmacy. The retail pharmacy market consists of approximately 53,000
pharmacies. The Company has recently launched marketing efforts in the pharmacy
market to educate pharmacists about the clinical and economic benefits of
in-pharmacy testing. The Company believes that its success in the pharmacy
market will be dependent in large part upon the development of therapeutic
monitoring programs implemented in conjunction with physicians and third party
payors. The Company believes that pharmacists can effectively perform diagnostic
screening and therapeutic monitoring on a cost effective basis using the L-D-X
System. Pharmacists will provide patients with immediate counseling, including a
cardiac risk assessment profile, and encourage patients to discuss the results
with their physicians. Preliminary data from Project ImPACT suggest the
potential benefits of pharmacists assessing the effectiveness of and patient
compliance with drug therapy for chronic diseases. The Company has terminated
its exclusive distribution agreement with AmeriSource Corporation. In an effort
to further penetrate the pharmacy market, the Company is in

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discussions with several potential distributors to form non-exclusive agreements
to distribute its products to the pharmacy market.

Health Promotion. The health promotion market includes corporate wellness
programs, fitness centers, health promotion service providers, community health
centers, public health programs, the military and other independent screeners.
In 1997, the Company entered into an agreement with a service provider to offer
consumer testing of individual cholesterol levels using the L-D-X System at
selected Wal-Mart stores across the country and has ongoing relationships with
14 regional distributors who provide equipment and supplies to customers that
conduct diagnostic screening for abnormal cholesterol and related lipid levels
and diabetes. Additionally, through its agreements with regional distributors
and screening organizations, the Company provides the L-D-X System for use in
diagnostic screening for employees of Exxon Corporation, General Motors
Corporation, Ford Motor Company and Sears, Roebuck and Co. The Company intends
to increase the number of regional distributors and corporate relationships in
the health promotion market.

International. The Company's international distribution strategy is to
penetrate targeted geographical markets by selling directly to both high volume
users and distributors in those markets. The Company has entered into
non-exclusive agreements with 39 foreign distributors to distribute the L-D-X
System primarily in Europe, the Pacific Rim and Latin America.

COMPETITION

The markets for diagnostic screening and therapeutic monitoring in which
the Company operates are intensely competitive. The Company's competition
consists mainly of clinical and hospital laboratories, as well as manufacturers
of bench top analyzers. The substantial majority of diagnostic tests used by
physicians and other health care providers are currently performed by clinical
and hospital laboratories. The Company expects that these laboratories will
compete intensely to maintain their dominance in the markets for diagnostic
screening and therapeutic monitoring. In order to achieve broad market
acceptance for the L-D-X System, the Company will be required to demonstrate
that the L-D-X System is an attractive alternative to bench top analyzers as
well as to clinical and hospital laboratories. This will require physicians to
change their established means of having such tests performed. There can be no
assurance that the L-D-X System will be able to compete with these other
analyzers and testing services. See "Risk Factors -- Uncertainty of Market
Acceptance of the L-D-X System" and "-- Highly Competitive Industry; Rapid
Technological Change."

Companies having a significant presence in the markets for therapeutic
monitoring, such as Abbott Laboratories, Clinical Diagnostic Systems, a division
of Johnson & Johnson and formerly a division of Eastman Kodak Company, and
Boehringer Mannheim, have developed or are developing analyzers designed for
preventive care testing. These competitors have substantially greater financial,
technical, research and other resources and larger, more established marketing,
sales, distribution and service organizations than the Company. In addition,
such competitors offer broader product lines than the Company, have greater name
recognition than the Company and offer discounts as a competitive tactic. In
addition, several smaller companies are currently making or developing products
that compete or will compete with those of the Company. The Company believes
that it currently has a competitive advantage due to the status of the L-D-X
System as the only CLIA waived system capable of performing multiple tests
simultaneously on a single instrument. The Company expects that its competitors
will compete actively to maintain and increase market share and will seek to
develop multi-analyte tests that qualify for CLIA waiver. There can be no
assurance that the Company's competitors will not succeed in obtaining CLIA
waived status for their products or in developing or marketing technologies or
products that are more effective and commercially attractive than the Company's
current or future products, or that would render the Company's technology or
products obsolete or noncompetitive.

The Company's current and future products must compete effectively with the
existing and future products of the Company's competitors primarily on the basis
of ease of use, breadth of tests available, market presence, cost effectiveness,
precision, accuracy, immediacy of results and the ability to perform tests near
the patient, to test multiple analytes from a single sample and to conduct tests
without a skilled technician or pre-treating blood. There can be no assurance
that the Company will have the financial resources, technical

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expertise or marketing, distribution or support capabilities to compete
successfully in the future or, if the Company does have such resources and
capabilities, that it will employ them successfully.

MANUFACTURING

The Company manufactures, tests, performs quality assurance on, and
packages and ships its products from, an approximately 40,300 square foot
facility located in Hayward, California. The Company maintains control of those
portions of the manufacturing process that it believes are complex and provide
an important competitive advantage.

L-D-X Analyzer

The L-D-X Analyzer incorporates a variety of subassemblies and components
designed or specified by the Company, including an optical element,
microprocessors, circuit boards, a liquid crystal display and other electrical
components. These components and subassemblies are manufactured by a variety of
third parties, and are shipped to the Company for final assembly and quality
assurance. The Company's manufacture of the L-D-X Analyzer consists primarily of
assembly, testing, inspection and packaging. Testing consists of a burn-in
period, functional tests and integrated system testing using specially produced
test cassettes. The Company believes it can expand its current L-D-X Analyzer
manufacturing capacity as foreseeably required.

Cassettes

The Company purchases chemicals, membranes and other raw materials from
third party suppliers and converts these raw materials, using proprietary
processes, into single use test cassettes. The Company believes its proprietary
processes and custom designed equipment are important components of its cassette
manufacturing operations. The Company has developed core manufacturing
technologies, processes and production machinery, including: (i) membrane
lamination and welding; (ii) discrete membrane impregnation; (iii) on-line
calibration; and (iv) software control of the manufacturing process. The Company
has two fully operational cassette manufacturing lines. The Company is currently
planning and building a third manufacturing line that the Company anticipates
will become operational in fiscal 2000. In the event that cassette sales volume
significantly increases, the Company may require the added capacity of the third
line prior to its scheduled operational date. The Company plans for the third
manufacturing line to be modular and implemented in phases so that portions of
it could feed the existing two lines before it is fully implemented. In
addition, the Company intends to design and install a manufacturing line to
commercially produce immunoassay cassettes. There can be no assurance that such
expansion of cassette manufacturing capacity can be completed in a timely
fashion, if ever, and the failure to do so would have a material adverse effect
on the Company's business, financial condition and results of operations.

Manufacturing of the cassettes is highly complex and sensitive to a wide
variety of factors, including raw material variations and impurities,
manufacturing equipment performance and the manufacturing environment
containment levels. The interruption of cassette manufacturing operations, the
loss of employees dedicated to the cassette manufacturing facility or the
failure to maintain acceptable process yields for existing or future products
could have a material adverse effect on the Company's business, financial
condition and results of operations. See "Risk Factors -- Risks Associated with
Cassette Manufacturing."

Raw Materials; Quality Assurance

Outside vendors provide the Company with the subassemblies, components and
raw materials necessary for the manufacture of the Company's products. These
subassemblies, components and raw materials are inspected and tested by the
Company's quality control personnel. The Company's quality control personnel
also perform finished goods quality control and inspection and maintain
documentation for compliance with QSR and other government manufacturing
regulations. The Company's manufacturing facilities are subject to periodic
inspection by regulatory authorities. Certain key components and raw materials
used in the manufacturing of the Company's products are currently provided by
single source vendors and on a purchase order basis. The Company believes that
it maintains adequate levels of such components and materials in

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inventory and that alternative sources are available. However, any interruption
of the supply of or any impurity or variation in the quality of such inputs
would have a material adverse effect on the Company's business, financial
condition and results of operations once the inventory is depleted and until a
new source of supply were qualified. See "Risk Factors -- Dependence on
Suppliers" and "-- Government Regulation."

PATENTS AND PROPRIETARY TECHNOLOGY

The Company owns nine United States patents covering various technologies,
including the method for separating HDL from other lipoproteins in a dry
chemistry format, the basic design of the testing cassette and the L-D-X
Analyzer and the method of correcting for the effects of substances that can
interfere with testing of a blood sample. The Company has also filed patent
applications relating to its technology internationally under the Patent
Cooperation Treaty and individual foreign applications. The Company is also the
licensee of United States patents relating to: (i) the measurement of Lp(a);
(ii) the measurement of bone resorption markers (Pyrilinks-D); and (iii) the
Company's cassette technology.

The medical products industry has been characterized by extensive
litigation regarding patents and other intellectual property rights, and any
such litigation could result in substantial loss or diversion of revenues of the
Company and could have a material adverse effect on the Company's business,
financial condition and results of operations. There can be no assurance that
pending patent applications filed by the Company will be approved or that the
Company's issued or pending patents will not be challenged or circumvented by
competitors. The Company believes that its future success will depend primarily
upon the technical expertise, creative skills and management abilities of its
officers, directors and key employees rather than on patent ownership.

The Company's current products incorporate technologies which are the
subject of patents issued to, and patent applications filed by, others. The
Company has obtained licenses for certain of these technologies and might be
required to obtain licenses for others. There can be no assurance that the
Company will be able to obtain licenses for technology patented by others on
commercially reasonable terms, or at all, that it will be able to develop
alternative approaches if unable to obtain licenses or that the Company's
current and future licenses will be adequate for the operation of the Company's
business. The failure to obtain such licenses or identify and implement
alternative approaches could have a material adverse effect on the Company's
business, financial condition and results of operations.

There can be no assurance that patent infringement claims will not be
asserted by other parties in the future, that in such event the Company will
prevail or that it will be able to obtain necessary licenses on reasonable
terms, or at all. Adverse determinations in any litigation could subject the
Company to significant liabilities and/or require the Company to seek licenses
from third parties. If the Company is unable to obtain necessary licenses or is
unable to develop or implement alternative technology, the Company may be unable
to manufacture and sell the affected products. Any of these outcomes could have
a material adverse effect on the Company's business, financial condition or
results of operations.

The Company relies substantially on trade secrets, technical know-how and
continuing invention to develop and maintain its competitive position. The
Company works actively to foster continuing technological innovation to maintain
and protect its competitive position, and the Company has taken security
measures to protect its trade secrets and periodically explores ways to further
enhance trade secret security. There can be no assurance that such measures will
provide adequate protection for the Company's trade secrets or other proprietary
information. Although the Company has entered into proprietary information
agreements with its employees, consultants and advisors, there can be no
assurance that these agreements will provide adequate remedies for any breach.
There can be no assurance that the Company's competitors will not independently
develop substantially equivalent proprietary information and techniques or
otherwise gain access to the Company's trade secrets or disclose such
technology, or that the Company can meaningfully protect its right to its trade
secrets. See "Risk Factors -- Dependence on Proprietary Technology; Uncertainty
of Patent and Proprietary Technology Protection; Dependence on Licensing of
Technology from Third Parties."

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GOVERNMENT REGULATION

FDA and Other Regulations

The manufacture and sale of the Company's products are subject to
regulation by numerous governmental authorities, principally the FDA and
corresponding state and foreign regulatory agencies. Pursuant to the FDC Act,
the FDA regulates the clinical testing, manufacture, labeling, distribution and
promotion of medical devices. Noncompliance with applicable requirements can
result in, among other things, fines, injunctions, civil penalties, recall or
seizure of products, total or partial suspension of production, failure of the
government to grant pre-market clearance or pre-market approval for devices,
withdrawal of marketing approvals, a recommendation by the FDA that the Company
not be permitted to enter into government contracts and criminal prosecution.
The FDA also has the authority to request repair, replacement or refund of the
cost of any device manufactured or distributed by the Company.

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

Before a new device can be introduced into the market, the manufacturer
must generally obtain marketing clearance through a pre-market notification
under Section 510(k) of the FDC Act or an approval of a PMA application under
Section 515 of the FDC Act or be exempt from 510(k) requirements. Under a recent
amendment to the FDC Act, most Class I devices are exempt from 510(k)
requirements. A 510(k) clearance typically will be granted if the submitted
information establishes that the proposed device is "substantially equivalent"
to a legally marketed Class I or II medical device or to a Class III medical
device for which the FDA has not called for a PMA. A 510(k) notification must
contain information to support a claim of substantial equivalence, which may
include laboratory test results or the results of clinical studies of the device
in humans. It generally takes from four to twelve months from the date of
submission to obtain 510(k) clearance, but it may take longer. A "not
substantially equivalent" determination by the FDA, or a request for additional
information, could delay the market introduction of new products that fall into
this category. For any devices that are cleared through the 510(k) process,
modifications or enhancements that could significantly affect safety or
effectiveness, or constitute a major change in the intended use of the device,
will require new 510(k) submissions. The L-D-X Analyzer and all existing test
cassettes required that the Company obtain 510(k) clearance prior to marketing
in the United States.

In general, the Company intends to develop and market tests that will
require no more than 510(k) clearance. However, if the Company cannot establish
that a proposed test cassette is substantially equivalent to a legally marketed
device, the Company will be required to seek pre-market approval of the proposed
test cassette from the FDA through the submission of a PMA application. However,
if a future product were to require submission of a PMA application, regulatory
approval of such product would involve a much longer and more costly process
than a 510(k) clearance. The Company does not believe that its products under
development will require the submission of a PMA application. A PMA application
generally must be supported by extensive data, including laboratory, preclinical
and clinical data to demonstrate safety and efficacy, as well as a complete
description of the device and its components and a detailed description of the
methods, facilities and controls used to manufacture the device. In addition,
the PMA submission must include the proposed labeling, advertising literature
and training methods (if required). The PMA approval process can be lengthy,
expensive and uncertain. An FDA review of a PMA application generally takes one
to three years from the date the PMA application is accepted for filing, but may
take significantly longer.

Any products manufactured or distributed by the Company pursuant to FDA
clearance or approvals are subject to pervasive and continuing regulation by the
FDA and certain state agencies, including record keeping

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requirements and reporting of adverse experience with the use of the device.
Labeling and promotional activities are subject to scrutiny by the FDA and, in
certain circumstances, by the Federal Trade Commission. Current FDA enforcement
policy prohibits the marketing of approved medical devices for unapproved uses.

The FDC Act regulates the Company's quality control and manufacturing
procedures by requiring the Company and its contract manufacturers to
demonstrate compliance with QSR. The FDA monitors compliance with these
requirements by requiring manufacturers to register with the FDA, which subjects
them to periodic inspections. While the Company's manufacturing processes,
facilities and practices have not been inspected by the FDA, the Company
believes that its manufacturing practices are in compliance with QSR. The State
of California also regulates and inspects the Company's manufacturing
facilities. The Company has been inspected twice by the State of California to
date and is manufacturing under an issued medical device manufacturers facility
license from the State of California. If any violations of the Company's
applicable regulations are noted during an FDA, European Notified Body or State
of California inspection of the Company's manufacturing facilities or the
manufacturing facilities of its contract manufacturers, the continued marketing
of the Company's products could be materially adversely affected.

The EU has promulgated rules that require that devices such as those
developed, manufactured and sold by the Company receive the right to affix the
CE mark, a symbol of adherence to applicable EU medical device directives, QSR
and ISO 900/EN46001 standards. The Company's products will be covered by the In
Vitro Diagnostics Directive that has not been published or adopted. The Company
has completed all the testing necessary to comply with applicable safety
regulations relative to the In Vitro Diagnostics Directive. While the Company
intends to satisfy the requisite policies and procedures that will permit it to
affix the CE mark to its products, there can be no assurance that the Company
will be successful in meeting EU certification requirements, and failure to
receive the right to affix the CE mark will prohibit the Company from selling
its products in EU member countries and could have a material adverse effect on
the Company's business, financial condition and results of operations.

The Company and its products are also subject to a variety of state and
local laws and regulations in those states or localities where its products are
or will be marketed. Any applicable state or local laws or regulations may
hinder the Company's ability to market its products in those states or
localities. For example, 20 states have regulations that impose requirements on
pharmacies and/or pharmacists that perform clinical testing, five of which
states have regulations that prohibit certain pharmacy based testing. The
Company is also subject to numerous federal, state and local laws relating to
such matters as safe working conditions, manufacturing practices, environmental
protection, fire hazard control and disposal of hazardous or potentially
hazardous substances. There can be no assurance that the Company will not be
required to incur significant costs to comply with such laws and regulations now
or in the future or that such laws or regulations will not have a material
adverse effect upon the Company.

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

CLIA Regulations

The use of the Company's products in the United States is subject to CLIA,
which provides for federal regulation of laboratory testing, an activity also
regulated by most states. Laboratories either must obtain a registration
certificate from the Health Care Financing Administration ("HCFA") , register
with an approved accreditation agency or obtain a state license in a state with
a federally approved license program. The CLIA regulations seek to ensure the
quality of medical testing and generally took effect in September 1992 with a
two year phase-in of certain requirements. The three primary mechanisms to
accomplish this goal are daily quality control requirements to ensure the
accuracy of laboratory devices and procedures, proficiency testing to measure
testing accuracy and personnel standards to assure appropriate training and
experience for laboratory workers. CLIA categorizes tests as "waived," or as
being "moderately complex" or "highly complex" on the basis of specific
criteria.

41
<PAGE> 43

Prior to January 1996, the L-D-X System, including the Company's current
cassettes, was categorized under CLIA as moderately complex. In January 1996,
the L-D-X System and the TC, HDL, triglycerides and glucose tests in any
combination were reclassified as waived under CLIA. CLIA waiver allows health
care providers to use the L-D-X System at a lower cost. Under the waived
classification, users of the L-D-X System are only required to obtain a
certificate of waiver from HCFA and pay a $100 fee, and are not required to
comply with the CLIA requirements otherwise applicable to individual diagnostic
tests. This certificate must be renewed every two years. The Company provides
United States purchasers of its products with the documentation, systems and
support necessary to comply with CLIA. In order to successfully commercialize
tests that are currently under development, the Company believes that it will be
critical to obtain waived classification for such tests under CLIA. There can be
no assurance that any new tests developed by the Company will qualify for waived
classification. Any failure of the new tests to obtain waived status under CLIA
will adversely impact the Company's ability to commercialize such tests, which
could have a material adverse effect on the Company's business, financial
condition and results of operations. If the Company does not receive CLIA waiver
for any of its products in development, the Company may choose to market such
products in the United States as moderately complex products and/or market such
products outside of the United States. These decisions will be made on a
product-by-product basis. In addition, there can be no assurance that any future
amendment of CLIA or the promulgation of additional regulations impacting
laboratory testing will not have an adverse effect on the Company's ability to
market the L-D-X System. If CLIA regulations were modified in a manner that
reduced regulatory requirements and burdens faced by competitive products,
certain competitive advantages of the L-D-X System's waived status could be
reduced or eliminated. See "Risk Factors -- Government Regulation."

THIRD PARTY REIMBURSEMENT

In the United States, health care providers, such as hospitals and
physicians, that purchase products such as the L-D-X System and single use test
cassettes, generally rely on third party payors, including private health
insurance plans, federal Medicare, state Medicaid and managed care
organizations, to reimburse all or part of the cost of the procedure in which
the product is being used. The Company's ability to commercialize its products
successfully in the United States will depend in part on the extent to which
reimbursement for the costs of tests performed with the L-D-X System and related
treatment will be available from government health authorities, private health
insurers and other third party payors. Third party payors can affect the pricing
or the relative attractiveness of the Company's products by regulating the
maximum amount of reimbursement provided by such payors for testing services.
Reimbursement is currently not available for certain uses of the Company's
products in particular circumstances. Tests performed in the health promotion
market are generally not subject to reimbursement. Third party payors are
increasingly scrutinizing and challenging the prices charged for medical
products and services. Decreases in reimbursement amounts for tests performed
using the Company's products may decrease amounts physicians and other
practitioners are able to charge patients, which in turn may adversely affect
the Company's ability to sell its products on a profitable basis. In addition,
certain health care providers are moving toward a managed care system in which
such providers contract to provide comprehensive health care for a fixed cost
per patient. Managed care providers are attempting to control the cost of health
care by authorizing fewer elective procedures, such as the screening of blood
for chronic diseases. The Company is unable to predict what changes will be made
in the reimbursement methods utilized by third party payors. Inability of
healthcare providers to obtain reimbursement from third party payors, or changes
in third party payors' policies toward reimbursement of tests employing the
Company's products, could have a material adverse effect on the Company's
business, financial condition and results of operations. Given the efforts to
control and reduce health care costs in the United States in recent years, there
can be no assurance that currently available levels of reimbursement will
continue to be available in the future for the Company's existing products or
products under development.

Effective October 1, 1991, HCFA adopted regulations providing for the
inclusion of capital related costs in the prospective payment system for
hospital inpatient services under which most hospitals are reimbursed by
Medicare on a per diagnosis basis at fixed rates unrelated to actual costs,
based on DRGs. Under this system of reimbursement, equipment costs generally
will not be reimbursed separately, but rather will be included in a single,
fixed rate, per patient reimbursement. These regulations are being phased in
over a ten
42
<PAGE> 44

year period. Recently enacted Medicare reform legislation requires HCFA to
implement a prospective payment system for outpatient hospital services by 1999
as well. This system might also provide for a per-patient fixed rate
reimbursement for outpatient department capital costs. Although the full
implications of these changes cannot be known, the Company believes that the
regulations will place more pressure on hospitals' operating margins, causing
them to limit capital expenditures. These regulations could have an adverse
effect on the Company if hospitals decide to defer obtaining medical equipment
as a result of any such limitation on their capital expenditures. The recent
Medicare legislation also requires HCFA to adopt uniform coverage and
administration policies for laboratory tests. The Company is unable to predict
what adverse impact on the Company, if any, additional government regulations,
legislation or initiatives or changes by other payors affecting reimbursement or
other matters that may influence decisions to obtain medical equipment may have.

The Company believes that the escalating cost of medical products and
services has led to and will continue to lead to increased pressures on the
health care industry, both foreign and domestic, to reduce the cost of products
and services, including products offered by the Company. In addition, market
acceptance of the Company's products in international markets is dependent, in
part, upon the availability of reimbursement within prevailing health care
payment systems. Reimbursement and health care payment systems in international
markets vary significantly by country, and include both government sponsored
health care and private insurance. There can be no assurance in either United
States or foreign markets that third party reimbursement and coverage will be
available or adequate, that current reimbursement amounts will not be decreased
in the future or that future legislation, regulation, or reimbursement policies
of third party payors will not otherwise adversely affect the demand for the
Company's products or its ability to sell its products on a profitable basis.
See "Risk Factors -- Uncertainty Relating to Third Party Reimbursement."

PRODUCT LIABILITY AND INSURANCE

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

The Company has liability insurance covering its property and operations
with coverage and deductible amounts and exclusions which the Company believes
are customary for companies of its size in its industry. However, there can be
no assurance that the Company's current insurance coverage is adequate or that
it will be able to maintain insurance at an acceptable cost or otherwise to
protect against liability. See "Risk Factors -- Risk of Product Liability;
Product Liability Insurance May Be Insufficient or Unavailable."

EMPLOYEES

As of March 31, 1998, the Company employed 141 full time employees. There
were 31 employees in sales and marketing, 10 employees in administration, 83
employees in manufacturing and 17 employees in research and development. The
Company seeks to attract and retain skilled and experienced employees, although
there can be no assurance that it will continue to do so in the future. The loss
of key personnel or the inability to hire or retain qualified personnel could
have a material adverse effect on the Company's business, financial condition
and results of operations. None of the Company's employees is covered by a
collective bargaining agreement, and management considers relations with
employees to be good.
43
<PAGE> 45

FACILITIES

The Company leases a facility in Hayward, California of approximately
40,300 square feet. The Company's facility contains approximately 8,000 square
feet of laboratory space, 10,000 square feet of manufacturing space and the
balance is devoted to sales, marketing, administrative and common areas. The
Company's lease on the facility expires in the year 2000 with an option to renew
the lease for three years at 90% of the then current market rate. The Company is
currently seeking additional space for offsite storage. See "-- Manufacturing."

LEGAL PROCEEDINGS

From time to time, the Company may be involved in litigation relating to
claims arising out of its operations in the normal course of business. As of the
date of this Prospectus, the Company is not engaged in any legal proceedings
that are expected, individually or in the aggregate, to have a material adverse
effect on the Company's business, financial condition or results of operations.

44
<PAGE> 46

MANAGEMENT

DIRECTORS AND EXECUTIVE OFFICERS

The following table sets forth certain information concerning the directors
and executive officers of the Company as of March 31, 1998:

<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Warren E. Pinckert II......... 54 President, Chief Executive Officer and Director
Andrea J. Tiller.............. 40 Vice President of Finance, Chief Financial Officer,
Treasurer and Secretary
Steven L. Barbato............. 48 Vice President of Operations
Gary E. Hewett................ 46 Vice President and Chief Scientific Officer
Mark J. Kussman............... 50 Vice President of Sales and Marketing
Harvey S. Sadow, 75 Chairman of the Board
Ph.D.(1)(2).................
Joseph Buchman, M.D.(1)....... 68 Director
John L. Castello(2)........... 62 Director
John H. Landon................ 57 Director
H.R. Shepherd(1).............. 77 Director
</TABLE>

- ---------------
(1) Member of the Audit Committee.

(2) Member of the Compensation Committee.

Warren E. Pinckert II has served as President, Chief Executive Officer and
a director of the Company since June 1993. Mr. Pinckert served as Executive Vice
President of Operations of the Company from 1991 to June 1993 and as Chief
Financial Officer and Vice President of Business Development of the Company from
1989 to June 1993. Mr. Pinckert also served as Secretary of the Company from
1989 to January 1997. Prior to joining the Company, Mr. Pinckert was Chief
Financial Officer of Sunrise Medical Inc., an international durable medical
equipment manufacturer, from 1983 to 1989. Mr. Pinckert also serves on the Board
of Directors of PacifiCare Health Systems, Inc., a managed care organization.
Mr. Pinckert earned a B.S. in Accounting and a M.B.A. from the University of
Southern California and is a certified public accountant.

Andrea J. Tiller has served as Vice President of Finance, Chief Financial
Officer and Treasurer since joining the Company in November 1996. Ms. Tiller has
also served as Secretary of the Company since January 1997. From March 1996 to
November 1996, Ms. Tiller was an independent management consultant. From
September 1994 to December 1995, Ms. Tiller was Director of Corporate Planning
at Target Therapeutics Inc., a medical device manufacturer and currently a
division of Boston Scientific Corporation. From 1991 to September 1994, Ms.
Tiller was employed as Business Planning Manager of SynOptics Communications,
Inc., a computer networking company now known as Bay Networks Inc. Prior to
joining SynOptics Communications, Inc., Ms. Tiller served as a Senior Marketing
Research Specialist at E.I. du Pont de Nemours and Company ("DuPont") and has
twice owned and operated consulting practices in the areas of business strategy
and development. Ms. Tiller earned a B.A. in Economics from Stanford University
and a M.B.A. from the San Francisco State University Graduate School of
Business.

Steven L. Barbato has served as Vice President of Operations of the Company
since September 1997. Prior to that Mr. Barbato served as Vice President of
Manufacturing of the Company from 1992. From 1990 to 1992, Mr. Barbato served as
Vice President of Operations of the Pandex Division of Baxter Diagnostics, Inc.
("Baxter Diagnostics"), a biotechnical instrument and reagent development
company and served in other capacities at Baxter Diagnostics from January 1992
to May 1992. From 1989 to 1990, Mr. Barbato served as Director of Manufacturing
for the Paramax Chemistry Division of Baxter Diagnostics, a manufacturer of
automated whole blood analyzers. From 1987 to 1989, Mr. Barbato was employed as
Manager of Manufacturing by the Pandex Division of Baxter Diagnostics. Mr.
Barbato earned a B.S. in Chemical Engineering from Northeastern University and a
M.B.A. from Xavier University.

45
<PAGE> 47

Gary E. Hewett, a co-founder of the Company, has served as Vice President
and Chief Scientific Officer of the Company since October 1997. Prior to that
Mr. Hewett was Vice President of Research and Development of the Company from
its inception in 1988. From 1985 to 1988, Mr. Hewett was employed by Genelabs
Technologies, Inc., a biopharmaceutical company, as Vice President of
Diagnostics. Prior to 1985, Mr. Hewett was employed in a variety of management
and technical positions at the following companies: Cetus Corporation, a
biotechnology firm, from 1983 to 1985; Molecular Design, Inc., a computer
software company, from 1980 to 1983; Beckman Instruments, Inc., a clinical
instrument company, from 1978 to 1983; and Durrum Instrument (Dionics), an
analytical instrument firm, from 1975 to 1978. Mr. Hewett earned a B.A. in
Neurophysiology from the University of California, Berkeley.

Mark J. Kussman has served as Vice President of Sales and Marketing of the
Company since August 1996. From June 1994 to June 1996, Mr. Kussman served as
Vice President of Sales and Marketing of Medical Analysis Systems, Inc., a
manufacturer of controls and blood chemistry reagents. From 1991 to June 1994,
Mr. Kussman served as Marketing Manager for the Syva division of Syntex
Corporation, a manufacturer of drug abuse detection, therapeutic drug monitoring
and infectious disease detection systems. From 1988 to 1990, Mr. Kussman was
employed as U.S. Marketing Manager by the Diagnostics Division of Abbott
Laboratories. Mr. Kussman earned a B.S. in Marketing Management from Southern
Illinois University and a M.B.A. from St. Louis University.

Harvey S. Sadow, Ph.D. has been a director of the Company since January
1990 and has served as Chairman of the Board since 1992. Dr. Sadow was President
and Chief Executive Officer of Boehringer Ingelheim Corporation, a health care
company, from 1971 to 1988, and of Boehringer Ingelheim Pharmaceuticals, Inc.,
an ethical specialty pharmaceutical company, from 1984 to 1988. In 1988, upon
his retirement, Dr. Sadow became Chairman of the Board of Directors of both
Boehringer Ingelheim Corporation and Boehringer Ingelheim Pharmaceuticals, Inc.
Dr. Sadow retired as Chairman of both companies in 1990 but remained on their
Boards of Directors until 1992. Dr. Sadow is Chairman of Acacia Biosciences,
Inc., a drug discovery technology company; Chairman of Cortex Pharmaceuticals,
Inc., a neuroscience company; a director of Penederm Incorporated, a developer
and marketer of specialized dermatology products; a director of Anika
Therapeutics, Inc., a hyaluronic acid technology specialty company; a director
of Trega Biosciences, Inc., a drug discovery company and a director of several
privately held companies in the health care field. Dr. Sadow earned a B.S. from
the Virginia Military Institute, a M.S. from the University of Kansas and a
Ph.D. from the University of Connecticut.

Joseph Buchman, M.D. has been a director of the Company since July 1994.
Dr. Buchman is a practicing physician with a private practice in Connecticut.
Dr. Buchman is a certified member of the American Board of Internal Medicine and
Cardiovascular Disease. Dr. Buchman is currently Director of the Preventive
Cardiology Program for Danbury Hospital Health Services, and has been a member
of the Cardiothoracic and Vascular Group, a professional corporation in
Connecticut, since 1992. Prior to 1992, Dr. Buchman maintained a private medical
practice. Dr. Buchman has published numerous articles on the subject of coronary
risk factors. Dr. Buchman earned a B.A. from Wesleyan University and a M.D. from
New York University, College of Medicine.

John L. Castello has been a director of the Company since August 1993. Mr.
Castello is the Chairman of the Board of XOMA Corporation ("XOMA"), a
biotechnology company. Mr. Castello joined XOMA in April 1992 after serving as
President of the Ares Serono Group, Inc., a Swiss ethical pharmaceutical
company, from 1986 to 1991, and prior to that Mr. Castello was Chairman and
Chief Executive Officer from August 1991 to April 1992. From 1977 to 1986, Mr.
Castello held senior management positions at Amersham International PLC and
Abbott Laboratories. Mr. Castello also serves on the Board of Directors of Metra
Biosystems. Mr. Castello earned a B.S. in Mechanical and Industrial Engineering
from Notre Dame University.

John H. Landon has been a director of the Company since December of 1997.
Mr. Landon served as Vice President and General Manager, Medical Products of
DuPont from 1992 to 1996. Prior to that, Mr. Landon served in various capacities
at DuPont, including Vice President and General Manager, Diagnostics and
Biotechnology from 1990 to 1992, Director of Diagnostics from 1988 to 1990,
Business Director of Diagnostic

46
<PAGE> 48

Imaging from 1985 to 1988 and in various other professional and management
positions at DuPont from 1962 to 1985. Mr. Landon is also a director of Digene
Corporation and a director and member of the Executive Committee of Christiana
Care Corporation, a firm created by the merger of the Medical Center of
Delaware, Mid-Atlantic Health Systems, and several other healthcare entities.
Previously, Mr. Landon served as a director of The DuPont Merck Pharmaceutical
Company and the Health Industry Manufacturers Association. Mr. Landon earned a
B.S. in Chemical Engineering from the University of Arizona.

H. R. Shepherd has been a director of the Company since July 1994. Mr.
Shepherd is a special advisor to the Chairman of the Board of Directors of
Medeva PLC ("Medeva"), an international pharmaceutical company, and is a founder
and Chairman of the Board of Directors of the Albert B. Sabin Vaccine Institute
at Georgetown University. Mr. Shepherd is also an Adjunct Professor in the
Department of Microbiology and Immunology at the Georgetown University Medical
Center. Mr. Shepherd served as Chairman and Chief Executive Officer of Armstrong
Pharmaceuticals, Inc., a company specializing in aerosol pharmaceutical
packaging and labeling, from 1985 to 1993, before it was acquired by Medeva. Mr.
Shepherd earned a B.S. from Cornell University and a Honorary Doctorate of
Humane Letters from Villanova University.

47
<PAGE> 49

PRINCIPAL SHAREHOLDERS

The following table sets forth certain information with respect to the
beneficial ownership of the Common Stock as of March 27, 1998 and as adjusted to
reflect the sale of the 3,000,000 shares of Common Stock offered hereby
(assuming no exercise of the Underwriters' over-allotment option): (i) by each
director, (ii) by the Chief Executive Officer and each of the four next most
highly compensated executive officers (the "Named Executive Officers"), and
(iii) by all directors and executive officers as a group. Except as otherwise
noted, the shareholders named in the table have sole voting and investment power
with respect to all shares of Common Stock shown as beneficially owned by them,
subject to applicable community property laws.

<TABLE>
<CAPTION>
PERCENTAGE BENEFICIALLY
OWNED(1)
SHARES ------------------------
BENEFICIALLY PRIOR TO AFTER
BENEFICIAL OWNER OWNED(1) OFFERING OFFERING
---------------- ------------ --------- ---------
<S> <C> <C> <C>
Kopp Investment Advisors, Inc.(2)........................... 1,488,440 13.1% 10.3%
6600 France Avenue South
Suite 672
Edina, MN 55433
The Kaufmann Fund, Inc.(3).................................. 800,000 7.0 5.6
140 East 45th Street, 43rd Floor
New York, NY 10017
U.S. Bancorp(4)............................................. 573,122 5.0 4.0
601 2nd Avenue, South
Minneapolis, MN 55402-4302
Warren E. Pinckert II(5).................................... 383,870 3.3 2.6
Gary E. Hewett(6)........................................... 97,349 * *
Harvey S. Sadow, Ph.D.(7)................................... 55,724 *
Steven L. Barbato(8)........................................ 44,687 * *
Andrea J. Tiller(9)......................................... 35,437 * *
John L. Castello(10)........................................ 35,000 * *
Mark J. Kussman(11)......................................... 32,812 * *
Joseph Buchman(12).......................................... 25,500 * *
John H. Landon(13).......................................... 2,500 * *
H.R. Shepherd(14)........................................... 2,500 * *
All current directors and executive officers as a group (10
persons)(15).............................................. 715,379 6.0 4.8
</TABLE>

- ---------------
* Less than one percent.

(1) This table is based upon information supplied by officers, directors and
principal shareholders. Applicable percentage of ownership is based on
11,402,084 shares of Common Stock outstanding as of March 27, 1998 together
with applicable options for such shareholder. Beneficial ownership is
determined in accordance with the rules of the Securities and Exchange
Commission, and includes voting and investment power with respect to
shares. Shares of Common Stock subject to options or warrants currently
exercisable or exercisable within 60 days after March 27, 1998 are deemed
outstanding for computing the percentage ownership of the person holding
such options or warrants, but are not deemed outstanding for computing the
percentage of any other person.

(2) Reflects ownership as reported on Schedule 13G/A dated February 9, 1998
with the Commission by Kopp Investment Advisors, Inc. ("KIA"). Represents
shares beneficially owned by (i) KIA, a registered investment advisor, (ii)
Kopp Holding Company ("Holding") and (iii) LeRoy C. Kopp individually and
through his ownership of a controlling interest in KIA, his position as
sole stockholder of Holding and his individual interests. KIA has sole
voting power over 379,000 shares of the Company's Common Stock, sole
dispositive power over 320,000 and shared dispositive power over 1,168,400
shares of the Company's Common Stock. Holding has beneficial ownership over
1,488,440. Mr. Kopp has sole

48
<PAGE> 50

voting and dispositive power over 51,200 shares of Common Stock and
beneficial ownership over 1,539,640 shares of Common Stock.

(3) Reflects ownership of the Company's Common Stock as reported to the
Securities and Exchange Commission on Form 13G/A by The Kaufmann Fund, Inc.
("Kaufmann") on January 29, 1998. Kaufmann is a registered investment
company pursuant to Section 8 of the Investment Company Act of 1940, as
amended. Includes 800,000 shares of Common Stock over which Kaufmann has
sole voting and dispositive power.

(4) Reflects ownership of the Company's Common Stock as reported to the
Securities and Exchange Commission on Form 13G/A by U.S. Bancorp on
February 13, 1998. U.S. Bancorp is a bank holding company registered
pursuant to the Bank Holding Company Act of 1956, as amended. Includes (i)
573,122 shares of Common Stock over which U.S. Bancorp has sole voting
power, (ii) 554,622 shares over which U.S. Bancorp has sole dispositive
power and (iii) 3,500 shares over which U.S. Bancorp has shared dispositive
power.

(5) Includes 309,128 shares of Common Stock issuable pursuant to stock options
exercisable within 60 days after March 31, 1998.

(6) Includes 82,343 shares of Common Stock issuable pursuant to stock options
exercisable within 60 days after March 27, 1998.

(7) Includes 37,500 shares of Common Stock issuable pursuant to stock options
exercisable within 60 days after March 27, 1998.

(8) Represents 44,687 shares of Common Stock issuable pursuant to stock options
exercisable within 60 days after March 27, 1998.

(9) Represents 33,437 shares of Common Stock issuable pursuant to stock options
exercisable within 60 days after March 27, 1998.

(10) Represents 35,000 shares of Common Stock issuable pursuant to stock options
exercisable within 60 days after March 27, 1998.

(11) Represents 32,812 shares of Common Stock issuable pursuant to stock options
exercisable within 60 days after March 27, 1998.

(12) Represents 25,500 shares of Common Stock issuable pursuant to stock options
exercisable within 60 days after March 27, 1998.

(13) Represents 2,500 shares of Common Stock issuable pursuant to stock options
exercisable within 60 days after March 27, 1998.

(14) Represents 2,500 shares of Common Stock issuable pursuant to stock options
exercisable within 60 days after March 27, 1998.

(15) Includes 607,907 shares of Common Stock issuable pursuant to stock options
exercisable within 60 days after March 27, 1998.

49
<PAGE> 51

UNDERWRITING

The underwriters named below (the "Underwriters"), for whom Prudential
Securities Incorporated, Vector Securities International, Inc. and EVEREN
Securities, Inc. are acting as representatives (the "Representatives"), have
severally agreed, subject to the terms and conditions contained in the
underwriting agreement (the "Underwriting Agreement"), to purchase from the
Company the number of shares of Common Stock set forth below opposite their
respective names:

<TABLE>
<CAPTION>
NUMBER
UNDERWRITER OF SHARES
----------- ---------
<S> <C>
Prudential Securities Incorporated..........................
Vector Securities International, Inc........................
EVEREN Securities, Inc......................................

---------
Total....................................................... 3,000,000
=========
</TABLE>

The Company is obligated to sell, and the Underwriters are obligated to
purchase, all the shares of Common Stock offered hereby if any are purchased.

The Underwriters, through their Representatives, have advised the Company
that they propose to offer the Common Stock initially at the public offering
price set forth on the cover page of this Prospectus; that the Underwriters may
allow to selected dealers a concession of $ per share; and that such dealers
may reallow a concession of $ per share to certain other dealers. After the
Offering, the public offering price and the concessions may be changed by the
Representatives.

The Company has granted the Underwriters an option, exercisable for 30 days
from the date of this Prospectus, to purchase up to 450,000 additional shares of
Common Stock at the public offering price, less underwriting discounts and
commissions, as set forth on the cover page of this Prospectus. The Underwriters
may exercise such option solely for the purpose of covering over-allotments
incurred in the sale of the shares of Common Stock offered hereby. To the extent
such option is exercised, each Underwriter will become obligated, subject to
certain conditions, to purchase approximately the same percentage of such
additional shares as the number set forth next to such Underwriter's name in the
preceding table bears to 3,000,000.

The Company and its officers and directors, who in the aggregate
beneficially own approximately 715,379 shares of Common Stock, have agreed (the
"Lock-Up Agreements") not to, directly or indirectly, offer, sell, offer to
sell, contract to sell, pledge, grant any option to purchase or otherwise sell
or dispose (or announce any offer, sale, offer of sale, contract of sale,
pledge, grant of any option to purchase or other sale or disposition) of any
shares of Common Stock or any other securities or of securities substantially
similar thereto or any other securities, convertible into, or exchangeable or
exercisable for, shares of Common Stock or other such similar securities of the
Company for a period of 90 days after the date of this Prospectus without the
prior written consent of Prudential Securities Incorporated, on behalf of the
Underwriters, other than Common Stock issued by the Company in connection with
the exercise of outstanding securities, options granted by the Company pursuant
to its 1997 Stock Incentive Program and common stock issuable pursuant to such
options and securities issued by the Company pursuant to the 1992 Employee Stock
Purchase Plan. In addition,

50
<PAGE> 52

directors and officers may transfer securities of the Company either during
their respective lifetimes or on death by gift, will or intestacy to their
respective immediate families or to a trust the beneficiaries of which are
exclusively such directors and officers and/or a member or members of their
respective immediate families, provided, however, that in any such case, it
shall be a condition to the transfer that the transferee execute an agreement
stating that the transferee is receiving and holding such securities subject to
the provisions of such Lock-Up Agreement, and there shall be no further transfer
of such securities except in accordance with such Lock-Up Agreement. Prudential
Securities Incorporated may, in its sole discretion, at any time and without
notice, release all or any portion of the shares of Common Stock subject to such
lock-up agreements.

The Company has agreed to indemnify the several Underwriters and contribute
to losses arising out of certain liabilities, including liabilities under the
Securities Act.

In connection with the Offering, certain Underwriters (and selling group
members, if any) or their respective affiliates who are qualified market makers
on the Nasdaq National Market may engage in passive market making transactions
in the Common Stock of the Company on the Nasdaq National Market in accordance
with Rule 103 of Regulation M under the Exchange Act during the business day
prior to the pricing of the Offering before the commencement of offers and sales
of Common Stock. Passive market makers must comply with applicable volume and
price limitations and must be identified as such. In general, a passive market
maker must display its bid at a price not in excess of the highest independent
bid for such security; if all independent bids are lowered below the passive
market maker's bid, however, such bid must then be lowered when certain purchase
limits are exceeded.

In connection with the Offering, certain Underwriters (and selling group
members, if any) and their respective affiliates may engage in transactions that
stabilize, maintain or otherwise affect the market price of the Common Stock.
Such transactions may include stabilization transactions effected in accordance
with Rule 104 of Regulation M under the Exchange Act pursuant to which such
persons may bid for or purchase Common Stock for the purpose of stabilizing its
market price. The Underwriters also may create a short position for the account
of the Underwriters by selling more Common Stock in connection with the Offering
than they are committed to purchase from the Company and in such case may
purchase Common Stock in the open market following completion of the Offering to
cover all or a portion of such short position. The Underwriters may also cover
all or a portion of such short position, up to 450,000 shares of Common Stock,
by exercising the Underwriters' over-allotment option referred to previously. In
addition, Prudential Securities Incorporated, on behalf of the Underwriters, may
impose "penalty bids" under contractual arrangements with the Underwriters
whereby it may reclaim from an Underwriter (or any selling group member) for the
account of the other Underwriters, the selling concession with respect to Common
Stock that is distributed in the Offering but subsequently purchased for the
account of the Underwriters in the open market. Any of the transactions
described in this paragraph may result in the maintenance of the price of the
Common Stock at a level above that which might otherwise prevail in the open
market. None of the transactions described in this paragraph are required, and,
if they are undertaken, they may be discontinued at any time.

LEGAL MATTERS

The validity of the shares of Common Stock offered hereby will be passed
upon for the Company by Wilson Sonsini Goodrich & Rosati, Professional
Corporation, Palo Alto, California. Certain legal matters in connection with the
Offering will be passed upon for the Underwriters by Cooley Godward LLP, Palo
Alto, California.

51
<PAGE> 53

EXPERTS

The financial statements as of March 28, 1997 and March 27, 1998 and for
each of the three years in the period ended March 27, 1998 included in this
Prospectus and the financial statement schedule included in the Registration
Statement have been so included in reliance on the report of Price Waterhouse
LLP, independent accountants, given on the authority of said firm as experts in
auditing and accounting.

The statements in this Prospectus under the captions "Risk
Factors -- Dependence on Proprietary Technology; Uncertainty of Patent and
Proprietary Technology Protection; Dependence on Licensing of Technology from
Third Parties" and "Business -- Patents and Proprietary Technology" have been
reviewed and approved by Dehlinger & Associates, patent counsel for the Company,
as experts on such matters, and are included herein in reliance upon that review
and approval.

INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE

The following documents heretofore filed by the Company with the Securities
and Exchange Commission (the "Commission") pursuant to the Exchange Act are
incorporated herein by reference: (1) the Company's Annual Report on Form 10-K
for the fiscal year ended March 28, 1997; (2) the Company's Definitive Proxy
Statement on Schedule 14A and Notice of Annual Meeting of Shareholders filed
with the Commission on July 21, 1997; (3) the Company's Quarterly Reports on
Form 10-Q for the quarters ended June 27, 1997, September 26, 1997 and December
26, 1997; (4) the Company's Registration Statement on Form 8-A relating to the
Company's Common Stock as declared effective by the Commission on June 26, 1992;
and (5) the description of the Company's Preferred Share Purchase Rights
contained in the Registration Statement on Form 8-A filed with the Commission on
January 27, 1997.

All reports and other documents subsequently filed by the Company pursuant
to Sections 13(a), 13(c), 14 or 15(d) of the Exchange Act after the date of this
Prospectus and prior to the termination of the Offering shall be deemed to be
incorporated by reference herein and to be a part hereof from the date of the
filing of such reports and documents. The Company hereby undertakes to provide
without charge to each person, including any beneficial owner, to whom a copy of
this Prospectus is delivered, upon written or oral request of such person a copy
of any or all of the foregoing documents incorporated herein by reference
(exclusive of exhibits, unless such exhibits are specifically incorporated by
reference into such documents). Requests for such documents should be submitted
in writing to the Company's Secretary at the corporate headquarters of the
Company at 3347 Investment Boulevard, Hayward, California 94545, or by telephone
at (510) 732-7200.

Any statement contained in a document incorporated or deemed to be
incorporated by reference herein shall be deemed to be modified or superseded
for purposes of this Prospectus to the extent that a statement contained herein
or in any other subsequently filed document that also is or is deemed to be
incorporated by reference herein modifies or supersedes such statement. Any
statement so modified or superseded shall not be deemed, except as so modified
or superseded, to constitute a part of the Registration Statement or this
Prospectus.

ADDITIONAL INFORMATION

The Company is subject to the informational requirements of the Exchange
Act and in accordance therewith files reports, proxy statements and other
information with the Commission. Such reports, proxy statements and other
information can be inspected and copied at the Public Reference Section of the
Commission at Room 1024, 450 Fifth Street, N.W., Judiciary Plaza, Washington,
D.C. 20549, and at the Commission's following Regional Offices: Suite 1400,
Northwest Atrium Center, 500 West Madison Street, Chicago, Illinois 60661; and
13th Floor, Seven World Trade Center, New York, New York 10048. Copies of such
material can be obtained at prescribed rates from the Public Reference Section
of the Commission at 450 Fifth Street, N.W., Judiciary Plaza, Washington, D.C.
20549 or through the Commission's World Wide Web site at http:\\www.sec.gov. The
Common Stock is included on the Nasdaq National Market. Reports, proxy
statements and other information concerning the Company can also be inspected at
the National Association of Securities Dealers, Inc., 1735 K Street N.W.,
Washington, D.C. 20002.

52
<PAGE> 54

The Company has filed with the Commission a Registration Statement on Form
S-3 under the Securities Act with respect to the Common Stock offered hereby.
This Prospectus does not contain all of the information set forth in the
Registration Statement and the exhibits and schedules thereto. For further
information with respect to the Company and such Common Stock, reference is made
to the Registration Statement and the exhibits and schedules filed as a part
thereof. Although the statements contained in this Prospectus as to the contents
of any contract or any other document referred to state all material elements of
the contracts and other documents, such statements are not necessarily complete.
In each instance, reference is made to the copy of such contract or document
filed as an exhibit to the Registration Statement, and each such statement is
qualified in all respects by such reference. Copies of the Registration
Statement, including exhibits and schedules thereto, may be inspected without
charge at the Commission's principal office in Washington, D.C., or obtained at
prescribed rates from the Public Reference Section of the Commission at 450
Fifth Street, N.W., Judiciary Plaza, Washington, D.C. 20549 or through the
Commission's World Wide Web site at http:\\www.sec.gov.

53
<PAGE> 55

INDEX TO FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Accountants........................... F-2
Balance Sheets.............................................. F-3
Statements of Operations.................................... F-4
Statement of Changes in Shareholders' Equity................ F-5
Statements of Cash Flows.................................... F-6
Notes to Financial Statements............................... F-7
</TABLE>

F-1
<PAGE> 56

REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Directors and
Shareholders of Cholestech Corporation

In our opinion, the accompanying balance sheets and the related statements
of operations, of changes in shareholders' equity and of cash flows present
fairly, in all material respects, the financial position of Cholestech
Corporation at March 28, 1997 and March 27, 1998, and the results of its
operations and its cash flows for each of the three years in the period ended
March 27, 1998, in conformity with generally accepted accounting principles.
These financial statements are the responsibility of the Company's management;
our responsibility is to express an opinion on these financial statements based
on our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.

PRICE WATERHOUSE LLP

San Jose, California
April 23, 1998, except as
to Note 10, which is
as of April 29, 1998

F-2
<PAGE> 57

CHOLESTECH CORPORATION

BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)

ASSETS

<TABLE>
<CAPTION>
MARCH 28, MARCH 27,
1997 1998
--------- ---------
<S> <C> <C>
Current assets:
Cash and cash equivalents................................. $ 6,088 $ 5,130
Marketable securities..................................... 7,921 9,621
Accounts receivable, net.................................. 1,866 3,793
Inventories............................................... 2,353 3,306
Prepaid expenses and other assets......................... 280 154
-------- --------
Total current assets.............................. 18,508 22,004
Property and equipment, net................................. 2,399 3,711
Other assets, net........................................... 180 73
-------- --------
$ 21,087 $ 25,788
======== ========

LIABILITIES AND SHAREHOLDERS' EQUITY

Current liabilities:
Accounts payable and accrued liabilities.................. $ 1,643 $ 3,003
Accrued payroll and benefits.............................. 527 1,136
Product warranty.......................................... 214 203
-------- --------
Total current liabilities......................... 2,384 4,342
-------- --------
Commitments (Notes 4 and 5)
Shareholders' equity:
Preferred Stock, no par value; 5,000,000 shares
authorized; no shares issued
and outstanding........................................ -- --
Common Stock, no par value; 25,000,000 shares authorized;
11,222,040 and 11,402,084 shares issued and
outstanding............................................ 69,174 69,880
Unrealized gains on investments........................... -- 49
Accumulated deficit....................................... (50,471) (48,483)
-------- --------
Total shareholders' equity........................ 18,703 21,446
-------- --------
$ 21,087 $ 25,788
======== ========
</TABLE>

See accompanying notes to financial statements.

F-3
<PAGE> 58

CHOLESTECH CORPORATION

STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)

<TABLE>
<CAPTION>
YEAR ENDED
----------------------------------------
MARCH 29, MARCH 28, MARCH 27,
1996 1997 1998
---------- ----------- -----------
<S> <C> <C> <C>
Revenues............................................. $ 6,873 $ 12,861 $ 21,664
Cost of products sold................................ 4,481 6,957 10,513
---------- ----------- -----------
Gross profit......................................... 2,392 5,904 11,151
---------- ----------- -----------
Operating expenses:
Sales and marketing................................ 3,305 4,108 5,380
Research and development........................... 731 1,341 2,224
General and administrative......................... 1,246 1,537 2,087
---------- ----------- -----------
Total operating expenses................... 5,282 6,986 9,691
---------- ----------- -----------
Income (loss) from operations........................ (2,890) (1,082) 1,460
Interest income...................................... 284 517 571
Interest expense..................................... (140) (244) (2)
---------- ----------- -----------
Income (loss) before taxes........................... (2,746) (809) 2,029
Provision for income taxes........................... -- -- 41
---------- ----------- -----------
Net income (loss).................................... $ (2,746) $ (809) $ 1,988
========== =========== ===========
Net income (loss) per share:
Basic.............................................. $ (0.34) $ (0.08) $ 0.18
========== =========== ===========
Diluted............................................ $ (0.34) $ (0.08) $ 0.17
========== =========== ===========
Shares used to compute net income (loss) per share:
Basic.............................................. 8,041,531 10,381,914 11,289,102
========== =========== ===========
Diluted............................................ 8,041,531 10,381,914 11,905,043
========== =========== ===========
</TABLE>

See accompanying notes to financial statements.

F-4
<PAGE> 59

CHOLESTECH CORPORATION

STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE DATA)

<TABLE>
<CAPTION>
COMMON STOCK
-------------------- ACCUMULATED
SHARES AMOUNT OTHER DEFICIT TOTAL
---------- ------- ----- ----------- -------
<S> <C> <C> <C> <C> <C>
Balance at March 31, 1995.................. 7,999,962 $55,465 $(36) $(46,916) $ 8,513
Issuance of Common Stock pursuant to
employee stock purchase plan and exercise
of stock options and warrants............ 131,862 140 140
Compensation expense relating to stock
options.................................. 39 39
Forgiveness of loan........................ 36 36
Net loss................................... (2,746) (2,746)
---------- ------- ---- -------- -------
Balance at March 29, 1996.................. 8,131,824 55,644 -- (49,662) 5,982
Sale of Common Stock to the public, net of
issuance costs........................... 2,875,000 12,858 12,858
Issuance of Common Stock pursuant to
employee stock purchase plan and exercise
of stock options and warrants............ 175,690 422 422
Issuance of Common Stock pursuant to a
development, license and distribution
agreement................................ 39,526 250 250
Net loss................................... (809) (809)
---------- ------- ---- -------- -------
Balance at March 28, 1997.................. 11,222,040 69,174 -- (50,471) 18,703
Issuance of Common Stock pursuant to
employee stock purchase plan and exercise
of stock options......................... 180,044 706 706
Unrealized gains on available-for-sale
securities............................... 49 49
Net income................................. 1,988 1,988
---------- ------- ---- -------- -------
Balance at March 27, 1998.................. 11,402,084 $69,880 $ 49 $(48,483) $21,446
========== ======= ==== ======== =======
</TABLE>

See accompanying notes to financial statements.

F-5
<PAGE> 60

CHOLESTECH CORPORATION
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)

<TABLE>
<CAPTION>
YEAR ENDED
-----------------------------------
MARCH 29, MARCH 28, MARCH 27,
1996 1997 1998
--------- --------- ---------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss)...................................... $ (2,746) $ (809) $ 1,988
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization....................... 612 846 767
Deferred revenue.................................... (30) (6) --
Compensation expense relating to stock options
issued
below market...................................... 39 -- --
Forgiveness of note receivable...................... 36 -- --
Write-off of property and equipment................. 3 3 --
Changes in assets and liabilities:
Accounts receivable............................... (443) (759) (1,927)
Inventories....................................... (559) (443) (953)
Prepaid expenses and other assets................. 1 (113) 126
Other assets...................................... (6) (12) 107
Accounts payable and accrued liabilities.......... 721 (26) 1,400
Accrued payroll and benefits...................... (51) 274 609
Product warranty.................................. 37 27 (11)
--------- --------- --------
Net cash provided by (used in) operating
activities........................................ (2,386) (1,018) 2,106
--------- --------- --------
Cash flows from investing activities:
Purchase of marketable securities...................... (121,016) (191,737) (33,391)
Proceeds from sale of marketable securities............ 121,266 187,566 31,740
Purchases of property and equipment.................... (331) (1,019) (2,079)
--------- --------- --------
Net cash (used in) investing activities............. (81) (5,190) (3,730)
--------- --------- --------
Cash flows from financing activities:
Proceeds from long term debt........................... 1,500 -- --
Repayment of long term debt............................ (202) (1,298) --
Proceeds from short term bank borrowing................ 250 800 --
Repayment of short term bank borrowing................. -- (1,050) --
Principal payments on capital leases................... (90) (47) (40)
Issuance of Common Stock............................... 140 13,530 706
--------- --------- --------
Net cash provided by financing activities........... 1,598 11,935 666
--------- --------- --------
Net change in cash and cash equivalents.................. (869) 5,727 (958)
Cash and cash equivalents at beginning of period......... 1,230 361 6,088
--------- --------- --------
Cash and cash equivalents at end of period............... $ 361 $ 6,088 $ 5,130
========= ========= ========
Supplemental disclosures of cash flow information:
Cash paid for interest................................. $ 140 $ 244 $ 2
========= ========= ========
Cash paid for income taxes............................. $ -- $ -- $ 25
========= ========= ========
Supplemental disclosures of non-cash financing and
investing activities:
Capital lease obligations incurred for acquisition of
property
and equipment....................................... $ -- $ 47 $ --
========= ========= ========
</TABLE>

See accompanying notes to financial statements.

F-6
<PAGE> 61

CHOLESTECH CORPORATION

NOTES TO FINANCIAL STATEMENTS

1. THE COMPANY AND A SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

THE COMPANY

Cholestech Corporation (the "Company") was incorporated in February 1988.
The Company develops, manufactures and markets the Cholestech L-D-X System (the
"L-D-X System"), which performs near-patient diagnostic screening and
therapeutic monitoring for the management of prevalent chronic diseases. The
L-D-X System is capable of measuring multiple analytes simultaneously with a
single drop of whole blood within five minutes.

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

FISCAL YEAR END

The Company's fiscal year is a 52-53 week period ending on the last Friday
in March. Fiscal 1996, 1997 and 1998 each comprised 52 week periods.

RECLASSIFICATIONS

Certain reclassifications have been made to the prior year financial
statements to conform to the fiscal 1998 presentation. Such reclassifications
had no effect on previously reported results of operations.

REVENUE RECOGNITION

Revenues from product sales are recognized at the time products are shipped
and are denominated in U.S. dollars. The Company also provides amounts for
estimated sales returns.

CASH EQUIVALENTS AND MARKETABLE SECURITIES

The Company considers all highly liquid investments with a maturity of
three months or less at the date of purchase to be cash equivalents; all other
investments are classified as short-term marketable securities. The Company has
established policies that limit the type, credit quality and length of maturity
of the securities in which it invests. The Company's investment policy allows no
investments in any single private issuer to exceed $1,000,000 and the
investments must have, at a minimum, a credit rating of AA. Cash equivalents and
marketable securities at March 27, 1998 consist principally of investments in
money-market funds, commercial paper and U.S. government-agency obligations.
Marketable securities are classified as available-for-sale and are carried at
their market value at the balance sheet date.

CONCENTRATION OF CREDIT RISK

Financial instruments that potentially subject the Company to credit risk
consist of cash equivalents, marketable securities and accounts receivable. Cash
equivalents and marketable securities are maintained with a high credit quality
institution, and the composition and maturities of the investments are regularly
monitored by management. Generally, these securities are highly liquid and may
be redeemed upon demand and, therefore, have minimal risk associated with them.
The Company has not experienced any material losses on its investments.

The Company's trade accounts receivable generally consist of a large number
of small customers. Concentrations of credit risk with respect to trade accounts
receivable are considered to be limited due to this customer base and the
diversity of the Company's geographic sales areas. The Company performs ongoing
credit evaluations of its customers' financial condition and, generally,
requires no collateral. The Company maintains a provision for potential credit
losses and such amounts, in the aggregate, have not exceeded management
expectations. No single customer accounted for more than 10% of revenues in
fiscal 1996, 1997 or 1998.

F-7
<PAGE> 62
CHOLESTECH CORPORATION

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

INVENTORIES

Inventories are stated at the lower of cost or market, cost being
determined using the first-in, first-out (FIFO) method. Cost includes direct
materials, direct labor and manufacturing overhead.

PROPERTY AND EQUIPMENT

Property and equipment are stated at cost. Depreciation is computed using
the straight-line method over the estimated useful lives of the related assets
that range from two to five years. Leasehold improvements are amortized over
their estimated useful lives, not to exceed the term of the related lease. The
cost of additions and improvements is capitalized while maintenance and repairs
are charged to expense as incurred.

PRODUCT WARRANTY

The Company's products are generally under warranty against defects in
material and workmanship for a period of one year. The Company accrues for
estimated future warranty costs at the time of sale.

INCOME TAXES

The Company uses the asset and liability method of accounting for income
taxes, which requires the recognition of deferred tax liabilities and assets for
the expected future tax consequences of temporary differences between the
financial reporting and income tax bases of assets and liabilities.

NET INCOME (LOSS) PER SHARE

The Company adopted Statement of Financial Accounting Standards ("SFAS")
No. 128, "Earnings per Share", during the quarter ended December 26, 1997. SFAS
No. 128 requires the presentation of both basic earnings per share and, for
companies with complex capital structures (or potentially dilutive securities,
such as convertible debt, options and warrants), diluted earnings per share on
the face of the statement of operations. All prior period amounts have been
restated to conform with SFAS No. 128. Basic earnings per share is computed by
dividing income (loss) available to common shareholders (numerator) by the
weighted average number of common shares outstanding (denominator) during the
period. Diluted earnings per share gives effect to all potential Common Stock
outstanding during a period, if dilutive. In computing diluted earnings per
share, the average stock price is used in determining the number of shares
assumed to be repurchased from the exercise of stock options. The following
table reconciles the numerator and denominator of the fiscal 1998 basic and
diluted earnings per share computation. For fiscal 1996 and 1997, the numerator
and denominator in the basic and diluted per share computations were the same.

<TABLE>
<CAPTION>
YEAR ENDED MARCH 27, 1998
--------------------------------------
EARNINGS
INCOME SHARES PER SHARE
------- ------- ------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
Basic EPS.................................. $1,988 11,289 $0.18
Effect of dilutive securities.............. -- 616 (0.01)
------ ------
Diluted EPS................................ $1,988 11,905 $0.17
====== ====== =====
</TABLE>

Due to the net loss incurred during fiscal 1996 and 1997, options to
purchase 875,683 and 1,074,097 shares of Common Stock outstanding at March 29,
1996 and March 28, 1997, were considered anti-dilutive and therefore excluded
from the calculation of diluted net loss per share. In addition, at March 27,
1998, options to purchase 156,143 shares of Common Stock were considered
anti-dilutive because the respective exercise prices were greater than the
average fair market value of the Common Stock.

F-8
<PAGE> 63
CHOLESTECH CORPORATION

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

FAIR VALUE OF FINANCIAL INSTRUMENTS

The carrying value of cash equivalents, marketable securities and capital
lease obligations approximate their fair value due to the short maturity of
these instruments.

USE OF ESTIMATES

The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the reporting
period. Actual results could differ from those estimates.

ACCOUNTING FOR STOCK-BASED COMPENSATION

The Company accounts for stock-based compensation using the intrinsic value
method prescribed in Account Principles Board Opinion ("APB") No. 25,
"Accounting for Stock Issued to Employees." Under APB No. 25, compensation cost
is measured as the excess, if any, of the quoted market price of the Company's
stock at the date of grant over the price the employee must pay to acquire the
stock. The Company provides additional pro forma disclosures as required under
SFAS No. 123, "Accounting for Stock-Based Compensation" (see Note 6).

NEW ACCOUNTING PRONOUNCEMENTS

In June 1997, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 130, "Reporting Comprehensive Income." SFAS No. 130 establishes standards
for reporting and display of comprehensive income and its components in a full
set of general purpose financial statements that is displayed with the same
prominence as other financial statements for fiscal years beginning after
December 15, 1997. Comprehensive income, as defined, includes all changes in
equity (net assets) during a period from non-owner sources, including unrealized
gains and losses on available-for-sale securities. Reclassification of financial
statements for earlier periods is required. The Company will adopt SFAS No. 130
beginning in fiscal 1999 and does not expect such adoption to have a material
impact on its financial position or results of operations.

In June 1997, the FASB issued SFAS No. 131, "Disclosure About Segments of
an Enterprise and Related Information." This statement establishes standards for
the way companies report information about operating segments in annual
financial statements for fiscal years beginning after December 15, 1997. It also
establishes standards for related disclosures about products and services,
geographic areas and major customers. The Company will adopt SFAS No. 131 in
fiscal 1999. Because SFAS No. 131 only addresses disclosure and reporting
issues, its adoption will not have a material impact on the Company's financial
statements.

2. BALANCE SHEET COMPOSITION

Accounts receivable consist of (in thousands):

<TABLE>
<CAPTION>
MARCH 28, MARCH 27,
1997 1998
--------- ---------
<S> <C> <C>
Accounts receivable.................................... $1,948 $3,903
Less allowance for doubtful accounts and sales
returns.............................................. (82) (110)
------ ------
$1,866 $3,793
====== ======
</TABLE>

F-9
<PAGE> 64
CHOLESTECH CORPORATION

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

Inventories consist of (in thousands):

<TABLE>
<CAPTION>
MARCH 28, MARCH 27,
1997 1998
--------- ---------
<S> <C> <C>
Raw materials.......................................... $ 703 $1,292
Work-in-process........................................ 585 1,038
Finished goods......................................... 1,065 976
------ ------
$2,353 $3,306
====== ======
</TABLE>

Property and equipment consist of (in thousands):

<TABLE>
<CAPTION>
MARCH 28, MARCH 27,
1997 1998
--------- ---------
<S> <C> <C>
Machinery and equipment................................ $ 4,780 $ 5,434
Furniture and fixtures................................. 316 474
Computer equipment..................................... 1,067 1,954
Leasehold improvements................................. 231 632
Construction-in-progress............................... 468 447
------- -------
6,862 8,941
Less accumulated depreciation and amortization......... (4,463) (5,230)
------- -------
$ 2,399 $ 3,711
======= =======
</TABLE>

Property and equipment include assets under capital leases of $78,000 and
$26,000 and accumulated depreciation of $27,000 and $25,000 at March 28, 1997
and March 27, 1998, respectively.

Accounts payable and accrued liabilities consist of (in thousands):

<TABLE>
<CAPTION>
MARCH 28, MARCH 27,
1997 1998
--------- ---------
<S> <C> <C>
Trade accounts payable................................. $1,080 $2,605
Accrued royalties...................................... 300 86
Other accrued liabilities.............................. 263 312
------ ------
$1,643 $3,003
====== ======
</TABLE>

3. BORROWING ARRANGEMENTS

In December 1997, the Company renewed an agreement with its primary bank
for a $3 million revolving line of credit (the "line of credit"). While the
agreement is in effect, the Company is required to maintain on deposit with the
bank, assets with a collective value, as defined in the line of credit
agreement, equivalent to no less than 100% of the outstanding principle balance.
Amounts outstanding under the line of credit bear interest at the bank's prime
rate. The line of credit agreement expires on November 30, 1998. As of March 28,
1997 and March 27, 1998, there were no borrowings outstanding under the line of
credit.

4. LEASES

The Company leases office and laboratory facilities under a noncancellable
operating lease which expires on March 31, 2000. The lease contains renewal and
option provisions. Rent expense was $195,000, $195,000 and $229,000 for fiscal
1996, 1997 and 1998, respectively.

Future minimum payments required under the Company's noncancellable
operating lease at March 27, 1998 were $241,000 and $247,000 for fiscal years
1999 and 2000, respectively.

F-10
<PAGE> 65
CHOLESTECH CORPORATION

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

5. LICENSE AND DEVELOPMENT AGREEMENTS

The Company has obtained the right to use certain technology in
manufacturing its products. The related agreement, which expires in 2006,
requires the Company to pay a 2.0% royalty on net sales of the applicable
products. Total royalty expense for fiscal 1996, 1997 and 1998 was $381,000,
$551,000 and $562,000, respectively, and was charged to cost of products sold.

In May 1996, the Company entered into a development, marketing and license
agreement (the "Agreement") with Metra Biosystems, Inc. ("Metra Biosystems") to
develop an immunoassay test cassette incorporating Metra Biosystems' bone
resorption technology to be used with the L-D-X System. Pursuant to the
Agreement, Metra Biosystems purchased 39,526 shares of Common Stock for an
aggregate purchase price of $250,000 ($6.325 per share). Metra Biosystems is
obligated to purchase $750,000 of additional shares of Common Stock at the then
current market price, upon completion by the Company of specified development
milestones, unless Metra Biosystems exercises its option to terminate the
Agreement, which it may do at any time.

6. SHAREHOLDERS' EQUITY

PREFERRED STOCK

The Company is authorized to issue 5,000,000 shares of Preferred Stock. The
Board of Directors has the authority to issue the Preferred Stock in one or more
series and to fix the price, rights, preferences, privileges and restrictions
thereof, including dividend rights, dividend rates, conversion rights, voting
rights, terms of redemption, redemption prices, liquidation preferences and the
number of shares constituting a series or the designation of such series,
without any further vote or action by the Company's shareholders. In connection
with the Company's shareholder rights plan, 25,000 shares of the Preferred Stock
have been designated Series A Participating Preferred Stock. None of the shares
of Series A Participating Preferred Stock were outstanding as of March 27, 1998,
nor was there any activity relating to Preferred Stock during the three year
period ended March 27, 1998.

WARRANTS

During fiscal 1997, warrants to purchase 19,336 shares of Common Stock were
exercised at a price of $3.50 per share. As consideration for the exercise,
19,906 warrants to purchase 19,906 shares of Common Stock were surrendered to
the Company having an "in the money" value of $3.40 per share, resulting in zero
cash proceeds to the Company. There were no warrants outstanding at March 27,
1998.

STOCK INCENTIVE PROGRAM

The 1988 Stock Incentive Program (the "1988 Program") provides that
incentive stock options ("ISOs") and nonqualified stock options ("NSOs") for
shares of Common Stock may be granted to employees and consultants of the
Company. In accordance with the 1988 Program, the exercise price may not be less
than 100% and 85% of the fair market value of Common Stock on the date of grant
for ISOs and NSOs, respectively. The 1988 Program provides that options shall be
exercisable over a period not to exceed five years and a day. Options vest over
four years at a rate of at least 25 percent each year. Vesting of individual
option grants may be accelerated upon the occurrence of certain events as
described in the stock option agreement. In August 1995, the shareholders
approved an increase in the number of shares of Common Stock reserved for
issuance under the 1988 Program from 1,300,000 to 1,550,000 and in August 1996,
the shareholders approved an additional increase in the number of shares of
Common Stock reserved for issuance under the 1988 Program from 1,550,000 to
2,050,000. The 1988 Program expired in February 1998. There are no shares
available for future grant under the 1988 Program.

F-11
<PAGE> 66
CHOLESTECH CORPORATION

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

In August 1997, the shareholders approved the 1997 Stock Incentive Program
(the "1997 Program") which provides that incentive stock options ("ISOs") and
nonqualified stock options ("NSOs") for shares of Common Stock may be granted to
employees and consultants of the Company. In accordance with the 1997 Program,
the exercise price may not be less than 100% of the fair market value of Common
Stock on the date of grant for ISOs and NSOs. The 1997 Program provides that
options shall be exercisable over a period not to exceed five years and a day.
Options vest over four years at a rate of at least 25 percent each year. Vesting
of individual option grants may be accelerated upon the occurrence of certain
events as described in the stock option agreement. Pursuant to the terms of the
1997 Program, 900,000 shares of Common Stock were reserved for future issuance.

Stock option activity under the 1988 and 1997 Programs is as follows:

<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
OUTSTANDING EXERCISE PRICE
BALANCE OPTIONS PER SHARE
------- ----------- ----------------
<S> <C> <C>
Balance, March 31, 1995.......................... 879,028 $3.19
Granted.......................................... 212,923 $2.71
Exercised........................................ (79,885) $0.62
Canceled......................................... (136,383) $3.28
---------
Balance, March 29, 1996.......................... 875,683 $3.29
Granted.......................................... 427,500 $4.82
Exercised........................................ (137,707) $2.53
Canceled......................................... (91,379) $2.73
---------
Balance, March 28, 1997.......................... 1,074,097 $3.68
Granted.......................................... 449,893 $8.66
Exercised........................................ (150,286) $3.74
Canceled......................................... (78,039) $6.56
---------
Balance, March 27, 1998.......................... 1,295,665 $5.41
=========
</TABLE>

At March 27, 1998, options for 877,600 shares of Common Stock were
available for future grant under the 1997 Program.

The following table summarizes information about stock options outstanding
at March 27, 1998:

<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
--------------------------------------------- ------------------------
WEIGHTED AVG. WEIGHTED AVG. WEIGHTED AVG.
RANGE OF EXERCISE PRICES NUMBER CONTRACTUAL LIFE EXERCISE PRICE NUMBER EXERCISE PRICE
- ------------------------ --------- ---------------- -------------- ------- --------------
<S> <C> <C> <C> <C> <C>
$1.75 - $ 3.25 128,286 2.1 $ 2.42 95,156 $ 2.44
$3.26 - $ 6.56 1,011,236 3.0 $ 4.69 557,787 $ 4.08
$6.57 - $10.50 156,143 4.8 $12.52 1,558 $10.66
--------- -------
1,295,665 3.1 $ 5.41 654,501 $ 3.86
========= =======
</TABLE>

EMPLOYEE STOCK PURCHASE PLAN

In April 1992, the Company adopted the Employee Stock Purchase Plan (the
"Stock Purchase Plan"), which reserved 75,000 shares of Common Stock to be
issued in accordance with the Internal Revenue Code under such terms as approved
by the Board of Directors. In August 1995, the shareholders approved an increase
in the number of shares reserved for issuance under the Stock Purchase Plan from
75,000 to 200,000. In August 1997, the shareholders approved an additional
increase in the number of shares reserved for issuance under the Stock Purchase
Plan from 200,000 to 400,000. Under the term of the Stock Purchase Plan,
employees can choose semi-annually to have up to 15% of their compensation
withheld to purchase shares of

F-12
<PAGE> 67
CHOLESTECH CORPORATION

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

Common Stock. The purchase price is equal to 85% of the lower of the closing
price of the Common Stock on the Nasdaq National Market on the day the Stock
Purchase Plan period begins or ends. Under the Stock Purchase Plan, the Company
sold 50,814, 21,543 and 29,758 shares of Common Stock to employees in fiscal
1996, 1997 and 1998, respectively.

PRO FORMA DISCLOSURES

Had compensation cost for the Company's stock option and stock purchase
plans been determined based on the fair value of the options at the grant dates,
as prescribed in SFAS No. 123, the Company's net income (loss) and net income
(loss) per share would have been as follows:

<TABLE>
<CAPTION>
YEAR ENDED
--------------------------------------
MARCH 29, MARCH 28, MARCH 27,
1996 1997 1998
---------- ---------- ----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
Net income (loss):
As reported....................................... $(2,746) $ (809) $1,988
Pro forma......................................... $(2,786) $(1,035) $1,195
Net income (loss) per share:
As reported -- basic.............................. $ (0.34) $ (0.08) $ 0.18
Pro forma -- basic................................ $ (0.34) $ (0.10) $ 0.11
As reported -- diluted............................ $ (0.34) $ (0.08) $ 0.17
Pro forma -- diluted.............................. $ (0.34) $ (0.10) $ 0.10
</TABLE>

The fair value of each stock option is estimated on the date of grant using
the Black-Scholes valuation model, with the following assumptions used for
grants during the applicable periods: dividend yield of 0.0% for all periods;
risk-free interest rates of 6.0%, 6.3% and 5.9% for options granted during
fiscal 1996, 1997 and 1998, respectively; volatility factors of 79%, 79% and 78%
for options granted during fiscal 1996, 1997 and 1998, respectively; and a
weighted average expected option term of 2.5 years, 2.5 years and 4.0 years for
fiscal 1996, 1997 and 1998, respectively. The weighted average fair values of
stock options granted in fiscal 1996, 1997 and 1998 were $1.65, $2.44 and $5.03
per share, respectively.

The fair value of stock purchase rights is estimated using the
Black-Scholes valuation model, with the following assumptions for fiscal 1996,
1997 and 1998, respectively; dividend yield of 0.0% for all periods; an expected
life of 6 months for all periods; expected volatility factors of 95%, 74% and
81% for fiscal 1996, 1997 and 1998, respectively; and risk-free interest rates
of 5.5%, 5.3% and 5.4% for fiscal 1996, 1997 and 1998, respectively. The
weighted average fair values of stock purchase rights granted in fiscal 1996,
1997 and 1998 were $0.77, $1.21 and $1.85, respectively. The weighted average
exercise prices of stock purchase rights granted in fiscal 1996, 1997 and 1998
were $2.83, $5.54, and $8.20, respectively.

The pro forma effect on net income (loss) and net income (loss) per share
for fiscal 1996, 1997 and 1998 is not representative of the pro forma effect on
net income or loss in future periods because it does not take into consideration
pro forma compensation expense related to grants made prior to fiscal 1996.

SHAREHOLDER RIGHTS PLAN

In January 1997, the Board of Directors approved a shareholder rights plan
under which shareholders of record on March 31, 1997 received a right to
purchase (the "Right") one-thousandth of a share of Series A Participating
Preferred Stock at an exercise price of $44.00, subject to adjustment. The
Rights will separate from the Common Stock and Rights certificates will be
issued and will become exercisable upon the earlier of: (i) 10 days (or such
later date as may be determined by a majority of the Board of Directors)
following a public announcement that a person or group of affiliated or
associated persons has acquired, or obtained the

F-13
<PAGE> 68
CHOLESTECH CORPORATION

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

right to acquire, beneficial ownership of 15% or more of the Company's
outstanding Common Stock or (ii) 10 business days following the commencement of,
or announcement of an intention to make, a tender offer or exchange offer, the
consummation of which would result in the beneficial ownership by a person or
group of 15% or more of the Company's outstanding Common Stock. The Rights
expire on the earlier of (i) January 22, 2007 or (ii) redemption or exchange of
the Rights.

7. RETIREMENT SAVINGS PLAN

Effective September 1990, the Company adopted the Cholestech Corporation
Retirement Savings Plan (the "401(k) Plan") in which all employees of the
Company are entitled to participate. An eligible employee may elect to defer, in
the form of contributions to the 401(k) Plan, between 1% and 15% of the
employees' W-2 income, not to exceed $10,000 per year (adjusted for
cost-of-living increases). Employee contributions are invested in selected
mutual funds or a money market fund as specified by the employee. Employee
contributions are fully vested and nonforfeitable at all times. The 401(k) Plan
provides for employer contributions as determined by the Board of Directors. No
company contributions were made in fiscal 1996 and 1997. In fiscal 1998, the
Board of Directors approved a contribution of $164,000 by the Company to the
401(k) Plan.

8. INCOME TAXES

The provision for income taxes of $41,000 for the year ended March 27, 1998
represents current federal and state alternative minimum taxes payable, reduced
for the utilization of net operating loss and tax credit carryforwards. No
provision for income taxes was recorded for the years ended March 29, 1996 and
March 28, 1997 as the Company incurred net operating losses for income tax
purposes.

Deferred tax assets (liabilities) consist of the following (in thousands):

<TABLE>
<CAPTION>
MARCH 28, MARCH 27,
1997 1998
--------- ---------
<S> <C> <C>
Net operating loss carryforwards............................ $ 17,810 $ 16,834
Research and development tax credit carryforwards........... 2,031 2,237
Capitalized research and development........................ 280 358
Other....................................................... (862) (328)
Valuation allowance for deferred tax assets................. (19,259) (19,101)
-------- --------
$ -- $ --
======== ========
</TABLE>

The Company has historically experienced significant operating losses and
operates in an industry subject to rapid technological changes. Therefore,
management believes that there is sufficient uncertainty regarding the Company's
ability to generate future taxable income and utilize its net operating loss and
tax credit carryforwards such that a full valuation allowance for deferred tax
assets was required at March 27, 1998.

At March 27, 1998, the Company has net operating loss carryforwards
available to reduce future taxable income for federal and state income tax
purposes of approximately $44,380,000 and $18,756,000, respectively.
Additionally, the Company had research and development credit carryforwards
available to reduce income taxes for federal and state income tax purposes of
approximately $1,648,000 and $589,000, respectively.

As a result of a change in ownership which occurred in May 1990, there is
an annual limitation of approximately $1,500,000 for federal and state income
tax purposes on the combined use of approximately $6,131,000 of federal net
operating loss carryforwards and the use of $550,000 of federal and state tax
credit carryforwards. Additionally, as a result of the Company's public offering
in December 1992, net operating loss and tax credit carryforwards incurred prior
to December 1992 are subject to an annual limitation of approximately $5,450,000
for federal and state income tax purposes on the combined use of approximately

F-14
<PAGE> 69
CHOLESTECH CORPORATION

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

$26,208,000 of federal and $4,534,000 of state net operating loss carryforwards,
and the use of $1,151,000 of federal and $379,000 of state tax credit
carryforwards. If the amounts of these limitations are not utilized in a
particular year, the amount not utilized increases the limitation in the
subsequent year.

9. GEOGRAPHIC INFORMATION

The Company's export sales were $1,325,000, $1,251,000 and $3,067,000 for
fiscal 1996, 1997 and 1998, respectively. Sales to Europe were $825,000,
$908,000 and $2,170,000, in fiscal 1996, 1997 and 1998, respectively, with the
remainder of export sales to the Pacific Rim and Latin America.

10. SUBSEQUENT EVENT

On April 29, 1998, the Company filed a Registration Statement on Form S-3
with the Securities and Exchange Commission to register and sell 3,000,000
shares of Common Stock.

F-15
<PAGE> 70
Inside Front Cover:

[Photograph of gloved hands of technician taking blood sample from patient's
finger with pipette.]

Step 1: Take a blood sample from a finger stick.

[Photograph of gloved hand of technician transferring blood from pipette to test
cassette.]

Step 2: Deposit the blood into the sample well of the test cassette.

[Photograph of gloved hand of technician inserting test cassette into cassette
drawer of L-D-X Analyzer.]

Step 3: Insert the test cassette into the L-D-X Analyzer and press the "RUN"
button.

[Photograph of gloved hand of technician pushing the "RUN" button of the L-D-X
Analyzer, which is situated next to a printer, a test cassette and a test
cassette package.]

Step 4: Within five minutes, the L-D-X Analyzer displays the test results.

[Company Logo]

The Cholestech L-D-X(R) preventive care testing for the management of chronic
diseases.

[Photograph of technician seated at table taking blood sample from seated
patient.]

Inside Back Cover:

[Photograph of the L-D-X Analyzer, printer, six test cassette boxes, starter
pack box, three test cassettes and assorted capillary pipettes.]

Cholestech L-D-X(R) System

[Company Logo]

<PAGE> 71

======================================================

NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS IN CONNECTION WITH THE OFFER MADE BY THIS PROSPECTUS, AND, IF GIVEN
OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING
BEEN AUTHORIZED BY THE COMPANY OR ANY OF THE UNDERWRITERS. THIS PROSPECTUS DOES
NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF ANY OFFER TO BUY ANY
SECURITIES OTHER THAN THE SHARES OF COMMON STOCK OFFERED BY THIS PROSPECTUS, NOR
DOES IT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF ANY OFFER TO BUY THE
SHARES OF COMMON STOCK BY ANYONE IN ANY JURISDICTION IN WHICH SUCH OFFER OR
SOLICITATION IS NOT AUTHORIZED, OR IN WHICH THE PERSON MAKING SUCH OFFER OR
SOLICITATION IS NOT QUALIFIED TO DO SO, OR TO ANY PERSON TO WHOM IT IS UNLAWFUL
TO MAKE SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR
ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION
THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO
THE DATE HEREOF.
------------------------

TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary................... 3
Risk Factors......................... 5
Use of Proceeds...................... 18
Dividend Policy...................... 18
Price Range of Common Stock.......... 18
Capitalization....................... 19
Selected Financial Data.............. 20
Management's Discussion and Analysis
of Financial Condition and Results
of Operations...................... 21
Business............................. 27
Management........................... 45
Principal Shareholders............... 48
Underwriting......................... 50
Legal Matters........................ 51
Experts.............................. 52
Incorporation of Certain Documents by
Reference.......................... 52
Additional Information............... 52
</TABLE>

======================================================
======================================================

3,000,000 Shares

LOGO

Common Stock
-----------------
PROSPECTUS
----------------
PRUDENTIAL SECURITIES INCORPORATED

VECTOR SECURITIES INTERNATIONAL, INC.
EVEREN SECURITIES, INC.
, 1998
======================================================
<PAGE> 72

PART II

INFORMATION NOT REQUIRED IN PROSPECTUS

ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION

The following table sets forth all expenses, other than underwriting
discounts and commissions, payable by the Company in connection with the sale of
the Common Stock being registered. All of the amounts shown are estimates except
for the SEC registration fee and the NASD filing fee.

<TABLE>
<S> <C>
SEC Registration Fee........................................ $ 16,602
NASD Filing Fee............................................. 6,128
Nasdaq National Market Listing Fee.......................... 17,500
Blue Sky Qualification Fees and Expenses.................... 10,000
Printing and Engraving Expenses............................. 125,000
Legal Fees and Expenses..................................... 175,000
Accounting Fees and Expenses................................ 125,000
Transfer Agent and Registrar Fees........................... 10,000
Miscellaneous............................................... 14,770
--------
TOTAL............................................. $500,000
========
</TABLE>

ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS

As permitted by Section 204(a) of the California General Corporation Law,
the Registrant's Articles of Incorporation eliminate a director's personal
liability for monetary damages to the Registrant and its shareholders arising
form a breach or alleged breach of the director's fiduciary duty, except for
liability arising under Sections 310 and 316 of the California General
Corporation Law or liability for (i) acts or omissions that involve intentional
misconduct or knowing and culpable violation of law, (ii) acts or omissions that
a director believes to be contrary to the best interests of the Registrant or
its shareholders or that involve the absence of good faith on the part of the
director, (iii) any transaction from which a director derived an improper
personal benefit, (iv) acts or omissions that show a reckless disregard for the
director's duty to the Registrant or its shareholders in circumstances in which
the director was aware, or should have been aware, in the ordinary course of
performing a director's duties, of a risk of serious injury to the Registrant or
its shareholders, (v) acts or omissions that constitute an unexcused pattern of
inattention that amounts to an abdication of the director's duty to the
Registrant or its shareholders, (vi) interested transactions between the
corporation and a director in which a director has a material financial
interest, and (vii) liability for improper distributions, loans or guarantees.
This provision does not eliminate the directors' duty of care, and in
appropriate circumstances equitable remedies such as an injunction or other
forms of non-monetary relief would remain available under California law.

Sections 204(a) and 317 of the California General Corporation Law authorize
a corporation to indemnify its directors, officers, employees and other agents
in terms sufficiently broad to permit indemnification (including reimbursement
for expenses) under certain circumstances for liabilities arising under the
Securities Act. The Registrant's Articles of Incorporation and Bylaws contain
provisions covering indemnification to the maximum extent permitted by the
California General Corporation Law of corporate directors, officers and other
agents against certain liabilities and expenses incurred as a result of
proceedings involving such persons in their capacities as directors, officers,
employees or agents, including proceedings under the Exchange Act. The Company
has entered into Indemnification Agreements with its directors and executive
officers.

In addition to the foregoing, the Underwriting Agreement provides for
indemnification by the Underwriters of the Registrant, its directors and
officers, and by the Registrant of the several Underwriters, against certain
liabilities, including liabilities arising under the Securities Act.

At present, there is no pending litigation or proceeding involving a
director, officer, employee or other agent of the Registrant in which
indemnification is being sought, nor is the Registrant aware of any threatened

II-1
<PAGE> 73

litigation that may result in a claim for indemnification by any director,
officer, employee or other agent of the Registrant.

ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

(a) Exhibits

<TABLE>
<S> <C>
1.1* Form of Underwriting Agreement
4.1(1) Form of Common Stock Certificate.
4.2(2) Preferred Share Rights Agreement dated January 22, 1997
between the Registrant and Chase Mellon Shareholder
Services, L.L.C., including the Certificate of
Determination, the form of Rights Certificate and Summary of
Rights attached thereto as Exhibits A, B and C,
respectively.
5.1 Opinion of Wilson Sonsini Goodrich & Rosati, Professional
Corporation.
23.1 Consent of Independent Accountants.
23.2 Consent of Wilson Sonsini Goodrich & Rosati, Professional
Corporation (included in Exhibit 5.1).
23.3 Consent of Dehlinger & Associates.
24.1 Power of Attorney (See page II-4).
27.1 Financial Data Schedule.
27.2 Restated Financial Data Schedule.
27.3 Restated Financial Data Schedule.
27.4 Restated Financial Data Schedule.
27.5 Restated Financial Data Schedule.
27.6 Restated Financial Data Schedule.
27.7 Restated Financial Data Schedule.
27.8 Restated Financial Data Schedule.
27.9 Restated Financial Data Schedule.
</TABLE>

- ---------------
* To be filed by amendment.

(1) Incorporated by reference to exhibits filed with Registrant's Registration
Statement on Form S-1 (No. 33-47603) which became effective on June 26,
1992.

(2) Incorporated by reference to exhibits filed with Registrant's Registration
Statement on Form 8-A (No. 000-20198) as declared effective by the
Commission on March 28, 1997.

(b)Financial Statement Schedules:

II -- Valuation and Qualifying Accounts

All other Schedules for which provision is made in the applicable
accounting regulations of the Securities and Exchange Commission are not
required under the related instructions or are inapplicable, and therefore have
been omitted.

ITEM 17. UNDERTAKINGS

The Registrant hereby undertakes to provide to the Underwriters at the
closing specified in the Underwriting Agreement, certificates in such
denominations and registered in such names as required by the Underwriters to
permit prompt delivery to each purchaser.

Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions or otherwise, the Registrant has
been advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Securities Act, and
is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrant of expenses
incurred or paid by a director, officer, or controlling person of the Registrant
in the successful defense

II-2
<PAGE> 74

of any action, suit or proceeding) is asserted by such director, officer of
controlling person in connection with the securities being registered, the
Registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate jurisdiction
the question of whether such indemnification by it is against public policy as
expressed in the Securities Act and will be governed by the final adjudication
of such issue.

The Registrant hereby undertakes that:

(1) For purposes of determining any liability under the Securities Act
of 1933 (the "Act"), the information omitted from the form of Prospectus
filed as part of this Registration Statement in reliance upon Rule 430A and
contained in a form of Prospectus filed by the Registrant pursuant to Rule
424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be
part of this Registration Statement as of the time it was declared
effective.

(2) For the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of Prospectus shall
be deemed to be a new Registration Statement relating to the securities
offered therein, and the Offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.

(3) For the purpose of determining liability under the Securities Act,
each filing of the Registrant's annual report pursuant to Section 13(a) or
Section 15(d) of the Exchange Act, (and, where applicable, each filing of
an employee benefit plan's annual report pursuant to Section 15(d) of the
Exchange Act) that is incorporated by reference in the Registration
Statement shall be deemed to be a new registration statement relating to
the securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial BONA FIDE offering thereof.

II-3
<PAGE> 75

SIGNATURES

Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant has duly caused this Registration Statement on Form S-3 to be signed
on its behalf by the undersigned, thereunto duly authorized, in the City of
Hayward, State of California, on the 29th day of April, 1998.

CHOLESTECH CORPORATION

By /s/ WARREN E. PINCKERT II

------------------------------------
Warren E. Pinckert II
President, Chief Executive Officer
and Director

KNOW ALL PERSONS BY THESE PRESENTS, that each such person whose signature
appears below constitutes and appoints, jointly and severally, Warren E.
Pinckert II and Andrea J. Tiller his or her attorneys-in-fact, each with the
power of substitution, for him or her in any and all capacities, to sign any
amendments to this Registration Statement on Form S-3 (including post-effective
amendments), to sign any registration statement for the same offering covered by
this Registration Statement that is to be effective upon filing pursuant to Rule
462(b) promulgated under the Securities Act of 1933, and to file the same, with
all exhibits thereto and other documents in connection therewith, with the
Securities and Exchange Commission, thereby ratifying and confirming all that
each of said attorneys-in-fact, or his substitute or substitutions, may do or
cause to be done by virtue hereof.

Pursuant to the requirements of the Securities Act of 1933, as amended,
this Registration Statement has been signed by the following persons in the
capacities and on the dates indicated:

<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>

/s/ WARREN E. PINCKERT II President, Chief Executive April 29, 1998
- -------------------------------------------------------- Officer and Director
Warren E. Pinckert II (Principal Executive
Officer)

/s/ ANDREA J. TILLER Vice President of Finance, April 29, 1998
- -------------------------------------------------------- Chief Financial Officer and
Andrea J. Tiller Secretary (Principal
Financial and Accounting
Officer)

/s/ HARVEY S. SADOW, PH.D. Chairman of the Board April 29, 1998
- --------------------------------------------------------
Harvey S. Sadow, Ph.D.

/s/ JOSEPH BUCHMAN, M.D. Director April 29, 1998
- --------------------------------------------------------
Joseph Buchman, M.D.

/s/ JOHN L. CASTELLO Director April 29, 1998
- --------------------------------------------------------
John L. Castello

/s/ JOHN H. LANDON Director April 29, 1998
- --------------------------------------------------------
John H. Landon

/s/ H.R. SHEPHERD Director April 29, 1998
- --------------------------------------------------------
H.R. Shepherd
</TABLE>

II-4
<PAGE> 76

SCHEDULE II

CHOLESTECH CORPORATION

VALUATION AND QUALIFYING ACCOUNTS

<TABLE>
<CAPTION>
BALANCE AT ADDITIONS TO BALANCE AT
BEGINNING COSTS AND END OF
OF PERIOD EXPENSES DEDUCTIONS PERIOD
---------- ------------ ---------- ----------
<S> <C> <C> <C> <C>
FISCAL YEAR ENDED MARCH 29, 1996
Allowance for doubtful accounts................ $ 25,000 $ 57,000 -- $ 82,000
Amortization of other assets................... 344,000 143,000 -- 487,000

FISCAL YEAR ENDED MARCH 28, 1997
Allowance for doubtful accounts................ $ 82,000 $ 49,000 $ 49,000 $ 82,000
Amortization of other assets................... 487,000 140,000 -- 627,000

FISCAL YEAR ENDED MARCH 27, 1998
Allowance for doubtful accounts................ $ 82,000 $ 41,000 $ 13,000 $110,000
Amortization of other assets................... 627,000 101,000 700,000 28,000
</TABLE>
<PAGE> 77

EXHIBIT INDEX

<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION OF DOCUMENT PAGE
- ------- ------------------------------------------------------------ ------------
<C> <S> <C>
1.1* Form of Underwriting Agreement
4.1(1) Form of Common Stock Certificate.
4.2(2) Preferred Share Rights Agreement dated January 22, 1997
between the Registrant and Chase Mellon Shareholder
Services, L.L.C., including the Certificate of
Determination, the form of Rights Certificate and Summary of
Rights attached thereto as Exhibits A, B and C,
respectively.
5.1 Opinion of Wilson Sonsini Goodrich & Rosati, Professional
Corporation.
23.1 Consent of Independent Accountants.
23.2 Consent of Wilson Sonsini Goodrich & Rosati, Professional
Corporation (included in Exhibit 5.1).
23.3 Consent of Dehlinger & Associates.
24.1 Power of Attorney (See page II-4).
27.1 Financial Data Schedule.
27.2 Restated Financial Data Schedule.
27.3 Restated Financial Data Schedule.
27.4 Restated Financial Data Schedule.
27.5 Restated Financial Data Schedule.
27.6 Restated Financial Data Schedule.
27.7 Restated Financial Data Schedule.
27.8 Restated Financial Data Schedule.
27.9 Restated Financial Data Schedule.
</TABLE>

- ---------------
* To be filed by amendment.

(1) Incorporated by reference to exhibits filed with Registrant's Registration
Statement on Form S-1 (No. 33-47603) which became effective on June 26,
1992.

(2) Incorporated by reference to exhibits filed with Registrant's Registration
Statement on Form 8-A (No. 000-20198) as declared effective by the
Commission on March 28, 1997.

<PAGE> 1
EXHIBIT 5.1

WILSON SONSINI GOODRICH & ROSATI
Professional Corporation
650 Page Mill Road
Palo Alto, California 94304-1050
(tel.) 650-493-9300; (fax) 650-493-6811

April 28, 1998

Cholestech Corporation
3347 Investment Boulevard
Hayward, California 94545-3877

Re: Registration Statement on Form S-3

Ladies and Gentlemen:

We have examined the Registration Statement on Form S-3 to be filed by you
with the Securities and Exchange Commission on April 28, 1998 (as such may be
further amended or supplemented, the "Registration Statement"), in connection
with the registration under the Securities Act of 1933, as amended (the "Act"),
of up to 3,450,000 shares of your Common Stock, no par value per share and the
attached Preferred Share Purchase Rights, which prior to the occurrence of
certain events will not be exercisable or evidenced separately from the Common
Stock, (collectively, the "Shares"). The Shares, which include up to 450,000
shares of Common Stock issuable pursuant to an over-allotment option granted to
the underwriters (the "Underwriters"), are to be sold to the Underwriters as
described in such Registration Statement for sale to the public. As your counsel
in connection with this transaction, we have examined the proceedings proposed
to be taken by you in connection with the issuance and sale of the Shares.

Based upon the foregoing, it is our opinion that, upon conclusion of the
proceedings being taken or contemplated by us, as your counsel, to be taken
prior to the issuance of the Shares and upon completion of the proceedings
taken in order to permit such transactions to be carried out in accordance with
the securities laws of various states where required, the Shares, when issued
and sold in the manner described in the Registration Statement, will be legally
and validly issued,fully paid and nonassessable.

We consent to the use of this opinion as an exhibit to the Registration
Statement and further consent to the use of our name wherever appearing in the
Registration Statement, including the prospectus constituting a part thereof,
as such may be further amended or supplemented, or incorporated by reference in
any Registration Statement relating to the prospectus filed pursuant to Rule
462(b) of the Act.

Very truly yours,

WILSON SONSINI GOODRICH & ROSATI
Professional Corporation

/s/ WILSON SONSINI GOODRICH & ROSATI
------------------------------------

<PAGE> 1

EXHIBIT 23.1

CONSENT OF INDEPENDENT ACCOUNTANTS

We hereby consent to the incorporation by reference in the Prospectus
constituting part of this Registration Statement on Form S-3 of our report dated
April 24, 1997, which appears on page F-2 of the 1997 Annual Report on Form 10-K
of Cholestech Corporation for the year ended March 28, 1997. We also consent to
the use in the Prospectus constituting part of this Registration Statement on
Form S-3 of our report dated April 23, 1998, except as to Note 10, which is as
of April 29, 1998, relating to the financial statements of Cholestech
Corporation, which appears in such Prospectus. We also consent to the
application of such report to the Financial Statement Schedule for the three
years ended March 27, 1998, listed under Item 16(b) of this Registration
Statement when such schedule is read in conjunction with the financial
statements referred to in our report. The audits referred to in such report also
included this schedule. We also consent to the references to us under the
headings "Experts" and "Selected Financial Data" in such Prospectus. However, it
should be noted that Price Waterhouse LLP has not prepared or certified such
"Selected Financial Data."

PRICE WATERHOUSE LLP

San Jose, California
April 29, 1998

<PAGE> 1
EXHIBIT 23.3

CONSENT OF DEHLINGER & ASSOCIATES

We consent to the reference to our firm under the caption "Experts" in the
Registration Statement on Form S-3 and the related Prospectus of Cholestech
Corporation (the "Company") for the registration of up to 3,450,000 shares of
Common Stock of the Company filed with the Securities and Exchange Commission.

DEHLINGER & ASSOCIATES

/s/ DEHLINGER & ASSOCIATES

Palo Alto, California
April 28, 1998

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<MULTIPLIER> 1,000

<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> MAR-27-1998
<PERIOD-START> MAR-29-1997
<PERIOD-END> MAR-27-1998
<CASH> 5,130
<SECURITIES> 9,621
<RECEIVABLES> 3,903
<ALLOWANCES> (110)
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<DEPRECIATION> (5,230)
<TOTAL-ASSETS> 25,788
<CURRENT-LIABILITIES> 4,342
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0
0
<COMMON> 69,880
<OTHER-SE> (48,434)
<TOTAL-LIABILITY-AND-EQUITY> 25,788
<SALES> 21,664
<TOTAL-REVENUES> 21,664
<CGS> 10,513
<TOTAL-COSTS> 20,204
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<INTEREST-EXPENSE> 2
<INCOME-PRETAX> 2,029
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<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,988
<EPS-PRIMARY> 0.18
<EPS-DILUTED> 0.17

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<ARTICLE> 5
<RESTATED>
<MULTIPLIER> 1,000

<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAR-27-1998
<PERIOD-START> MAR-29-1997
<PERIOD-END> JUN-27-1997
<CASH> 7,729
<SECURITIES> 6,257
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<CURRENT-ASSETS> 19,117
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0
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<COMMON> 69,205
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<TOTAL-LIABILITY-AND-EQUITY> 21,630
<SALES> 4,203
<TOTAL-REVENUES> 4,203
<CGS> 1,996
<TOTAL-COSTS> 4,203
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1
<INCOME-PRETAX> 122
<INCOME-TAX> 3
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 119
<EPS-PRIMARY> .01
<EPS-DILUTED> .01

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<ARTICLE> 5
<RESTATED>
<MULTIPLIER> 1,000

<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> MAR-27-1998
<PERIOD-START> MAR-29-1997
<PERIOD-END> SEP-26-1998
<CASH> 4,491
<SECURITIES> 9,502
<RECEIVABLES> 3,338
<ALLOWANCES> (105)
<INVENTORY> 2,408
<CURRENT-ASSETS> 20,198
<PP&E> 7,418
<DEPRECIATION> (4,836)
<TOTAL-ASSETS> 22,885
<CURRENT-LIABILITIES> 3,339
<BONDS> 0
0
0
<COMMON> 69,424
<OTHER-SE> (49,878)
<TOTAL-LIABILITY-AND-EQUITY> 22,885
<SALES> 9,615
<TOTAL-REVENUES> 9,615
<CGS> 4,701
<TOTAL-COSTS> 9,341
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1
<INCOME-PRETAX> 568
<INCOME-TAX> 12
<INCOME-CONTINUING> 274
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 556
<EPS-PRIMARY> .05
<EPS-DILUTED> .05

</TABLE>

<ARTICLE> 5
<RESTATED>
<MULTIPLIER> 1,000

<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> MAR-27-1998
<PERIOD-START> MAR-29-1997
<PERIOD-END> DEC-26-1997
<CASH> 9,514
<SECURITIES> 5,541
<RECEIVABLES> 2,755
<ALLOWANCES> (131)
<INVENTORY> 2,530
<CURRENT-ASSETS> 20,427
<PP&E> 3,797
<DEPRECIATION> (581)
<TOTAL-ASSETS> 23,716
<CURRENT-LIABILITIES> 3,479
<BONDS> 0
0
0
<COMMON> 69,499
<OTHER-SE> (49,262)
<TOTAL-LIABILITY-AND-EQUITY> 23,716
<SALES> 15,264
<TOTAL-REVENUES> 15,264
<CGS> 7,419
<TOTAL-COSTS> 14,538
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2
<INCOME-PRETAX> 1,165
<INCOME-TAX> 25
<INCOME-CONTINUING> 726
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,140
<EPS-PRIMARY> .10
<EPS-DILUTED> .10

</TABLE>

<ARTICLE> 5
<RESTATED>
<MULTIPLIER> 1,000

<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> MAR-28-1997
<PERIOD-START> MAR-30-1996
<PERIOD-END> MAR-28-1997
<CASH> 6,088
<SECURITIES> 7,921
<RECEIVABLES> 1,948
<ALLOWANCES> (82)
<INVENTORY> 2,353
<CURRENT-ASSETS> 18,508
<PP&E> 6,862
<DEPRECIATION> (4,463)
<TOTAL-ASSETS> 21,087
<CURRENT-LIABILITIES> 2,384
<BONDS> 0
0
0
<COMMON> 69,174
<OTHER-SE> (50,471)
<TOTAL-LIABILITY-AND-EQUITY> 21,087
<SALES> 12,624
<TOTAL-REVENUES> 12,861
<CGS> 6,957
<TOTAL-COSTS> 13,943
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 244
<INCOME-PRETAX> (809)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,082)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (809)
<EPS-PRIMARY> (0.08)
<EPS-DILUTED> (0.08)

</TABLE>

<ARTICLE> 5
<RESTATED>
<MULTIPLIER> 1,000

<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAR-28-1997
<PERIOD-START> MAR-30-1996
<PERIOD-END> JUN-28-1996
<CASH> 409
<SECURITIES> 3,705
<RECEIVABLES> 14,864
<ALLOWANCES> (78)
<INVENTORY> 2,132
<CURRENT-ASSETS> 21,664
<PP&E> 5,986
<DEPRECIATION> (3,888)
<TOTAL-ASSETS> 24,030
<CURRENT-LIABILITIES> 4,533
<BONDS> 0
0
0
<COMMON> 68,845
<OTHER-SE> (50,073)
<TOTAL-LIABILITY-AND-EQUITY> 24,030
<SALES> 2,760
<TOTAL-REVENUES> 2,760
<CGS> 1,646
<TOTAL-COSTS> 3,163
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 55
<INCOME-PRETAX> (411)
<INCOME-TAX> 0
<INCOME-CONTINUING> (403)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (411)
<EPS-PRIMARY> (.05)
<EPS-DILUTED> (.05)

</TABLE>

<ARTICLE> 5
<RESTATED>
<MULTIPLIER> 1,000

<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> MAR-28-1997
<PERIOD-START> MAR-30-1996
<PERIOD-END> SEP-27-1996
<CASH> 5,424
<SECURITIES> 8,155
<RECEIVABLES> 2,112
<ALLOWANCES> (80)
<INVENTORY> 2,374
<CURRENT-ASSETS> 18,290
<PP&E> 6,420
<DEPRECIATION> (4,076)
<TOTAL-ASSETS> 20,888
<CURRENT-LIABILITIES> 2,150
<BONDS> 0
0
0
<COMMON> 69,017
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<TOTAL-LIABILITY-AND-EQUITY> 20,888
<SALES> 5,691
<TOTAL-REVENUES> 5,816
<CGS> 3,270
<TOTAL-COSTS> 6,478
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 237
<INCOME-PRETAX> (648)
<INCOME-TAX> 0
<INCOME-CONTINUING> (662)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (648)
<EPS-PRIMARY> (.07)
<EPS-DILUTED> (.07)

</TABLE>

<ARTICLE> 5
<RESTATED>
<MULTIPLIER> 1,000

<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> MAR-28-1997
<PERIOD-START> MAR-30-1996
<PERIOD-END> DEC-27-1996
<CASH> 6,944
<SECURITIES> 6,796
<RECEIVABLES> 1,800
<ALLOWANCES> (78)
<INVENTORY> 2,545
<CURRENT-ASSETS> 15,410
<PP&E> 6,671
<DEPRECIATION> (4,261)
<TOTAL-ASSETS> 20,823
<CURRENT-LIABILITIES> 2,155
<BONDS> 0
0
0
<COMMON> 69,121
<OTHER-SE> (50,473)
<TOTAL-LIABILITY-AND-EQUITY> 20,823
<SALES> 8,748
<TOTAL-REVENUES> 8,985
<CGS> 4,939
<TOTAL-COSTS> 9,987
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 241
<INCOME-PRETAX> (811)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,002)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (811)
<EPS-PRIMARY> (.08)
<EPS-DILUTED> (.08)

</TABLE>

<ARTICLE> 5
<RESTATED>
<MULTIPLIER> 1,000

<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> MAR-29-1996
<PERIOD-START> APR-01-1995
<PERIOD-END> MAR-29-1996
<CASH> 361
<SECURITIES> 0
<RECEIVABLES> 1,189
<ALLOWANCES> (82)
<INVENTORY> 1,910
<CURRENT-ASSETS> 7,295
<PP&E> 5,814
<DEPRECIATION> (3,773)
<TOTAL-ASSETS> 9,645
<CURRENT-LIABILITIES> 2,853
<BONDS> 0
0
0
<COMMON> 55,644
<OTHER-SE> (49,662)
<TOTAL-LIABILITY-AND-EQUITY> 9,645
<SALES> 6,873
<TOTAL-REVENUES> 6,873
<CGS> 4,481
<TOTAL-COSTS> 9,763
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 140
<INCOME-PRETAX> 2,746
<INCOME-TAX> 0
<INCOME-CONTINUING> 2,890
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,746
<EPS-PRIMARY> (0.34)
<EPS-DILUTED> (0.34)

</TABLE>