- Quarterly Report (10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(MARK ONE)

x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE QUARTERLY PERIOD ENDED March 31, 2009

¨	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE TRANSITION PERIOD FROM TO .

COMMISSION FILE NUMBER: 000-30369

MONOGRAM BIOSCIENCES, INC.

(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

DELAWARE

94-3234479

(STATE OR OTHER JURISDICTION OF

INCORPORATION OR ORGANIZATION)

(IRS EMPLOYER

IDENTIFICATION NO.)

345 OYSTER POINT BLVD

SOUTH SAN FRANCISCO, CA 94080

(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)

TELEPHONE NUMBER (650) 635-1100

(REGISTRANT’S TELEPHONE NUMBER, INCLUDING AREA CODE)

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨

Indicate by check mark whether the Registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ¨ No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definition of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):


¨ Large accelerated filer	x Accelerated filer	¨ Non-accelerated filer	¨ Smaller reporting company
		(Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange

Act). Yes ¨ No x

As of May 1, 2009 there were 23,042,427 shares of the registrant’s common stock outstanding.

MONOGRAM BIOSCIENCES, INC.

INDEX


		PAGE NO.
PART I. FINANCIAL INFORMATION

Item 1.	Financial Statements (unaudited)

	Condensed Consolidated Balance Sheets as of March 31, 2009 and December 31, 2008	3

	Condensed Consolidated Statements of Operations for the three months ended March 31, 2009 and 2008	4

	Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2009 and 2008	5

	Notes to Condensed Consolidated Financial Statements	6

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	16

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	23

Item 4.	Controls and Procedures	24

PART II. OTHER INFORMATION

Item 1.	Legal Proceedings	25

Item 1A.	Risk Factors	25

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	39

Item 3.	Defaults Upon Senior Securities	39

Item 4.	Submission of Matters to a Vote of Security Holders	39

Item 5.	Other Information	39

Item 6.	Exhibits	40

Signatures		42

MONOGRAM BIOSCIENCES, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands)

(Unaudited)


	March 31, 2009			December 31, 2008 (1)
ASSETS
Current assets:
Cash and cash equivalents	$	13,740		$	15,965
Accounts receivable, net		16,332			15,883
Prepaid expenses		627			1,123
Inventory		1,462			1,623
Other current assets		388			324

Total current assets		32,549			34,918
Property and equipment, net		7,507			7,874
Deferred costs		19,092			17,275
Goodwill		9,927			9,927
Other assets		14			38

Total assets	$	69,089		$	70,032

LIABILITIES AND STOCKHOLDERS’ DEFICIT
Current liabilities:
Accounts payable	$	2,404		$	2,637
Accrued compensation		3,181			2,911
Accrued liabilities		4,113			4,015
Contingent value rights		1,935			1,935
Loans payable		10,118			9,704
Other current liabilities		730			660

Total current liabilities		22,481			21,862
Long-term 3% convertible promissory note		20,579			18,594
Long-term 0% convertible promissory note		13,883			10,468
Long-term deferred revenue		28,171			24,769
Other long-term liabilities		1,211			1,025

Total liabilities		86,325			76,718

Commitments and contingencies (Note 5)
Stockholders’ deficit:
Common stock		23			23
Additional paid-in capital		293,378			292,493
Accumulated deficit		(310,637	)		(299,202	)

Total stockholders’ deficit		(17,236	)		(6,686	)

Total liabilities and stockholders’ deficit	$	69,089		$	70,032

(1)	The condensed consolidated balance sheet as of December 31, 2008 has been derived from the audited financial statements as of that date but does not include all of the information and footnotes required by U.S. generally accepted accounting principles for complete financial statements.

See accompanying notes to Condensed Consolidated Financial Statements.

MONOGRAM BIOSCIENCES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share data)

(Unaudited)


	Three Months Ended March 31,
	2009			2008
Revenue:
Product revenue	$	13,586		$	14,007
Contract revenue		605			820
License revenue		15			10

Total revenue		14,206			14,837

Operating costs and expenses:
Cost of product revenue		6,640			6,364
Research and development		5,909			6,024
Sales and marketing		3,969			4,352
General and administrative		3,519			4,566

Total operating costs and expenses		20,037			21,306

Operating loss		(5,831	)		(6,469	)
Convertible debt valuation adjustment		(5,400	)		4,736
Interest (expense) income, net		(204	)		6

Net loss	$	(11,435	)	$	(1,727	)

Basic and diluted net loss per common share	$	(0.50	)	$	(0.08	)

Weighted-average shares used in computing basic and diluted net loss per common share		22,962			22,365

See accompanying notes to Condensed Consolidated Financial Statements.

MONOGRAM BIOSCIENCES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)


	Three Months Ended March 31,
	2009			2008
OPERATING ACTIVITIES:
Net loss	$	(11,435	)	$	(1,727	)
Adjustments to reconcile net loss to net cash used in operating activities:
Convertible debt valuation adjustment		5,400			(4,736	)
Depreciation and amortization		615			691
Stock-based compensation expense		695			980
Convertible promissory note interest payment in stock		189			189
401(k) stock matching compensation expense		210			200
Provision for doubtful accounts		281			235
Change in assets and liabilities:
Accounts receivable		(730	)		(4,953	)
Prepaid expenses		496			200
Inventory		161			(321	)
Other assets		(40	)		(287	)
Accounts payable		(233	)		274
Accrued compensation		270			459
Accrued liabilities		(78	)		70
Accrued restructuring costs		(144	)		(144	)
Contingent value rights		—			12
Deferred revenue, net of deferred costs		1,799			(203	)
Other long-term liabilities		194			157

Net cash used in operating activities		(2,350	)		(8,904	)

INVESTING ACTIVITIES:
Purchases of short-term investments		—			(4,085	)
Maturities and sales of short-term investments		—			10,000
Capital expenditures		(289	)		(617	)

Net cash (used in) provided by investing activities		(289	)		5,298

FINANCING ACTIVITIES:
Principal payments on loans payable and capital lease obligations		(9,586	)		(4,294	)
Proceeds from loans payable		10,000			10,000

Net cash provided by financing activities		414			5,706

Net (decrease) increase in cash and cash equivalents		(2,225	)		2,100
Cash and cash equivalents at the beginning of the period		15,965			18,762

Cash and cash equivalents at the end of the period	$	13,740		$	20,862

See accompanying notes to Condensed Consolidated Financial Statements.

MONOGRAM BIOSCIENCES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2009

(Unaudited)

1. THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Monogram Biosciences is a life sciences company committed to advancing personalized medicine and improving patient outcomes through the development of innovative molecular diagnostic products that guide and target the most appropriate treatments. Through a comprehensive understanding of genetics, biology and pathology of particular diseases, the Company has pioneered and is developing molecular diagnostics and laboratory services that are designed to:

•

enable physicians to better manage infectious diseases and cancers by providing the critical information that helps them prescribe personalized treatments for patients by matching the underlying molecular features of an individual patient’s disease to the drug expected to have maximal therapeutic benefit; and

•

enable pharmaceutical companies to develop new and improved anti-viral therapeutics and targeted cancer therapeutics more efficiently and cost effectively by providing enhanced patient selection and monitoring capabilities throughout the development process.

Through this approach, the Company has become a leader in developing and commercializing innovative products that help guide and improve the treatment of infectious diseases, cancer and other serious diseases. The Company’s goal with personalized medicine is to enable the management of diseases at the individual patient level through the use of sophisticated diagnostics that permit the targeting of therapeutics to those patients most likely to respond to or benefit from them, thereby offering the right treatment to the right patient at the right time .

Over the last several years, Monogram Biosciences has built a business based on the personalized medicine approach to human immunodeficiency virus (“HIV”) with drug resistance testing and, more recently, with a unique patient selection test, Trofile. With the commercialization in 2008 of the first product based on the Company’s proprietary VeraTag technology, the Company has begun to leverage the experience and infrastructure built in the HIV treatment market to the larger market opportunity in cancer treatment. In the future, the Company plans to seek opportunities to address an even broader range of serious diseases. Monogram Biosciences was incorporated in the state of Delaware, in November 1995, and commenced commercial operations in 1999.

The accompanying unaudited condensed consolidated financial statements have been prepared by Monogram Biosciences, Inc., also referred to as the Company, Monogram, we, us, or our, in accordance with accounting principles generally accepted in the United States for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. generally accepted accounting principles (“GAAP”) for complete financial statements. In the opinion of management, all adjustments (consisting only of adjustments of a normal recurring nature) considered necessary for a fair presentation have been included. Consolidated operating results for the three month period ended March 31, 2009, are not necessarily indicative of the results that may be expected for the year ending December 31, 2009, or any other future periods. The condensed consolidated balance sheet as of December 31, 2008 has been derived from the audited financial statements as of that date but does not include all of the information and footnotes required by U.S. generally accepted accounting principles for complete financial statements. For further information, refer to the audited financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2008.

The Company’s condensed consolidated financial statements contemplate the conduct of the Company’s operations in the normal course of business. The Company has incurred net losses since inception and there can be no assurance that the Company will attain profitability. The Company had a net loss of $11.4 million for the three months ended March 31, 2009 and an accumulated deficit of approximately $310.6 million at March 31, 2009. Cash and cash equivalents declined from $16.0 million at December 31, 2008 to $13.7 million at March 31, 2009. If the Company’s losses continue, its liquidity may be impaired.

The Company has funded its operations, since inception, primarily through public and private sales of common and preferred stock, issuance of convertible debt, equipment financing arrangements, product revenue, contract revenue, advances by pharmaceutical company customers and borrowings under a revolving line of credit. In May 2006, the Company issued a 3% Senior Secured Convertible Note to Pfizer in the principal amount of $25.0 million, which matures on May 19, 2010. See Note 8 “Collaboration and Note Purchase Agreement” for further discussion. At March 31, 2009 and December 31, 2008, the Company had borrowings under a Credit and Security Agreement (“Credit Agreement”) of $10.0 million and $9.6 million, respectively. See Note 9 “Credit and Security Agreement” for further discussion. The Credit Agreement provides the Company with borrowings against eligible accounts receivable up to a maximum of $10 million, which expires on March 27, 2010.

As of March 31, 2009, the Company anticipates that its sources of liquidity will be sufficient to meet its obligations without the disposition of assets outside of the ordinary course of business or significant revisions of our planned operations through the next twelve months. However, significant changes in the credit limit or payment terms of the existing Credit Agreement or the lack of access to the credit market could adversely impact the Company’s liquidity. If such funds are not available on commercially reasonable terms, or even if such

funds are available should the Company choose to further reduce its costs due to uncertainty in the economic environment and the Company’s business, the Company may be required to curtail operations, or sell significant assets and could adversely impact the Company’s liquidity. In addition, the Company may choose to raise additional capital due to market conditions or strategic considerations even if the Company believes that it has sufficient funds for current or future operating plans. These funds may not be available on favorable terms, or may not be available at all. The Company expects negative cash flow from operations to continue through at least 2009 and expects that its available cash and cash equivalents of $13.7 million at March 31, 2009, as well as funds provided by the sale of its products, contract revenue, and borrowings under accounts receivable and equipment financing arrangements will be adequate to fund operations at least for the next twelve months.

Reference is made to “Summary of Significant Accounting Policies” included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2008. As of the date of the filing of this Quarterly Report, the Company did not identify any significant changes to the critical accounting policies discussed in our Annual Report for the year ended December 31, 2008.

Recent Accounting Pronouncements

In June 2008, the FASB issued FSP Emerging Issues Task Force (“EITF”) 03-6-1 , “Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities”. FSP EITF 03-6-1 concluded that unvested share-based payment awards that contain non-forfeitable rights to dividends or dividend equivalents (whether paid or unpaid) are participating securities and shall be included in the computation of basic earnings per share (EPS) of this nature are considered participating securities and the two-class method of computing basic and diluted earnings per share must be applied. FSP EITF 03-6-1 became effective for the Company on January 1, 2009. The implementation of this standard did not impact the Company’s earnings per share calculation.

In May 2008, the Financial Accounting Standards Board (“FASB”) issued FSP Accounting Principles Board (“APB”) 14-1, “Accounting for Convertible Debt Instruments That May Be Settled in Cash Upon Conversion (Including Partial Cash Settlement)”, that alters the accounting treatment for convertible debt instruments that allow for either mandatory or optional cash settlements upon conversion. FSP APB 14-1 is effective for us beginning January 1, 2009. The adoption of this standard did not impact the Company’s convertible notes nor impact its consolidated financial statements for the three month period ending March 31, 2009.

In April 2008, the Financial Accounting Standards Board (“FASB”) issued FASB Staff Position No. 142-3, “Determination of the Useful Life of Intangible Assets” (“FSP 142-3”). The FSP amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under SFAS No. 142, “Goodwill and Other Intangible Assets”. The intent of the FSP is to improve the consistency between the useful life of a recognized intangible asset under SFAS No. 142 and the period of expected cash flows used to measure the fair value of the asset under SFAS No. 141(R), “Business Combinations,” and other U.S. generally accepted accounting principles. The adoption of this standard, effective January 1, 2009, did not impact the Company’s consolidated financial statements.

In March 2008, the FASB issued Statement No. 161, “Disclosures about Derivative Instruments and Hedging Activities, an amendment of FASB Statement No. 133” (“FAS 161”). The standard was issued by the FASB to enhance the current disclosure framework in FASB Statement No. 133, Accounting for Derivative Instruments and Hedging Activities, as amended (“FAS 133”). FAS 161 addresses concerns that the disclosures required by FAS 133 do not provide adequate information about the impact derivative instruments can have on an entity’s financial position, results of operations, and cash flows. The adoption of this standard, effective January 1, 2009, did not impact the Company’s consolidated financial statements.

In December 2007, the FASB issued Statement of Financial Accounting Standards No. 141 (revised 2007), “Business Combinations” (“FAS 141R”). FAS 141R establishes principles and requirements for how the acquirer in a business combination recognizes and measures in its financial statements the fair value of identifiable assets acquired, the liabilities assumed and any noncontrolling interest in the acquiree at the acquisition date. FAS 141R determines what information to disclose to enable users of the financial statements to evaluate the nature and financial effects of the business combination. The provisions of FAS 141R became effective on January 1, 2009 and will only impact the Company should it be a party to a future business combination.

In December 2007, the FASB issued FAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements” (“FAS 160”), an amendment of Accounting Research Bulletin No. 51, “Consolidated Financial Statements” (“ARB 51”). FAS 160 changes the accounting and reporting for minority interests, which will be recharacterized as noncontrolling interests and classified as a component of equity. This new consolidation method significantly changes the accounting for transactions with minority interest holders. This statement is effective for the Company on January 1, 2009. The adoption of this standard had no impact to the Company’s consolidated financial statements.

2. INVENTORY

Inventory is stated at the lower of standard cost, which approximates actual cost on a first-in, first-out basis, or market. If inventory costs exceed expected market value due to obsolescence or lack of demand, write-offs are recorded for the difference between the cost and the estimated market value.

3. LOSS PER COMMON SHARE

Basic and diluted loss per common share is calculated based on the weighted-average number of common shares outstanding during the periods presented. Potentially dilutive securities have been excluded from the diluted loss per common share computations in all periods presented as such securities have an anti-dilutive effect on loss per common share due to the Company’s net loss. At March 31, 2009 and December 31, 2008, these potentially dilutive securities are as follows:


	March 31, 2009	December 31, 2008
	(In thousands)
3% Convertible promissory note (as if converted basis)	1,540	1,540
0% Convertible promissory note (as if converted basis)	1,984	1,984
Outstanding warrants	4	4
Outstanding stock options	4,799	3,954

Total	8,327	7,482

4. CONTINGENT VALUE RIGHTS

As part of the merger with ACLARA BioSciences, Inc. (“ACLARA”), the Company issued Contingent Value Rights (“CVRs”) to ACLARA stockholders and was obligated to issue CVRs to holders of assumed ACLARA stock options upon future exercise of those options. In June 2006, the amount payable related to the outstanding CVRs was determined at $5.28 per CVR and holders of assumed ACLARA options are entitled to receive a cash payment of $5.28, upon future exercise of those options. At March 31, 2009, assumed ACLARA options to purchase approximately 350,000 shares of the Company’s common stock were outstanding and exercisable. The aggregate potential liability related to these options at March 31, 2009, was $1.9 million, which is reflected on the consolidated balance sheet in current liabilities. If all of these options were exercised, the Company would receive aggregate exercise proceeds of $4.1 million offset by the $1.9 million in CVR liability.

5. COMMITMENTS AND CONTINGENCIES

Commitments

As of March 31, 2009, the Company held several leases and a sublease of buildings and office space in South San Francisco, California, as follows:

•

Two leases of approximately 41,000 and 40,000 square foot, respectively, of laboratory and office space through April 2018; and

•

A sublease of approximately 27,000 square feet of laboratory and office space through May 2011.

As a result of the merger with ACLARA, at December 31, 2004, the Company assumed the lease for a facility of approximately 44,200 square feet of office and laboratory space in Mountain View, California. As of March 31, 2009, the remaining obligation was approximately $0.1 million, which is included in the table below. See Note 6 “Restructuring” for further analysis of restructuring charges.

At March 31, 2009, future minimum payments under the Company’s contractual obligations, excluding the lease assignment guarantee and CVR’s, are as follows:


	Payments Due By Period
	Less Than 1 Year		1-3 Years		3-5 Years		More Than 5 Years		Total
	(In thousands)
Purchase obligations	$	1,012	$	46	$	—	$	—	$	1,058
Operating lease obligations		3,205		7,137		7,541		16,949		34,832
Equipment financing arrangements		83		—		—		—		83
0% Convertible Senior Unsecured Note		—		30,000		—		—		30,000
3% Senior Secured Convertible Note		—		25,000		—		—		25,000
3% Convertible Note interest payment (1)		750		284		—		—		1,034
Loans payable		10,000		—		—		—		10,000

Total	$	15,050	$	62,467	$	7,541	$	16,949	$	102,007

(1)	Subject to certain limitations, the Company is entitled to make such interest payments using shares of its common stock.

In connection with the merger with ACLARA, the Company is obligated to make cash payments of $5.28 per share to holders of assumed ACLARA stock options upon future exercise of those options. See Note 4 “Contingent Value Rights,” for further discussion.

In June 2002, the Company assigned a lease of excess laboratory and office space and sold the related leasehold improvements and equipment to a third party. In October 2007, the Company extended the terms of the subleased office space relating to this lease assignment, which decreases our payment obligation in the event of default by the assignee. In the event of default by the assignee, the Company would be contractually obligated for payments under the lease of: $0.5 million in 2009; $0.7 million in 2010 and $0.3 million in 2011.

Contingencies

From time to time, the Company may have certain contingent liabilities that arise in the ordinary course of its business activities. The Company accrues a liability for such matters when it is probable that future expenditures will be made and such expenditures can be reasonably estimated.

For instance, the Company was informed in 2002 by Bayer Diagnostics (now a unit of Siemens AG), or Bayer, that it believed the Company required one or more licenses to patents controlled by Bayer in order to conduct certain of the Company’s current and planned operations and activities. The Company, in turn, believed that Bayer may require one or more licenses to patents controlled by the Company. Although the Company believes it does not need a license from Bayer for its HIV products, it held preliminary discussions with Bayer, prior to and in 2004, concerning the possibility of entering into a cross-licensing or other arrangement.

ACLARA, with which the Company merged in December 2004, and certain of its former officers and directors, referred to together as the ACLARA defendants, are named as defendants in a securities class action lawsuit filed in the United States District Court for the Southern District of New York. This action, which was filed on November 13, 2001, and is now captioned ACLARA BioSciences, Inc. Initial Public Offering Securities Litigation, also names several of the underwriters involved in ACLARA’s initial public offering, or IPO, as defendants. This class action is brought on behalf of a purported class of purchasers of ACLARA common stock from the time of ACLARA’s March 20, 2000 IPO through December 6, 2000. The central allegation in this action is that the underwriters in the ACLARA IPO solicited and received undisclosed commissions from, and entered into undisclosed arrangements with, certain investors who purchased ACLARA stock in the IPO and the after-market, and that the ACLARA defendants violated the federal securities laws by failing to disclose in the IPO prospectus that the underwriters had engaged in these allegedly undisclosed arrangements. More than 300 issuers who went public between 1998 and 2000 have been named in similar lawsuits. In February 2003, after the issuer defendants (including the ACLARA defendants) filed an omnibus motion to dismiss, the court dismissed the Section 10(b) claim as to the Company, but denied the motion to dismiss the Section 11 claim as to the Company and virtually all of the other issuer-defendants.

On June 26, 2003, the plaintiffs in the consolidated class action lawsuits announced a proposed settlement with ACLARA and the other issuer defendants. This proposed settlement was terminated on June 25, 2007, following the ruling by the United States Court of Appeals for the 2nd Circuit on December 5, 2006, reversing the District Court’s granting of class certification in the six focus cases currently being litigated in this proceeding. The proposed settlement, which had been approved by ACLARA’s board of directors, provided that the insurers of all settling issuers would guarantee that the plaintiffs recover $1 billion from non-settling defendants. Under the proposed settlement, the maximum amount that could have been charged to ACLARA’s insurance policy in the event that the plaintiffs recovered nothing from the investment banks would have been approximately $3.9 million. The Company believes that ACLARA had sufficient insurance coverage to cover the maximum amount that we may be responsible for under the proposed settlement.

On August 14, 2007, Plaintiffs filed Amended Master Allegations. On September 27, 2007, the Plaintiffs filed a renewed Motion for Class Certification. Defendants filed a Motion to Dismiss the focus cases on November 9, 2007. On March 26, 2008, the Court ruled on the Motion to Dismiss, holding that the plaintiffs had adequately pleaded their Section 10(b) claims against both the Issuer Defendants and the Underwriter Defendants. As to the Section 11 claim, the Court dismissed the claims brought by those plaintiffs who sold their securities for a price in excess of the initial offering price, on the grounds that they could not show cognizable damages, and by those who purchased outside the previously certified class period, on the grounds that those claims were time barred. This ruling, while not binding on the ACLARA IPO case, does provide strong guidance to all of the parties involved in this litigation.

Due to the inherent uncertainties of litigation and assignment of claims against the underwriters and because a final settlement has not yet been approved by the District Court, the ultimate outcome of the matter cannot be predicted.

Indemnification

During the normal course of business, the Company enters into contracts and agreements that contain a variety of representations and warranties and provide for general indemnifications. The Company’s exposure under these agreements is unknown because it involves claims that may be made against the Company in the future, but have not yet been made. To date, the Company has not paid any claims or been required to defend any action related to its indemnification obligations. However, the Company may record charges in the future as a result of these indemnification obligations.

License Agreements

In September 2007, the Company also licensed technology from The NSABP Foundation, Inc. (“NSABP”), which provides the Company access to tissue samples from up to 1,600 breast cancer patients treated with Herceptin in the adjuvant setting as participants in the NSABP B 31 study. The Company will pay annual license fees to NSABP and additional royalties if the Company successfully develops and commercializes certain products resulting from the licensed rights.

6. RESTRUCTURING

In connection with the Company’s merger with ACLARA in 2004, the Company took action to integrate and restructure the former ACLARA operations. A restructuring accrual of $3.0 million was established for the costs of vacating and subleasing the Mountain View facility, which includes an estimate of the excess of our lease costs over the anticipated sublease. In addition, an accrual for ACLARA employee severance costs of approximately $1.1 million was established as a result of the merger. Prior to 2007, additional restructuring accruals of approximately $1.9 million were recorded due to delays in vacating and subleasing the Mountain View facility of which $1.6 million was recorded in goodwill and $0.3 million was recorded in the Company’s consolidated results of operations. In 2007, the Company executed a lease termination agreement in exchange for a reduced but fixed payment commitment over the remainder of the previous lease term. At March 31, 2009, there was approximately $0.2 million in remaining restructuring charges reflected as a current liability in the consolidated balance sheet.

7. 0% CONVERTIBLE SENIOR UNSECURED NOTES

In January 2007, the Company entered into a Securities Purchase Agreement to sell $30 million principal amount of 0% Convertible Senior Unsecured Notes (the “0% Notes”) to a single qualified institutional buyer. The aggregate purchase price for the 0% Notes was approximately $22.5 million. Although due in 2026, the 0% Notes may be called by the holder of the 0% Notes at December 31, 2011, December 31, 2016 or December 31, 2021, at a price equal to 100% of the accreted value. Prior to the fifth year anniversary of the issuance of the Notes, the accreted value includes (a) the issue price of each Note and (b) the portion of the excess of the principal amount of each note over the issue price, which has been amortized, in accordance with the indenture under which the 0% Notes are governed, at the rate of 5.84% per annum from the issue date through the date of determination. After the fifth anniversary of the issue date of the Notes, the accreted value will be equal to the principal amount of the Notes.

The 0% Notes do not bear interest and will be convertible, at the option of the holder of such 0% Notes, into shares of the Company’s common stock at an initial conversion price of $15.12 per share, which is equivalent to an initial conversion rate of approximately 66.14 shares per $1,000 principal amount of 0% Notes. The conversion price will adjust automatically upon certain changes to the Company’s capitalization.

Pursuant to a Registration Rights Agreement, dated as of January 11, 2007, by and between the Company and the qualified institutional buyer (“Registration Rights Agreement”), the Company filed a shelf registration statement with respect to the resale of the 0% Notes and the common stock issuable upon conversion thereof. This registration statement became effective on July 9, 2007. In the event the Company fails to comply with its ongoing obligations under the Registration Rights Agreement, it will be obligated to make additional payments to the holders of the 0% Notes.

The Company has the option to cause all or any portion of the 0% Notes to automatically convert at such time as the closing price of the Company’s common stock is greater than $18.90 for twenty out of thirty consecutive trading days and provided that certain other conditions are satisfied. Upon any such automatic conversion, the Company initially will pay the holders a premium make-whole amount equal to $14.13 per $1,000 principal amount of 0% Notes so converted, such premium make-whole being reduced over the initial three-year period following the closing. The premium make-whole amount may be paid in shares of common stock upon any such automatic conversion, provided that certain additional conditions are satisfied.

The 0% Notes are subordinated to all of the Company’s present senior debt, including the $25 million 3% Senior Secured Convertible Note, due May 19, 2010, issued to Pfizer Inc (“Pfizer”) in May 2006 (“the Pfizer Note”), as amended as described below, and the Company’s revolving credit line with GE.

Beginning December 31, 2009, the Company may redeem the 0% Notes in whole or in part at any time at a redemption price equal to the accreted value of the principal amount of the 0% Notes to be redeemed, plus liquidated damages, if any, and certain other amounts, provided that certain conditions are satisfied and the market price of the Company’s common stock exceeds the conversion price of the 0% Notes leading up to and at the time of redemption.

The Company will be required, under the terms of the 0% Notes, to repurchase the outstanding accreted value of the 0% Notes, at the election of the holder, upon certain change of control events described in the 0% Notes, or if the Company’s common stock is no longer listed on a United States national securities exchange, quoted on The NASDAQ Global Market, or approved for trading and/or eligible for quotation on an established automated over-the-counter trading market in the United States, including the OTC Bulletin Board but excluding the “pink sheets”, or any similar quotation system. In addition, under such circumstances, the Company would also be obligated to pay the premium make-whole amount described above and certain other amounts.

An event of default under the 0% Notes will occur if the Company: is delinquent in making certain payments due under the 0% Notes; fails to deliver shares upon conversion of the 0% Notes; fails to deliver certain required notices under the 0% Notes; fails, following notice, to cure a breach of any covenant under the 0% Notes, the securities purchase agreement, the registration rights agreement, the subordination agreement with Pfizer described below, or the indenture described below (together, the “Transaction Documents”); certain events of default occur with respect to other indebtedness; certain bankruptcy proceedings are commenced or orders granted; a representation or warranty made under the Transaction Documents is materially inaccurate and continues uncured following notice; the Company fails to file certain periodic reports with the Securities and Exchange Commission (subject to certain grace periods); or the Company incurs certain types of indebtedness prohibited under the terms of the 0% Notes. If an event of default occurs, the indebtedness under the 0% Notes could be accelerated, such that it becomes immediately due and payable.

In connection with the sale of the 0% Notes, the Company, Pfizer and U.S. Bank, National Association, as trustee, entered into a subordination agreement. The subordination agreement sets forth the terms under which the 0% Notes are subordinated to the Pfizer Note. As a condition of entry into the subordination agreement, the Company and Pfizer amended the Note Purchase Agreement, dated May 5, 2006, between Pfizer and the Company, and amended and restated the Pfizer Note, to conform to certain terms of the subordination agreement. As amended, the Pfizer Note provides that the Company will be in default, thereof, if (i) an event of default occurs and is continuing under the 0% Notes and (ii) the trustee or any holders of the 0% Notes give notice to the Company of its or their intent to either accelerate the 0% Notes or exercise any other remedies, thereunder (subject to certain limited exceptions).

In accordance with SFAS 155, “Accounting for Certain Hybrid Financial Instruments”, the Company elected to initially and subsequently measure the 0% Notes as a hybrid debt instrument in its entirety with adjustments to the fair value reflected in the consolidated statement of operations. Accordingly, the change in the net carrying amount to the fair value recognized includes unamortized debt issuance costs. The Company used a binomial lattice model as the valuation technique to determine fair value using management assessments and Level 3 inputs under SFAS 157, which utilize inputs other than observable quoted prices that are observable for the asset or liability, either directly or indirectly. Inputs derived from quoted prices include the Company’s stock price, the average yield of B- bonds and the prices of Treasury instruments. Input from management’s assessment includes the probability of certain events occurring during the term of the debt. Such inputs could substantially change the fair value of the 0% Notes; such as fluctuations in the Company’s common stock price, changes in management’s assessments over default probability or probability of change in control.

The following table sets forth the impact of fair value adjustments to the 0% Note, which are reflected in the consolidated statement of operations for the period ended March 31, 2009 and 2008, respectively.


	Period Ended
	2009		2008
	(In thousands)
Outstanding Fair Value at January 1,	$	10,468	$	18,511
Fair value adjustment recorded in:
“Convertible debt valuation adjustment”		3,415		(3,568	)

Outstanding Fair Value at March 31,	$	13,883	$	14,943

Unpaid Principal Balance at March 31,	$	25,607	$	24,176

8. COLLABORATION AND NOTE PURCHASE AGREEMENT

On May 5, 2006, the Company entered into a Collaboration Agreement with Pfizer regarding the Company’s Trofile Co-Receptor Tropism Assay (the “Collaboration Agreement”). The Collaboration Agreement has an initial term that expires on December 31, 2009, and is renewable by Pfizer for five successive one-year terms.

Under the agreement, the Company and Pfizer collaborate to make the Company’s Trofile Co-Receptor Tropism Assay available globally. The Company is responsible for making the assay available in the U.S. and performing the assay in accordance with agreed upon performance standards. The Company undertakes certain efforts to plan, establish and maintain an infrastructure to support the commercial availability of the assay outside the U.S., in countries designated by Pfizer, and, it is obligated to perform the assay with respect to patient samples originating outside of the U.S., in accordance with agreed upon performance standards. Pfizer is responsible for sales, marketing and regulatory matters related to the assay outside of the U.S. Pfizer reimburses the Company for costs incurred to establish and maintain the necessary logistics infrastructure to make the assay available outside of the U.S., and Pfizer pays the Company for each assay that the Company performs with respect to patient samples originating outside of the U.S.

Subject to certain limitations, Pfizer is entitled to establish its own facility to perform the assay in support of its human clinical trials, and to perform the assay in respect of patient samples following certain uncured material breaches of the Collaboration Agreement (including the performance standards) by the Company. For such purposes, the Company granted Pfizer a license to use certain intellectual property rights and proprietary materials related to the Company’s Trofile Co-Receptor Tropism Assay. The Company will be obligated in such a case to assist Pfizer in establishing and operating such facility, for which Pfizer will reimburse the Company for costs incurred in providing such assistance. To secure the Company’s obligations under the license described above, the Company has granted Pfizer a security interest in certain of its intellectual property rights and proprietary materials related to the Company’s Trofile Co-Receptor Tropism Assay. Pfizer and the Company have also extended the co-receptor portion of their existing services agreement for support of potential additional Pfizer clinical trials through December 31, 2009.

In accordance with Emerging Issues Task Force Issue No. 00-21, “Revenue Arrangements with Multiple Deliverables,” (“EITF 00-21”) revenue arrangements entered into after June 15, 2003 that include multiple element arrangements are analyzed to determine whether the deliverables are divided into separate units of accounting or as a single unit of accounting. Revenues are allocated to a delivered product or service when all of the following criteria are met: (1) the delivered item has value to the customer on a standalone basis; (2) there is objective and reliable evidence of the fair value of the undelivered item; and, (3) if the arrangement includes a general right of return relative to the delivered item, delivery or performance of the undelivered item is considered probable and substantially in our control. If all of the three required criteria under EITF 00-21 are met, then the deliverables would be accounted for separately, completed as performed. Otherwise, the arrangement would be accounted for as a single unit of accounting and the payments for performance obligations are recognized as revenue over the estimated period of when the performance obligations are performed. If the Company cannot reasonably estimate when its performance obligation either ceases or becomes inconsequential, then revenue is deferred until the Company can reasonably estimate when the performance obligation ceases or becomes inconsequential.

The Collaboration Agreement is a multiple element arrangement, including supply of the Trofile Assay in additional clinical studies (including expanded access programs in both the U.S. and outside the U.S.), supply of the Trofile Assay for clinical use outside of the U.S., reimbursement of costs for the establishment and operation of supply infrastructure outside of the U.S. and potential assistance to Pfizer in the establishment and operation of a second facility for processing of tropism assays. Under the guidelines of EITF 00-21, the Company accounts for the collaboration with Pfizer as a single unit of accounting due to the absence of established fair values of certain undelivered elements. Accordingly, the Company has deferred revenue under this collaboration until the earlier of establishment of fair values or completion of the deliverables. Additionally, related direct costs for the establishment and operation of supply infrastructure outside of the U.S. that are contractually reimbursable on a non-refundable basis under this collaboration have been deferred.

The following table sets forth the deferred infrastructure costs and related deferred revenue under the Collaboration Agreement as of March 31, 2009 and December 31, 2008, respectively.


	March 31, 2009		December 31, 2008
	(In thousands)
Deferred Costs	$	19,092	$	17,275

Deferred Revenue	$	24,990	$	21,546

On May 5, 2006, the Company also entered into a Note Purchase Agreement with Pfizer, which was amended in January 2007, as described in “0% Convertible Senior Unsecured Notes” Note above, pursuant to which it sold to Pfizer a 3% Senior Secured Convertible Note in the principal amount of $25 million (the “Pfizer Note”). The closing of the sale and issuance of the Pfizer Note occurred on May 19, 2006 and matures on May 19, 2010. The Company pays interest quarterly, in arrears, on March 31, June 30, September 30 and December 31 of each year, commencing on June 30, 2006. Subject to certain limitations, the Company is entitled to make such interest payments using shares of its common stock instead of cash.

The Pfizer Note is convertible into shares of the Company’s common stock at the election of its holder at a per share conversion price of $16.23. Following the effectiveness of the registration statement covering the estimated number of common shares underlying the Pfizer Note, which occurred June 23, 2006, the Pfizer Note will automatically convert into shares of the Company’s common stock should the closing price of the Company’s common stock be greater than 150% of the conversion price, or $24.36 per share, for twenty out of thirty consecutive trading days. The conversion price will adjust automatically upon certain changes to the Company’s capitalization. The Company will be required, under the terms of the Pfizer Note, to repurchase the outstanding amount of the Pfizer Note at the election of the holder upon certain change of control events described in the Pfizer Note, or if its common stock is no longer listed or quoted on the NASDAQ Global Market or an established automated over-the-counter trading market (including, if applicable, the OTC Bulletin Board). The Pfizer Note is secured by a first priority security interest in favor of Pfizer in certain of the Company’s assets related to its HIV testing business.

Under the terms of the Pfizer Note, the Company is prohibited from incurring certain types of indebtedness, from permitting certain liens on its assets, entering into transactions with affiliates and entering into certain capital transactions such as dividend payments, stock repurchases, capital distributions or other similar transactions. It is also subject to certain other covenants as set forth in the Pfizer Note, including limitations on its ability to enter into new lines of business after issuance of the Pfizer Note. An event of default under the Pfizer Note will occur if the Company: is delinquent in making payments of principal or interest; fails, following notice, to cure a breach of a covenant under the Pfizer Note, the related security agreement or the Note Purchase Agreement; a representation or warranty under the Pfizer Note, the related security agreement or the Note Purchase Agreement is materially inaccurate; an acceleration event occurs under certain types of its other secured indebtedness outstanding from time to time; certain bankruptcy proceedings are commenced or orders granted or an event of default occurs or is continuing under the 0% Notes issued in January 2007. If an event of default occurs, the indebtedness under the Pfizer Note could be accelerated, such that it becomes immediately due and payable. The Company is in compliance with all covenants under the Pfizer Note as of March 31, 2009.

As a result of the issuance of the 0% Notes, the Company is required to value and account for certain derivative instruments that are embedded in the Pfizer Note with adjustments to the fair value reflected in the statement of operations in accordance with SFAS 159, “The Fair Value Option for Financial Assets and Financial Liabilities” (“SFAS 159”) and SFAS 157, “Fair Value Measurements” (“SFAS 157”). The Company elected to early adopt SFAS 159 to measure the Pfizer Note as a hybrid debt instrument in its entirety using the framework established by SFAS 157, for measuring fair value. At the initial adoption of SFAS 159, the Company recorded a favorable cumulative effect of a change in accounting principle adjustment to beginning accumulated deficit for the Pfizer Note of $2.2 million, resulting in a fair value of $22.8 million at January 1, 2007. The Company used a binomial lattice model as the valuation technique to determine fair value using management assessments and Level 3 inputs under SFAS 157, which utilize inputs other than quoted prices that are observable for the asset or liability, either directly or indirectly. Such inputs could substantially change the fair value of the Pfizer Note; such as fluctuations to the Company’s common stock price, changes in management’s assessments over default probability or probability of change in control.

The following table sets forth the impact of fair value adjustments to the Pfizer Note, which are reflected in the consolidated statement of operations for the period ended March 31, 2009 and 2008, respectively.


	Period Ended
	2009		2008
	(In thousands)
Outstanding Fair Value at January 1,	$	18,595	$	20,786
Fair value adjustment recorded in:
“Convertible debt valuation adjustment”		1,984		(1,167	)

Outstanding Fair Value at March 31,	$	20,579	$	19,619

Unpaid Principal Balance at March 31,	$	25,000	$	25,000

9. CREDIT AND SECURITY AGREEMENT

In December 2007, the Company amended its Credit and Security Agreement with General Electric Capital Corporation (“GE”) entered into on September 29, 2006. The Credit and Security Agreement (the “Credit Agreement”), which expires on March 27, 2010, provides the Company with a revolving credit line, with borrowings against eligible accounts receivable up to a maximum of $10 million. GE has been granted a security interest over certain of the Company’s assets, including its accounts receivable, intellectual property used or held for use in connection with its oncology testing business and inventory. As of March 31, 2009 and December 31, 2008, respectively, there was approximately $10.0 million and $9.6 million outstanding under the revolving credit line, recorded as a loan payable in the consolidated financial statements.

Amounts borrowed under the Credit Agreement bear interest at a rate per annum equal to a published LIBOR rate plus 4.75%. As of March 31, 2009, the 1-month LIBOR rate was 0.51%. Amounts borrowed under the revolving credit line are repaid as the Company receives payment on its outstanding accounts receivable. The Credit Agreement also provides for the payment by the Company of an unused line fee, a collateral fee, a commitment fee, a deferred commitment fee in certain circumstances, and an early termination fee of $0.2 million if cancelled on or prior to September 27, 2009, or $0.1 million if cancelled after September 27, 2009.

Under the terms of the Credit Agreement, the Company is prohibited from incurring certain types of indebtedness and certain liens on its assets. It is also subject to certain other affirmative and negative covenants as set forth in the Credit Agreement. An event of default under the indebtedness to GE will occur if, among other things, the Company: is delinquent in making payments of principal, interest or fees on the revolving credit line; fails, following notice, to cure a breach of a covenant under the Credit Agreement; a representation or warranty under the Credit Agreement is materially inaccurate; certain liquidation or bankruptcy proceedings are commenced or certain orders are granted against the Company; the security interests granted by the Company in favor or GE fail, in certain circumstances, to constitute valid security interests; or an acceleration event occurs under certain types of the Company’s other secured indebtedness outstanding from time to time. If an event of default occurs, the indebtedness to GE under the Credit Agreement could be accelerated, such that it becomes immediately due and payable. The Company is in compliance with all covenants under the Credit Agreement as of March 31, 2009.

10. FAIR VALUE OF ASSETS AND LIABILITIES

The Company’s financial assets and liabilities are valued utilizing the market approach to measure fair value. The market approach uses prices and other relevant information generated by market transactions involving identical or comparable assets or liabilities. The standard describes a fair value hierarchy based on three levels of inputs that may be used to measure fair value which are the following:

•

Level 1—Quoted prices in active exchange markets involving identical assets or liabilities.

•

Level 2—Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

•

Level 3—Unobservable inputs for the asset or liability, either directly or indirectly, and management assessments and inputs using a binomial lattice model as the valuation technique.

The following table summarizes the Company’s financial liabilities measured at fair value on a recurring basis in accordance with FAS 157 as of March 31, 2009:


	(Level 3)
	(In thousands)
Financial liabilities:
3% Convertible promissory note	$	20,579
0% Convertible promissory note		13,883

Total financial liabilities	$	34,462

The fair market value of the 0% Notes and Pfizer Note are subject to interest rate risk. Generally, the fair market value of these 0% Notes and the Pfizer Note will increase as interest rates fall and decrease as interest rates rise, but the interest rate changes do not impact the Company’s consolidated financial position, cash flows or results of operations. Additionally, the fair market value of the Company’s debt obligations includes input from management regarding the probability of certain events occurring during the term of the debt. Assuming a hypothetical incremental five percentage points in probability of fundamental change, the fair value of our Pfizer Note and 0% Note, as of March 31, 2009, would have increased by approximately $0.1 million and $0.5 million, respectively. See Footnote 7 “0% Convertible Senior Unsecured Notes” and Footnote 8 “Collaboration and Note Purchase Agreement” for summary of the Company’s Level 3 financial liabilities as of March 31, 2009 and 2008, respectively.

As of March 31, 2009, the carrying value of the Company’s cash and cash equivalents approximated their fair value and consists of bank deposits and money market accounts. The Company held no direct investments in auction rate securities, collateralized debt obligations, structured investment vehicles or mortgage-backed securities.

11. INCOME TAXES

The Company adopted the provisions of FASB Interpretation No. 48, Accounting for Uncertainties in Income Taxes, an interpretation of SFAS No. 109, Accounting for Income Taxes (“FIN 48”) on January 1, 2007. FIN 48 prescribes a comprehensive model for how companies should recognize, measure, present, and disclose in their financial statements uncertain tax positions taken or expected to be taken on a tax return. Under FIN 48, tax positions must initially be recognized in the financial statements when it is more likely than not the position will be sustained upon examination by the tax authorities. Such tax positions must initially and subsequently be measured as the largest amount of tax benefit that is greater than 50% likely of being realized upon ultimate settlement with the tax authority assuming full knowledge of the position and relevant facts. The Company did not have any unrecognized tax benefits and there was no effect on our financial condition or results of operations as a result of adopting FIN 48. The Company is subject to taxation in the United States and various state and foreign jurisdictions. The tax years from 1995 through 2008, are subject to examination by the Internal Revenue Service due to the net operating losses generated in those years. The Company is currently not under any federal or state audits.

Interest and penalties are zero and the Company’s policy is to expense interest and penalties, if any, to income tax expense as incurred. Since the Company has a full valuation on all the deferred tax assets and does not expect to be profitable at least through December 2009, FIN 48 is not expected to have a material impact on the Company’s effective tax rate for the remainder of 2009. Additionally, the Company does not expect any material changes in unrecognized tax benefits in the next twelve months. The Company has not recognized any tax benefits as of March 31, 2009.

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

Except for the historical information contained herein, this quarterly report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, which are subject to the “safe harbor” created by those sections. Such forward-looking statements involve risks and uncertainties, and our actual results may differ materially from those discussed here. Factors that could cause or contribute to differences in our actual results include those discussed in the following section, as well as those discussed elsewhere in Part II, Item 1A entitled “Risk Factors” and throughout this report.

OVERVIEW

We are a life sciences company committed to advancing personalized medicine and improving patient outcomes through the development of innovative molecular diagnostic products that guide and target the most appropriate treatments. Through a comprehensive understanding of the genetics, biology and pathology of particular diseases, we have pioneered and are developing molecular diagnostics and laboratory services that are designed to:

•

Through this approach, we have become a leader in developing and commercializing innovative products that help guide and improve the treatment of infectious diseases and cancer. In the future, we plan to seek opportunities to address an even broader range of serious diseases. Our goal with personalized medicine is to enable the management of diseases at the individual patient level through the use of sophisticated diagnostics that permit the targeting of therapeutics to those patients most likely to respond to or benefit from them, thereby offering the right treatment to the right patient at the right time .

Over the last several years, we have built a business based on the personalized medicine approach to human immunodeficiency virus (“HIV”) with drug resistance testing products and, more recently, with a unique patient selection test, Trofile. With the commercialization in 2008 of the first product based on our proprietary VeraTag ™ technology, we have begun to leverage the experience and infrastructure we built in the HIV market to the larger market opportunity in cancer.

In HIV, our phenotypic and genotypic resistance testing products provide a practical method for measuring the impact of genetic mutations on HIV drug resistance. This information is used to optimize treatment options for the individual patient. We currently market these resistance testing products to assess in individual HIV patients, their susceptibility to HIV drugs in the drug classes of reverse transcriptase inhibitors, protease inhibitors, entry (fusion) inhibitors and integrase inhibitors. In addition to these resistance tests, in 2007, we initiated commercial sales of the Trofile Co-Receptor Tropism Assay. Trofile is a patient selection assay for the new class of CCR5 antagonists. The first drug in this class, Selzentry ( maraviroc) from Pfizer Inc (“Pfizer”), was approved by the U.S. Food and Drug and Administration (“FDA”) and by the European Commission in 2007. Upon approval of Selzentry in the U.S., we introduced our Trofile Assay commercially and it is now available to help physicians select patients for clinical use of Selzentry . Outside of the U.S., we are making Trofile available through a global collaboration with Pfizer. In HIV, combination therapy, where a patient is treated with a regimen of several drugs, is the standard of care. Tests to properly construct the optimal regimen, such as our phenotypic resistance tests and our Trofile Assay for patient selection are critical to the successful management of combination therapy.

In oncology, numerous targeted drug therapies for the treatment of cancer are being marketed and many additional targeted therapies are in development. Increasingly, combination therapy, where multiple drugs are used in combination to treat a patient, is being evaluated for cancer patients. Our proprietary VeraTag technology provides an assay platform for analyzing very small amounts of tumor samples recovered and prepared in a variety of methods, including formalin fixation, the current standard technique in hospital pathology laboratories. We believe this analytical platform may be well suited for currently marketed drugs such as Herceptin as well as the next generation of targeted cancer therapeutics. Conventional tests provide a qualitative measure of the presence of genes or proteins. In contrast, the VeraTag technology permits the quantitative and accurate measurement of proteins, and proteins in their activated form of homodimers and heterodimers. We believe that by making these measurements closer to the target of drugs we can provide a more reliable indicator of likely drug response or drug resistance, and thereby may permit the prediction, with a high degree of accuracy, of the likelihood of a patient’s cancer responding to a given therapy, facilitating the selection of more precise and effective therapeutic options. Our first product, HERmark , is approved for routine testing in our Clinical Laboratory Improvement Amendments, or CLIA, certified clinical reference laboratory and was introduced commercially in July 2008. HERmark measures a patient’s HER2 status through the level of HER2 total protein and HER2 homodimer that are present. Clinical data has been presented during 2008 and additional clinical studies are in progress to confirm HERmark’s clinical utility and to optimize its commercial value. Additional assays are in development related to other proteins, protein complexes and signaling pathways that are key drivers of proliferation or survival in cancer cells, both in breast cancer and other cancers.

We have incurred losses each year since inception. As of March 31, 2009, we had an accumulated deficit of approximately $308.1 million. We expect to incur additional operating losses as we commercialize HERmark , expand and further develop the VeraTag technology, transfer additional assays into the clinical laboratory, conduct clinical studies and expand our oncology commercial infrastructure to serve the oncology market.

ISSUANCE OF 0% CONVERTIBLE SENIOR UNSECURED NOTES

In January 2007, we issued $30 million principal amount of 0% Convertible Senior Unsecured Notes, due 2026 (the “0% Notes”). Although the 0% Notes are due in December 2026, the 0% Notes may be called at the holder’s option at December 31, 2011, December 31, 2016 or December 31, 2021, at a price equal to 100% of the accreted value. The aggregate purchase price for the 0% Notes was approximately $22.5 million. The 0% Notes do not bear interest and are convertible, at the option of the holder, into shares of our common stock, at an initial conversion price of $15.12 per share, which is equivalent to an initial conversion rate of approximately 66.14 shares per $1,000 principal amount of the 0% Notes. The conversion price will adjust automatically upon certain changes to our capitalization.

We have the option to cause all or any portion of the 0% Notes to automatically convert at such time as the closing price of our common stock is greater than $18.90 for twenty out of thirty consecutive trading days, provided that certain conditions are met. The 0% Notes are subordinated to all of our present senior debt, including the $25 million 3% Senior Secured Convertible Note, due May 19, 2010, issued to Pfizer in May 2006, as amended as described below, and our $10 million line of credit with Merrill Lynch Capital, subsequently acquired by General Electric, or GE.

AGREEMENTS WITH PFIZER INC

In May 2006, we entered into a non-exclusive Collaboration Agreement (the “Collaboration Agreement”) with Pfizer Inc (“Pfizer”) to facilitate the global availability for patient use of our proprietary co-receptor tropism assay, Trofile ™ (“Trofile Assay”). Our Trofile Assay is used to identify which co-receptor a patient’s HIV uses for entry to cells and has been used in connection with phase III clinical trials of Pfizer’s investigational CCR5 antagonist, Selzentry (maraviroc). In August 2007, Selzentry was approved by the FDA for use in CCR5-tropic treatment-experienced patients. The FDA-approved label for Selzentry indicates that tropism testing should be used for patient selection and we expect that the Trofile Assay will be used to select patients for Selzentry . In October 2007, Selzentry was approved by the European Commission. Under the Collaboration Agreement we are responsible for making our Trofile Assay available in the U.S. Pfizer has responsibility for sales, marketing and regulatory matters outside of the U.S. and reimburses us for our expenses incurred to establish and maintain the logistics infrastructure necessary to make the assay available internationally as required by Pfizer. The Collaboration Agreement’s initial term expires on December 31, 2009, and is renewable by Pfizer for five successive one year terms. We and Pfizer also extended the Trofile pricing provisions of our services agreement to support potential additional Pfizer clinical trials through December 31, 2009. This services agreement covers the provisions of Monogram assays for use by Pfizer in clinical studies.

We also entered into a note purchase agreement with Pfizer under which Pfizer purchased a Senior Secured Convertible Note in the principal amount of $25 million (the “Pfizer Note”). The Pfizer Note bears a 3% annual interest rate, payable quarterly in cash or shares of our common stock, at our option, and matures in May 2010, unless converted earlier. The Pfizer Note is convertible at Pfizer’s option into shares of our common stock at a conversion price of $16.23 per share and will automatically convert into shares of our common stock should the closing price of our common stock be greater than 150%, of the conversion price, or $24.36 per share, for twenty out of thirty consecutive trading days. In addition, the Pfizer Note is secured by certain assets related to our HIV testing business, subject to certain covenants and is senior in right of payment to all existing and future indebtedness, subject to certain limited exceptions. In connection with the sale of the 0% Notes, as described above, Pfizer, U.S. Bank and National Association, as trustee, and we entered into a subordination agreement in January 2007, setting forth the terms under which the 0% Notes are subordinated to the Pfizer Note. We also amended our note purchase agreement with Pfizer, and amended and restated the Pfizer Note, to conform to certain terms of the subordination agreement. As amended, the Pfizer Note provides that Monogram will be in default if (i) an event of default occurs and is continuing under the 0% Notes and (ii) the Trustee or any holders of the Notes gives notice to us of its or their intent to either accelerate the 0% Notes or exercise any other remedies thereunder (subject to certain limited exceptions).

As a result of the issuance of the 0% Notes, we were required to value and account for certain derivative instruments that are embedded in the Pfizer Note. We elected to early adopt SFAS 159, “The Fair Value Option for Financial Assets and Financial

Liabilities” to measure the Pfizer Note as a hybrid debt instrument in its entirety with adjustments to the fair value reflected in the consolidated statement of operations. At the initial adoption of SFAS 159, we recorded a cumulative-effect of a change in accounting principle for the Pfizer Note of $2.2 million, resulting in a fair value of $22.8 million at January 1, 2007. For the three month period ending March 31, 2009, this valuation resulted in a $2.0 million increase to the carrying value of the Pfizer Note, which is reflected as non-operating income in the consolidated statement of operations. As of March 31, 2009, the carrying value of the Pfizer Note was $20.6 million and the unpaid principal balance was $25 million.

In accordance with Emerging Issues Task Force Issue No. 00-21, “Revenue Arrangements with Multiple Deliverables,” (“EITF 00-21”) revenue arrangements entered into after June 15, 2003, that include multiple element arrangements are analyzed to determine whether the deliverables are divided into separate units of accounting or as a single unit of accounting. Revenues are allocated to a delivered product or service when all of the following criteria are met: (1) the delivered item has value to the customer on a standalone basis; (2) there is objective and reliable evidence of the fair value of the undelivered item; and (3) if the arrangement includes a general right of return relative to the delivered item, delivery or performance of the undelivered item is considered probable and substantially in our control. If all of the three required criteria under EITF 00-21 are met, then the deliverables would be accounted for separately, completed as performed. Otherwise, the arrangement would be accounted for as a single unit of accounting and the payments for performance obligations are recognized as revenue over the estimated period of when the performance obligations are performed. If we cannot reasonably estimate when a performance obligation either ceases or becomes inconsequential, then revenue is deferred until we can reasonably estimate when the performance obligation ceases or becomes inconsequential.

The Pfizer collaboration is a multiple element arrangement, including supply of the Trofile Assay in additional clinical studies (including expanded access programs in both the U.S. and outside the U.S.), supply of the Trofile Assay for use outside of the U.S., reimbursement of costs to establish and operate the supply infrastructure outside of the U.S. and potential assistance to Pfizer in the establishment and operation of a second facility to process tropism assays. Under the guidelines of EITF 00-21, we have determined that the collaboration with Pfizer be accounted for as a single unit of accounting due to the absence of established fair values of certain undelivered elements. Accordingly, we have deferred revenue under this collaboration until the earlier of establishment of fair values or completion of the deliverables. Additionally, related direct costs to establish and operate the supply infrastructure outside of the U.S. that are contractually reimbursable on a non-refundable basis are deferred. As of March 31, 2009, we had $25.0 million of deferred revenue and $19.1 million of deferred costs relating to the Collaboration Agreement, within the U.S. and internationally.

SUMMARY OF CRITICAL ACCOUNTING POLICIES AND ESTIMATES

Reference is made to “Summary of Critical Accounting Policies and Estimates” included in our Annual Report on Form 10-K for the year ended December 31, 2008. As of the date of the filing of this Quarterly Report, we have not identified any significant changes to the critical accounting policies discussed in our Annual Report for the year ended December 31, 2008.

RECENTLY ISSUED ACCOUNTING STANDARDS

See Note 1 “Summary of Significant Accounting Policies” of the Notes to Consolidated Financial Statements for a full description of recently issued accounting standards, including the expected dates of adoption and estimated effects on results of operations and financial condition, which is incorporated therein.

CONSOLIDATED RESULTS OF OPERATIONS

Three months ended March 31, 2009 and 2008


	Three Months Ended March 31,
	2009		2008
	(In thousands)
Product revenue	$	13,586	$	14,007
Contract revenue		605		820
License revenue		15		10

Total revenue	$	14,206	$	14,837

Revenue . Revenue for the three months ended March 31, 2009, decreased $0.6 million to $14.2 million compared to $14.8 million for the corresponding period in 2008. The decrease in total revenue was driven primarily by a $0.4 million decrease in product revenue, including a $0.8 million decrease in HIV resistance and pharmaceutical testing offset by a $0.4 million increase in revenue generated from our Trofile Co-Receptor Tropism Assay used for selecting HIV patients to be treated with Pfizer’s Selzentry .

Our product revenue consists primarily of revenue generated from our HIV resistance testing, Tropism testing and HIV pharmaceutical testing. Our Trofile Co-Receptor Tropism Assay was launched in 2007. In August 2007, Selzentry, the first drug in a new class of HIV drugs called CCR5 antagonists, was approved by the FDA for use in CCR5-tropic treatment-experienced patients. The FDA-approved label for Selzentry indicates that tropism testing should be used for patient selection and we expect that the Trofile Assay will continue to be used to select patients for Selzentry . However, if our test is not used to select patients for Selzentry , this could have a significant negative impact on our potential future revenues. We recorded nominal revenue in 2008 and for the three months ended March 31, 2009 with HERmark , our first oncology test that was made commercially available in July 2008. We expect that additional adoption of HERmark by physicians will occur for the remainder of 2009 and that revenue will increase once as clinical utility is demonstrated for HERmark and reimbursement is established by third party payers .

Contract revenue is earned from HIV research grants with the National Institutes of Health (“NIH”), and from other non-product and non-license revenue. For the three months ended March 31, 2009, these sources of revenue decreased $0.2 million to $0.6 million from $0.8 million for the same period in 2008, primarily due to decreased grant-related activity. Contract revenue may fluctuate from period to period depending upon the phase of the grant or project life cycle. We have an active program of applying for NIH funding and currently have a number of active grants that we believe will support the development of analytical and database tools to facilitate the identification and characterization of drug resistant strains of HIV, and assays that will aid in the pre-clinical and clinical evaluation of the next generation of anti-viral therapeutics.

We recorded nominal license revenue for both the three month periods ending March 31, 2009 and 2008. License revenue consists of revenue from Caliper Life Sciences, Inc. for the microfluidics patent portfolio acquired in our merger with ACLARA in 2004. Under a license agreement, Caliper is obligated to pay ongoing royalties related to product and service revenues that encompass the use of our patents, and royalty sharing for any sublicense revenue generated by Caliper.

We anticipate quarterly variations in product revenue due primarily to fluctuations in the timing of various planned and ongoing clinical studies conducted by pharmaceutical companies. Revenues from pharmaceutical company customers are expected to be reduced in the remainder of 2009 due to the timing of customers’ clinical trials. We have significant customer concentration and the loss of any major customer or the reduced use of our products by a major customer could have a significant negative impact on our revenue. For the three months ended March 31, 2009 and 2008, approximately 23% and 20%, respectively, of our revenues were derived from tests performed for the beneficiaries of the Medicare and Medicaid programs. Additionally, for the three months ended March 31, 2009 and 2008, Quest Diagnostics Incorporated represented approximately 10% and 11% and Schering-Plough represented approximately 8% and 10% of our total revenue, respectively.

Cost of product revenue. Cost of product revenue was $6.6 million and $6.4 million for the three months ended March, 31, 2009 and 2008, respectively. Included in these costs are materials, supplies, labor and overhead related to product revenue. Corresponding product revenue gross margins were 51% and 55% for the three months ended March 31, 2009 and 2008, respectively. The increase in product costs and the related decrease in product gross margin for the three month period ended March 31, 2009 as compared to the corresponding period in 2008, was primarily due to lower revenue and to increased facilities and material costs. Our gross margins also vary due to fluctuations in our various product revenues. Our Trofile and HIV pharmaceutical testing revenues carry a higher gross margin than our HIV resistance testing. We anticipate that gross margins on product revenue will continue to be affected by changes in the mix of our revenues as well as by the overall level of revenue. We believe that HERmark and other potential oncology products will have a higher gross margin than our HIV products.

Research and development. Research and development costs were $5.9 million for the three months ended March 31, 2009, as compared to $6.0 million for the same period in 2008. The $0.1 million decrease in 2009 of research and development expenses was primarily due to decreased contracting expenses relating to our oncology programs and personnel costs offset by increased facilities costs relating to the lease of a building in April 2008. The successful development of our products is highly uncertain. Completion dates and research and development expenses can vary significantly for each product and are difficult to predict.

Our products in development overlap and most of our research and development activities in infectious disease and oncology are advancing multiple potential product lines. Due to substantial overlap, we do not track costs on a project by project basis, except for the costs related to contract revenue. A portion of our infectious disease research and development expenses are funded by grants and development contracts.

A substantial portion of our research and development expenditures are directed at continuing the development and clinical validation of our VeraTag technology. VeraTag assays are designed to detect proteins and protein complexes, including protein dimers and modified forms of these proteins. These analytes are not readily discernible with other technologies, especially in human tissue samples that have been stored in the standard clinical method of formalin-fixed/paraffin embedded (“FFPE”). Measurements of activated proteins are expected to provide valuable information with respect to the activation states of key signaling pathways that drive cell proliferation and survival in tumors, and serve as biomarkers that indicate the likelihood of response to particular targeted therapeutics in individual patients and specific patient sub-groups. Importantly, our VeraTag assays require only a very small amount of biological sample and are designed to be performed directly on FFPE tissue samples, as well as other sample formats. This ability to utilize small amounts of human clinical samples in a wide range of formats, without extensive and time-consuming sample preparation, makes VeraTag assays well suited to diagnostic applications in human disease management.

The VeraTag platform is not specific to cancer. Measurements of proteins and activated proteins may be clinically relevant in a wide range of disease areas. Our focus in developing the technology to date has been on cancer, specifically on the EGFR/HER family of protein receptors. The following table summarizes ongoing and planned development activities for the assays that have been developed or are in development.


Assay	Development Status	Ongoing and Planned Development Activities
HER2 total protein	CLIA validated	• Clinical studies are ongoing and planned to evaluate these assays in breast cancer patient tissue samples, to evaluate their correlation with response to Herceptin treatment
HER2:HER2 homodimer	CLIA validated
HER1 total protein	Research use	• Clinical studies are ongoing and planned to evaluate certain of these assays in breast cancer patient tissue samples, to evaluate their correlation with resistance to Herceptin treatment • Clinical studies are planned to evaluate certain of these assays in patient tissue samples in other cancers, including lung, head and neck and others, to evaluate their correlation with clinical outcomes to targeted cancer drugs • Additional development to optimize assay performance • On establishment of clinical utility, assays may be validated in the clinical reference laboratory to enable availability as CLIA-validated tests
HER3 total protein	Research use
HER1:HER1 homodimer	Research use
HER1:HER2 heterodimer	Research use
HER2:HER3 heterodimer	Research use
HER3:PI3K complex (a downstream signaling complex in the Akt pathway)	Research use
p95 (a proteolytically truncated form of the HER2 protein)	Research use

Our infectious disease programs are primarily focused on support and continued development of our portfolio of HIV resistance tests and Trofile, our tropism patient selection test. In addition to these HIV tests, we continue to develop, with grant funding, our HIV Antibody Neutralization assay. This assay is validated for research purposes and is available to pharmaceutical company customers. Additional development work is ongoing related to the use of our assays in vaccine development. We also continue to develop, with funding from a grant and from a pharmaceutical company partner, resistance assays for HCV. A GeneSeq HCV (NS5B) assay has been validated for research use and is available to pharmaceutical company customers. GeneSeq HCV (NS3) and PhenoSense HCV assays are also in development.

The completion of our research and development projects is subject to a number of risks and uncertainties, including unplanned delays or expenditures during product development, the extent of clinical testing required for market adoption and regulatory approvals, the timing and results of clinical trials, failure to validate our technology and products in clinical trials and failure to receive any necessary regulatory approvals. Because of these uncertainties, the nature, timing and estimated costs of the efforts necessary to complete our research and development projects cannot be determined or estimated with any degree of certainty. Any delays or additional research and development efforts may also require us to obtain additional sources of funding to complete development of our products. Our failure to complete development of our products would have a material adverse impact on our ability to increase revenue and on our financial position and liquidity.

Sales and marketing. Sales and marketing expenses were $4.0 million and $4.4 million for three months ended March 31, 2009 and 2008, respectively. The $0.4 million decrease for the three month period ending March 31, 2009, as compared to the same period in 2008, was primarily attributed to lower marketing activities offset by the expansion of our sales force. We expect that our sales and marketing expenses for promotional programs as well as for sales and marketing personnel will increase with the commercialization of HERmark and in preparation for the introduction of future oncology products.

General and administrative. General and administrative expenses were $3.5 million and $4.6 million for three months ended March 31, 2009 and 2008, respectively. The $1.1 million decrease for the three months ended March 31, 2009 as compared to the same period in 2008, was primarily due to a decrease in personnel costs offset by increased facilities costs relating to the lease of a building in April 2008.

Stock-based Compensation . Stock-based compensation expenses related to employee stock option awards and employee stock purchases recognized under SFAS 123R were $0.7 and $1.0 million for the three months ended March 31, 2009 and 2008, respectively. The $0.3 million decrease in stock-based compensation expenses for the three month period ending March 31, 2009 as compared to the corresponding period in 2008, was primarily due to a lower fair value per share of stock options granted to employees in 2009 as well as a recovery of expense for unvested cancelled shares.

The table below sets out stock-based compensation expenses recognized under SFAS 123R for the three months ended March 31, 2009 and 2008, including CVR expenses related to options that vested in the period.


	Three Months Ended March 31,
	2009		2008
	(In thousands)
Cost of product revenue	$	106	$	127
Research and development		160		281
Sales and marketing		164		205
General and administrative		269		384

	$	699	$	997

Stock compensation expense under SFAS 123R is expected to continue to have an effect on results of operations in future periods and this impact may be significant.

In addition, we accounted for stock option grants to non-employees in accordance with the Emerging Issues Task Force Consensus No. 96-18, “Accounting for Equity Instruments That Are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or Services,” which requires the options subject to vesting to be periodically re-valued over their service periods, which approximate the vesting period. The impact of these options has not been material.

Convertible debt valuation adjustments and interest income, net . Convertible debt valuation adjustments were unfavorable by $5.4 million and favorable by $4.7 million for the three months ended March 31, 2009 and 2008, respectively. Pursuant to the guidelines set forth in SFAS 155, “Accounting for Certain Hybrid Financial Instruments,” we elected to initially and subsequently measure the 0% Notes as a hybrid debt instrument in its entirety with adjustments to the fair value reflected in the consolidated statement of operations. As a result of the issuance of the 0% Notes, we were required to value and account for certain derivative instruments embedded in the Pfizer Note with adjustments to the fair value reflected in the consolidated statement of operations. We elected to early adopt SFAS 159, “The Fair Value Option for Financial Assets and Financial Liabilities” to measure the Pfizer Note as a hybrid debt instrument in its entirety using the framework established by SFAS 157 for measuring fair value. For the three months ended March 31, 2009, this valuation led to a $2.0 million increase to the net carrying value of the Pfizer Note with a corresponding credit to the consolidated statement of operations and a $3.4 million increase to the net carrying value of the 0% Notes, to fair value with a corresponding credit to the consolidated statement of operations. Such adjustments could be substantial in future quarters in certain circumstances, such as if the Company’s common stock price is higher or lower than at March 31, 2009.

We recorded approximately $204,000 and $6,500 in interest expense, net, for the three months ended March 31, 2009, and 2008 respectively.

LIQUIDITY AND CAPITAL RESOURCES

For the three months ended March 31, 2009, we incurred a net loss from operations of $8.9 million. Cash and cash equivalents declined from $16.0 million at December 31, 2008 to $13.7 million at March 31, 2009, and borrowings under our Credit and Security Agreement (“Credit Agreement”) increased from $9.6 million to $10.0 million, respectively, during the same period. Under the terms of the Credit Agreement, we are prohibited from incurring certain types of indebtedness and certain liens on our assets. It is also subject to certain other affirmative and negative covenants as set forth in the Credit Agreement. An event of default under the indebtedness to GE will occur if, among other things, the Company: is delinquent in making payments of principal, interest or fees on the revolving credit line; fails, following notice, to cure a breach of a covenant under the Credit Agreement; a representation or warranty under the Credit Agreement is materially inaccurate; certain liquidation or bankruptcy proceedings are commenced or certain orders are granted against us; the security interests granted by us in favor or GE fail, in certain circumstances, to constitute valid security interests; or an acceleration event occurs under certain types of our other secured indebtedness outstanding from time to time. If an event of default occurs, the indebtedness to GE under the Credit Agreement could be accelerated, such that it becomes immediately due and payable. We are in compliance with all covenants under the Credit Agreement as of March 31, 2009.

The decline in our cash and cash equivalents were primarily driven by cash used to fund losses from operations, cash used to fund working capital and cash used to purchase property and equipment, partially offset by net proceeds from short-term borrowings. We actively review our cash requirements, working capital changes, capital expenditures and borrowing availability.

We have funded our operations, since inception, primarily through public and private sales of common and preferred stock, issuance of convertible debt, equipment financing arrangements, product revenue, contract revenue, advances by pharmaceutical company customers and borrowings under a revolving line of credit. In May 2006, the Company issued a 3% Senior Secured Convertible Note to Pfizer in the principal amount of $25.0 million, which matures on May 19, 2010. At March 31, 2009 and December 31, 2008, the Company had borrowings under a Credit and Security Agreement (“Credit Agreement”) of $10.0 million and $9.6 million, respectively. The Credit Agreement provides us with borrowings against eligible accounts receivable up to a maximum of $10 million and expires on March 27, 2010.

As of March 31, 2009, we anticipate that our sources of liquidity will be sufficient to meet our obligations without the disposition of assets outside of the ordinary course of business or significant revisions of our planned operations through the next twelve months. However, significant changes in the credit limit or payment terms of the existing Credit Agreement or the lack of access to the credit market could adversely impact our liquidity. If such funds are not available on commercially reasonable terms, or even if such funds are available should we choose to further reduce our costs due to uncertainty in the economic environment and our business, we may be required to curtail operations, or sell significant assets and could adversely impact our liquidity. In addition, we may choose to raise additional capital due to market conditions or strategic considerations even if we believe that we have sufficient funds for current or future operating plans. These funds may not be available on favorable terms, or may not be available at all. We expect negative cash flow from operations to continue through at least the remainder of 2009 and expect that our available cash and cash equivalents of $13.7 million at March 31, 2009, as well as funds provided by the sale of our products, contract revenue, and borrowings under accounts receivable and equipment financing arrangements will be adequate to fund operations at least for the next twelve months.

Net cash used in operating activities of $2.4 million for the three month period ending March 31, 2009, was primarily to fund our operating losses of $4.0 million, including expenditures related to the research and development of our oncology products offset by net cash proceeds of $1.7 million from working capital, which includes impact from timing of our accounts receivable collections. Net cash used in operating activities of $8.9 million for the three months ending March 31, 2008, was primarily to fund operating losses of $4.2 million for our HIV and oncology activities as well as $4.7 million used to fund working capital, which includes impact from timing of our accounts receivable collections. Cash flows from operating activities primarily relates to net operating losses and can vary significantly due to various factors including changes in accounts receivable, accrued liabilities and deferred revenue related to arrangements with customers. The average collection period of our accounts receivable is dependent on various factors, including the type of revenue (i.e. patient testing, pharmaceutical company testing or contract revenue), reimbursement processes, payment terms related to that revenue, whether the related revenue was recorded at the beginning or end of a period, and general economic conditions.

Net cash used for investing activities of $0.3 million for the three months ended March 31, 2009, resulted primarily from capital expenditures. Net cash provided by investing activities of $5.3 million for the three months ended March 31, 2008, resulted primarily from net maturities of short-term investments of $5.9 million offset by capital expenditures of $0.6 million.

Net cash provided by financing activities of $0.4 million and $5.7 million for the three months ended March 31, 2009 and 2008, respectively, resulted primarily from net proceeds from loans payable.

As of March 31, 2009, we held several leases and a sublease of buildings and office space in South San Francisco, California as follows:

•

Two leases of approximately 41,000 and 40,000 square feet, respectively, of laboratory and office space through April 2018; and

•

A sublease of approximately 27,000 square feet of laboratory and office space through May 2011.

In connection with the merger with ACLARA, we issued CVRs to ACLARA stockholders and were obligated to issue CVRs to holders of assumed ACLARA stock options upon future exercise of those options. In June 2006, the amount payable related to the outstanding CVRs was determined to be $5.28 per CVR and holders of assumed ACLARA options are entitled to receive a cash payment of $5.28, upon future exercise of those options. At March 31, 2009, assumed ACLARA options to purchase approximately 350,000 shares of the Company’s common stock were outstanding and exercisable. Upon exercise of these vested options, the Company would receive aggregate exercise proceeds of $4.1 million, offset by the CVR payments of $1.9 million. See Note 4 “Contingent Value Rights,” of the consolidated financial statements for further information.

As a result of the merger with ACLARA, at December 31, 2004, we assumed the lease for a facility of approximately 44,200 square feet of office and laboratory space in Mountain View, California. As of March 31, 2009, the remaining obligation was approximately $0.1 million, which is included in the table below.

At March 31, 2009, future minimum payments under our contractual obligations, excluding the lease assignment guarantee and CVR’s, are as follows:


	Payments Due By Period
	Less Than 1 Year		1-3 Years		3-5 Years		More Than 5 Years		Total
	(In thousands)
Purchase obligations	$	1,012	$	46	$	—	$	—	$	1,058
Operating lease obligations		3,205		7,137		7,541		16,949		34,832
Equipment financing arrangements		83		—		—		—		83
0% Convertible Senior Unsecured Note		—		30,000		—		—		30,000
3% Senior Secured Convertible Note		—		25,000		—		—		25,000
3% Convertible Note interest payment (1)		750		284		—		—		1,034
Loans payable		10,000		—		—		—		10,000

Total	$	15,050	$	62,467	$	7,541	$	16,949	$	102,007

(1)	Subject to certain limitations, we are entitled to make such interest payments using shares of our common stock.

Off-balance sheet arrangements. In June 2002, the Company assigned a lease of excess laboratory and office space and sold the related leasehold improvements and equipment to a third party. In October 2007, we extended the terms of the subleased office space relating to this lease assignment, which decreases our payment obligation in the event of default by the assignee. In the event of default by the assignee, the Company would be contractually obligated for payments under the lease of: $0.5 million in 2009; $0.7 million in 2010 and $0.3 million in 2011.

The contractual obligations discussed above are fixed costs. If we are unable to generate sufficient cash from operations to meet these contractual obligations, we may have to raise additional funds. These funds may not be available on favorable terms or at all.

Capital and liquidity considerations. We expect that we will have to make substantial investments in operating and capital expenditures as we develop and commercialize new clinical testing products and expand the availability of our current testing products. For the three months ended March 31, 2009, our capital expenditures were approximately $0.3 million. While we do not currently have any additional material commitments for future capital expenditures, we expect to incur capital expenditures for our existing facilities. In the future, we may incur additional capital expenditures as we expand our clinical laboratory to accommodate commercial availability of VeraTag assays for oncology, expand our commercial infrastructure in anticipation of the introduction of other oncology products, potentially establish an FDA compliant manufacturing facility and make our HIV and oncology assays available globally in support of drugs for which our tests may be important diagnostics.

From time to time, we may consider possible strategic transactions, including the potential acquisitions of products, technologies and companies, with the goal of growing our business and maximizing stockholder value. Such transactions, if any, could materially affect our future liquidity and capital resources. We may need to obtain additional funding by entering into new collaborations and strategic partnerships to enable us to develop and commercialize our products. Even if we receive funding from future collaborations and strategic partnerships, we may need to raise additional capital in the public equity markets, through private equity financing or through debt financing. Equity and debt financings and debt restructurings may be significantly more difficult if current market conditions do not improve or if they deteriorate further. Any additional equity financing or debt restructuring may also be dilutive to stockholders, and debt financing, if available, may involve additional restrictive covenants. Our failure to raise capital, when needed, may harm our business and operating results.

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

Our exposure to interest rate risk relates primarily to our debt obligations primarily in the form of convertible notes and our investment portfolio. Our debt obligations are subject to interest rate and market risk due to the convertible features of our notes. Generally, the fair market value of fixed interest rate debt will increase as interest rates fall and decrease as interest rates rise. Our investment portfolio may consist of fixed rate securities, which may have their fair market value adversely impacted due to fluctuations in interest rates, while floating rate securities may produce less income than expected if interest rates fall. Due in part to these factors, our future investment income may fall short of expectations due to changes in interest rates or we may suffer losses in principle if forced to sell securities that have declined in market value due to changes in interest rates. The primary objective of our investment activities is to preserve principal while at the same time maximize yields without significantly increasing risk. To achieve this objective, we may invest in debt instruments of the U.S. Government and its agencies and high-quality corporate issuers, and, by policy, restrict our exposure to any single corporate issuer by imposing concentration limits. To minimize the exposure due to adverse shifts in interest rates, we would maintain investments at an average maturity of generally less than two years.

As of March 31, 2009, the Company has moved its funds available for investing into cash equivalents such as money market accounts. However, we may continue to have risk exposure to our holdings in cash, money market accounts and cash equivalents, which may adversely impact the fair value of our holdings. As of March 31, 2009, there were no indicators of credit risk impact to the valuation of our current cash, money market accounts and other cash equivalents.

The fair market value of the 0% Notes, Pfizer Note and interest cost to us under the revolving credit line with GE are also subject to interest rate risk. Generally, the fair market value of the 0% Notes and the Pfizer Note will increase as interest rates fall and decrease as the interest rates rise, but the interest rate changes do not impact our financial position, cash flows or results of operations. Additionally, the fair market value of our debt obligations includes input from management regarding the probability of certain events occurring during the term of the debt. Assuming a hypothetical incremental five percentage points in probability of fundamental change, the fair value of our Pfizer Note and 0% Note, as of March 31, 2009, would have increased by approximately $0.1 million and $0.5 million, respectively. We also have exposure to changes in interest rates on our revolving credit line with GE, which bears interest at a rate per annum equal to a published LIBOR rate plus 4.75%. As of March 31, 2009, $10 million was outstanding under the revolving credit line.

We do not utilize derivative commodity instruments or other market risk sensitive instruments, positions or transactions in any material fashion.

We have operated primarily in the United States and all sales to date have been made in U.S. Dollars, including sales to Pfizer under our collaboration agreement. Accordingly, we have not had any material exposure to foreign currency rate fluctuations.

Item 4.

Controls and Procedures

We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in the reports that are filed under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission, and that such information is accumulated and communicated to management, including the Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.

Our Chief Executive Officer and Chief Financial Officer, with the assistance of other members of our management, have evaluated our disclosure controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as of the end of the period covered by this report, and have concluded based on that evaluation that those disclosure controls and procedures are effective.

Our management, including our Chief Executive Officer and Chief Financial Officer, does not expect that our disclosure controls and procedures or our internal control will prevent all errors and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within Monogram Biosciences have been detected.

There has been no change in our internal control over financial reporting during the most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

MONOGRAM BIOSCIENCES, INC.

PART II

Item 1.

Legal Proceedings

ACLARA, with which we merged, and certain of its former officers and directors, referred to together as the ACLARA defendants, are named as defendants in a securities class action lawsuit filed in the United States District Court for the Southern District of New York. See Note 5, “Commitments and Contingencies,” to the financial statements included with this Quarterly Report on Form 10-Q for further discussion and a description of material developments in this legal proceeding.

Item 1A.

Risk Factors

You should carefully consider the risks described below, together with all of the other information included in this report, in considering our business and prospects. The risks and uncertainties described below contain forward-looking statements, and our actual results may differ materially from those discussed here. Additional risks and uncertainties not presently known to us or that we currently deem immaterial also may impair our business operations. Each of these risk factors could adversely affect our business, operating results and financial condition, as well as adversely affect the value of an investment in our common stock.

We have marked with an asterisk (*) those risk factors below that reflect changes from the risk factors included in our Annual Report on Form 10-K filed with the Securities and Exchange Commission on February 13, 2009, as amended.

We have not achieved profitability and we anticipate continuing losses, which may cause our stock price to fall. *

We have experienced significant losses each year since inception, and we expect to continue to incur additional losses as we complete the development of the VeraTag technology and commercialize products for oncology. We have experienced losses applicable to common stockholders of $11.4 million for the three months ended March 31, 2009. As of March 31, 2009, we had an accumulated deficit of approximately $310.6 million. We expect to continue to incur losses, primarily as a result of expenses related to:

•

research and product development costs, including the continued development and clinical validation of the VeraTag technology and products based on that technology;

•

sales and marketing activities related to existing and planned products, including the development of a sales organization focused on the oncology market;

•

general and administrative costs to support growth of the business;

•

interest expense related to outstanding debt;

•

non-cash adjustments in our statement of operations to reflect changes in the fair value of our outstanding convertible debt;

•

recognition of costs in our statement of operations associated with certain product revenues that are deferred due to the accounting for our collaboration with Pfizer; and

•

non-cash adjustments relating to stock-based compensation.

If our losses continue, our liquidity may be impaired, our stock price may fall and our stockholders may lose part or all of their investment.

In the event that we need to raise additional capital, or restructure existing convertible notes, our stockholders could experience substantial additional dilution. If such financing or restructuring is not available on commercially reasonable terms, our liquidity could be adversely impacted and we may have to significantly curtail our operations or sell significant assets. *

We anticipate that our capital resources, together with funds from the sale of our products, contract and license revenue and borrowing under equipment and accounts receivable financing arrangements, will be sufficient to fund our planned operations at least for the next twelve months. The commercialization of the VeraTag technology is expected to include the development of a testing service and possibly test kits for use in connection with the treatment of cancer patients. However, we may need additional funding to accomplish these goals. To the extent operating and capital resources are insufficient to meet our obligations, including lease payments and future requirements, we will have to raise additional funds to continue the development, commercialization and expansion of our technologies, including the VeraTag technology and products based on that technology. Our inability to raise capital would seriously harm our business and product development efforts.

In addition, we may choose to raise additional capital due to market conditions or strategic considerations even if we believe we have sufficient funds for our current or future operating plans. However, we cannot guarantee that additional financing, in any form, will be available at all, or on terms acceptable to us. If we sell equity or convertible debt securities to raise additional funds, our

existing stockholders may incur substantial dilution and any shares so issued will likely have rights, preferences and privileges superior to the rights, preferences and privileges of our outstanding common stock. In the event financing is not available in the time frame required, we could be forced to reduce our operating expenses, curtail sales and marketing activities, reschedule research and development projects or delay, scale back or eliminate some or all of our activities. Further, we might be required to sell certain of our assets or obtain funds through arrangements with third parties that require us to relinquish rights to certain of our technologies or products that we would seek to develop or commercialize on our own. These actions, while necessary for the continuance of operations during a time of cash constraints and a shortage of working capital, could make it difficult or impossible to implement our long-term business plans or could adversely impact our liquidity.

We may consider restructuring our existing debt or incurring additional indebtedness by issuing additional debt securities or selling equity securities in the future to satisfy our existing debt, or to fund potential acquisitions or investments, or for general corporate purposes. As a result of recent events and trends in the equity and credit markets, we may not be able to secure additional equity or debt financing for future activities on satisfactory terms, or at all. Additionally, our existing debt obligations may limit our ability to obtain certain types of indebtedness. If we are not successful in obtaining sufficient financing, or debt restructuring because we are unable to access the capital markets on financially economical terms, it could reduce our research and development efforts and may materially adversely affect our future growth, results of operations and financial results, and we may be required to curtail significantly, or eliminate at least temporarily, one or more of our development programs.

The new class of drugs for treatment of HIV, known as CCR5 antagonists, including Pfizer’s Selzentry ™ , is important to Monogram’s business due to the use of the Trofile Assay for selection of patients. The CCR5 class and Selzentry may not be successful. While Selzentry has been approved by the FDA for use with treatment experienced patients and is in use for that indication, it may not achieve significant market adoption and may not be approved by the FDA for the broader indication of treatment naïve patients. While Trofile has been used to select patients in all phase III clinical trials to date for CCR5 antagonists, including that for Selzentry, and is currently in use for patient selections, physicians may not continue to use Trofile for this purpose.

Our testing services, including our Trofile Assay, have been used by certain pharmaceutical company customers, including Pfizer, in phase III clinical trials of the new class of CCR5 antagonist drugs. Pfizer’s CCR5 antagonist, Selzentry , was approved by the FDA in August 2007, for use in CCR5-tropic treatment-experienced patients. The FDA-approved label for Selzentry indicates that tropism testing should guide the use of Selzentry and the Trofile Assay is currently being used to select patients for Selzentry. However, if our test is not used to select patients for Selzentry and other CCR5 antagonists, this could have a significant negative impact on our potential future revenues.

With the approval of Selzentry , patient testing use of the Trofile assay has become an important source of testing revenue for us. While the FDA-approved label for Selzentry states that tropism testing should guide the use of Selzentry , there is no guarantee that our testing services will continue to be used by physicians. If such use does not continue and grow then the Trofile Assay will not generate significant future patient testing revenues for us. This could damage our market position, adversely affect our business, and cause our revenues to decline. While there are additional CCR5 antagonists in development, Pfizer’s Selzentry has the most significance to our near term business as it has been approved by the FDA. Any difficulty related to Selzentry would have a serious adverse affect on our revenues and business. If safety or efficacy concerns arise related to Selzentry, or to the entire class of CCR5 antagonists, all use and additional clinical trials related to this class of drugs could be terminated, Selzentry may not remain on the market and additional drugs might not be approved by the FDA, which would abruptly and negatively impact our revenues.

Even if Selzentry is successful in its use with treatment experienced patients, it may not be approved by the FDA for the broader indication of treatment naïve patients. A phase III trial of Selzentry in treatment naïve patients missed a trial endpoint in 2007. Even though a re-analysis, in 2008, of the patient samples using the enhanced version of Trofile may facilitate a determination that the trial endpoint was met, there is no guarantee that the FDA will approve Selzentry for the treatment naïve indication. Failure to achieve this approval would limit adoption of Selzentry and would adversely affect adoption of Trofile and our revenues and business.

Our revenues will be limited or diminished if changes are made to the way that our products are reimbursed, or if government or third-party payers limit the amounts that they will reimburse for our current products, or do not authorize reimbursement for our planned products.

Government and third-party payers, including Medicare and state Medicaid programs, generally require that we identify the services we perform in our clinical laboratory using industry standard codes known as the Current Procedural Terminology, or CPT codes, which are developed by the American Medical Association, or AMA. Most payers maintain a list of standard reimbursement rates for each such code, and our ability to be reimbursed for our services may therefore be effectively limited by our ability to describe the services accurately using the CPT codes. From time to time, the AMA changes its instructions about how our services should be coded using the CPT codes. If these changes leave us unable to accurately describe our services or we are not coordinated with payers such that corresponding changes are made to the payers’ reimbursement schedules, we may have to renegotiate our pricing and reimbursement rates, the changes may interrupt our ability to be reimbursed, and/or the overall reimbursement rates for

our services may decrease dramatically. We may spend significant time and resources to minimize the impact of these changes on reimbursement. If the coding available does not apply or cannot accurately reflect the testing we perform, such as in the billing of a new product, we may have to use an unlisted procedure CPT Code, or a “miscellaneous” code. This is the approach we have adopted for Trofile and HERmark , and the use of this code may delay our ability to be reimbursed, the timing of payments for our services and could cause interruptions in the future in reimbursement for our products, including Trofile and HERmark .

Government and third-party payers are attempting to contain or reduce the costs of healthcare and are challenging the prices charged for medical products and services. In addition, increasing emphasis on managed care in the United States will continue to put pressure on the pricing of healthcare products. This could, in the future, limit the price that we can charge for our products or cause fluctuations in reimbursement rates for our products. Changes occur from time to time in the administration of reimbursement by public payers, such as the recent change in the local contractor for the Medicare system for reference laboratories in California, and such changes could cause interruptions or changes in previously established reimbursement arrangements. This could hurt our ability to generate revenues. Significant uncertainty exists as to the reimbursement status of new medical products, such as our Trofile Assay and our HERmark Breast Cancer Assay, and products that we expect to develop, such as additional assays based on our VeraTag technology. Additionally, revenue recognition is delayed until reimbursement is established, on a payer by payer basis. If government and other third-party payers do not continue to provide adequate coverage and reimbursement for our testing products or do not authorize reimbursement for our newly introduced and our planned products, our revenues will be reduced.

Restructuring and other changes at Pfizer could have an adverse impact on the use of Trofile by physicians. *

Pfizer has announced the creation of a joint venture with Glaxo Smith Kline (GSK) in which Pfizer and GSK will contribute their HIV products and products in development to the joint venture, which initially will be approximately 85% owned by GSK. While the new entity will be exclusively focused on HIV and is expected to have a larger sales force than Pfizer’s current organization, the creation of the joint venture will not be completed until the fourth quarter of 2009. There is no guarantee that the new entity will have a positive impact on the utilization of Trofile, and there is no guarantee that adoption of Trofile will not be negatively affected while planning and integration of the joint venture occurs during 2009.

We derive a significant portion of our revenues from a small number of customers and our revenues may decline significantly if any major customer cancels, reduces or delays a purchase of our products. *

Our revenues to date consist, and are anticipated to consist for the remainder of 2009, largely of sales of HIV testing products. We have significant customer concentration and the loss of any major customer or the reduced use of our products by a major customer could have a significant negative impact on our revenue. Our revenue derived from tests performed for beneficiaries of Medicare and Medicaid programs represented approximately 23% and 20% of the Company’s revenues for the three months ended March 31, 2009 and 2008, respectively. Additionally, gross accounts receivable balances from Medicare and Medicaid represented 30% and 35% at March 31, 2009 and December 31, 2008, respectively. Other significant customers included: Quest Diagnostics representing approximately 10%, and 11% and Schering-Plough representing approximately 8% and 10% of our total revenue for the three month periods ending March 31, 2009 and 2008, respectively. It is likely that we will have significant customer concentration in the future.

Following our entry into the Collaboration Agreement with Pfizer in May 2006, and the amendment of our services agreement with Pfizer, we expect Pfizer’s significance as a customer will grow. As of March 31, 2009 and December 31, 2008, we had approximately $25.0 million and $21.5 million, respectively, of deferred revenue under the Pfizer Collaboration. The original term of the Collaboration Agreement with Pfizer will expire on December 31, 2009, subject to Pfizer’s right to renew the Agreement for up to five one year extensions upon notice to Monogram six months prior to term expiration. Although certain of our agreements with pharmaceutical company customers have provisions for minimum purchases, these provisions are generally subject to annual renewal or cancellation provisions. The loss of any major customer, a slowdown in the pace of increasing physician and physician group sales as a percentage of sales, cancellation or non-renewal of agreements with pharmaceutical company customers, the delay of significant orders from any significant customer, even if only temporary, or delays or terminations of clinical trials by pharmaceutical company customers, could have a significant negative impact on our revenues and our ability to fund operations from revenues, generate cash from operations or achieve profitability.

We may be unable to perform under our Collaboration Agreement with Pfizer, which could adversely affect our business. *

Our Collaboration Agreement with Pfizer requires us to make our Trofile Assay available in the United States and to perform the assay for Pfizer in accordance with agreed upon performance standards. We are also obligated to undertake certain efforts to plan for, establish and maintain an infrastructure to support the availability of the assay in countries outside the United States as designated by Pfizer.

We have never been subject to breach remedies in the case of failure to meet performance standards like those in the Pfizer Collaboration Agreement, and we may be unable to meet them should they occur. The performance standards include standards

regarding shipment times, assay turnaround times, percent of unscreenable samples and assay sensitivity. In addition, patient samples originating outside the United States will be included in the overall performance standards. We anticipate that under the Collaboration Agreement, we will receive patient samples from countries and laboratories that we have not previously dealt with. Although individual sites and countries must meet minimum volume and performance standards before they are included in the overall performance standard calculations, samples from these sources may not be consistently collected or maintained in accordance with our requirements, which could make a sample unscreenable or lead to unacceptable variability in the assay results. While we and Pfizer have agreed to exclude third party sample collection problems from the measurement of our performance under the Collaboration Agreement, there may be instances where we are unable to identify a sample collection problem, or where we and Pfizer disagree as to whether or not a performance issue is attributable to such a problem. In performing under the Collaboration Agreement, we will need to contract with third party laboratories outside the United States. We do not have experience in negotiating and managing relationships with overseas laboratories, and may have difficulty doing so. In addition, we anticipate that certain HIV variants will be more prevalent in patient populations in some countries from which we will be receiving patient samples under the collaboration, and with which we do not have extensive prior experience. Our assay may not work effectively with these variants, or may require additional enhancements. The foregoing and other factors may make us unable to perform under our collaboration with Pfizer, which could constitute a material breach of the Collaboration Agreement.

Following certain uncured material breaches by us under the Collaboration Agreement, including our failure to achieve the performance standards, Pfizer will be entitled to establish its own facility, with our assistance, to perform the assay in support of its human clinical trials, and to perform the assay with respect to patient samples. For these purposes, we have granted Pfizer a license to use intellectual property rights and proprietary materials related to the assay, secured by a security interest in favor of Pfizer, in intellectual property rights and proprietary materials related to the assay. Pfizer would pay us a royalty for each such assay that it performs. If we materially default under the Collaboration Agreement, including failing to achieve the performance standards, and Pfizer becomes entitled to use our intellectual property and proprietary materials to establish its own facility, our business could be significantly and adversely impacted by this potential loss in product revenue from Pfizer.

Products based on the VeraTag technology could be delayed or precluded by regulatory, clinical or technical obstacles, thereby delaying or preventing the development, introduction and commercialization of these new products and adversely impacting our revenue and profitability.

In July 2008, our first VeraTag product, HERmark Breast Cancer Assay, became available to physicians throughout the U.S. for assessment of HER2 status in patients with breast cancer. We continue to develop other testing products for use in connection with the treatment of cancer patients. These products will also be based on our proprietary VeraTag technology and are expected to leverage our experience in patient testing for HIV. The completion of these research and development activities is subject to a number of risks and uncertainties including the extent of clinical trials required for regulatory and marketing purposes, the timing and results of clinical trials, inability to access tumor samples on which to conduct studies of the correlation between measurements by VeraTag assays and clinical outcomes, failure or delay in validating the technology in clinical trials, failure to have results of clinical studies published in peer reviewed journals, and failure to achieve necessary regulatory approvals. These factors make it impossible to predict with any degree of certainty whether we will be able to complete the development of commercial products utilizing VeraTag technology or if we are able to do so what the cost and timing of such completion may be.

The FDA may impose medical device regulatory requirements on our tests, including possible pre-market approval requirements, which could be expensive and time-consuming and could prevent us from marketing these tests. *

In September 2006, the FDA issued draft guidance related to the regulation of certain kinds of tests, multivariate index assays (“IVDMIAs”) provided by CLIA labs. Following public comment, the FDA issued revised draft guidance in July 2007. The revised guidance was again subject to public comment and may be further revised before being finalized. In December 2008, Genentech, Inc. filed a Citizen’s Petition urging the FDA to regulate all laboratory developed tests. The draft guidance states that it applies to those tests provided by CLIA laboratories and that are categorized as IVDMIAs where the values of multiple variables are combined using an interpretation function to yield a single patient-specific result that is intended for use in diagnosis, cure, mitigation, treatment or prevention of disease. It is not clear which tests may be covered by the final guidance when issued, when such guidance may be issued or what form of approval process may be required, although in certain cases a full pre-market approval may be required. There is no assurance that some or all of our current products and products in development, including those for HIV or for cancer based on the VeraTag technology, will not be covered by the final guidance, or by other FDA regulation. In addition, certain members of Congress have announced that they may introduce proposed legislation regarding laboratory testing, which may apply to current or future products.

As our Trofile Assay has been used in phase III trials of CCR5 antagonist drug candidates, we filed a master file with the FDA providing information about the specification and validation of the assay. We have had discussions with the FDA regarding this information and the use of our HIV tests as a patient selection tool in such trials. While we have initiated commercial sales of our Trofile as a CLIA-based service, there is no guarantee that the FDA will not seek to regulate such services.

In the past, the FDA has not required that genotypic or phenotypic resistance testing for HIV conducted at a clinical laboratory be subject to pre-marketing clearance or approval, although the FDA has stated that it believes its jurisdiction extends to tests generated in a clinical laboratory. We received a letter from the FDA in September 2001, that asserted such jurisdiction over in-house tests like our HIV resistance tests, but which also stated the FDA was not currently requiring pre-market approval for HIV monitoring tests such as ours provided that the promotional claims for such tests are limited to its analytical capabilities and do not mention the benefit of making treatment decisions on the basis of test results. The FDA letter to us also asserted that our GeneSeq test had been misbranded due to the use of purchased analyte specific reagents, or ASRs, if test reports did not include a statement disclosing that the test has not been cleared or approved by the FDA. Since 2002, we have utilized in-house prepared ASRs in our products. The FDA indicated in those discussions that the focus of the letter was our genotypic tests and not our phenotypic tests. On August 8, 2007, the FDA issued final guidance regarding classification of HIV genotypic resistance testing devices as class II devices. We do not believe that this guidance impacts our genotypic products all of which are conducted in our clinical laboratory. The recent draft IVDMIA guidance described above indicates that genotypic testing, such as our HIV genotypic resistance testing, does not fall within the scope of that IVDMIA draft guidance. We believe that our phenotypic resistance tests and our HERmark Breast Cancer Assay, as direct biological measurements, do not fall within the definition of IVDMIA. However, there is no assurance that the FDA will not seek to regulate our products.

Either as a result of a decision to produce future test kits, or as a result of FDA regulation or other regulation, of our laboratory testing business, we may become subject to Good Manufacturing Practice Regulation, or GMP, under the auspices of the FDA. Our facilities are not GMP compliant. If our operations are subject to GMP regulation, then we will be required to establish a GMP compliant facility, or to enter into a relationship with a third party manufacturer that operates a GMP compliant facility. We do not have experience with GMP compliance. GMP compliance, or entry into a manufacturing relationship with a third party manufacturer, would be time-consuming and expensive. We anticipate that if we are required to establish our own GMP compliant facility, or we elect to enter into a relationship with a GMP compliant third party, either process would require significant start-up costs and would significantly increase on-going overhead costs.

We cannot be sure that the FDA will accept the steps we take, or that the FDA will not require us to alter our promotional claims or undertake the expensive and time-consuming process of seeking pre-market approval with clinical data demonstrating the sensitivity and specificity of our currently offered tests or tests in development, including tests for oncology based on our VeraTag technology. If pre-market approval is required, we cannot be sure that we will be able to obtain it in a timely fashion or at all; and in such event the FDA would have authority to require us to cease marketing tests until such approval is granted.

In general, we cannot predict the extent of future FDA or other regulation, including congressional regulation, of our business. In the future, we might be subject to greater or different regulations that could have a material effect on our finances and operations. If we fail to comply with existing or additional FDA regulations, it could cause us to incur civil or criminal fines and penalties, increase our expenses, prevent us from increasing revenues, or hinder our ability to conduct our business.

We could lose key personnel, which could materially affect our business and require us to incur substantial costs to recruit replacements for lost personnel.

Any of our key personnel could terminate their employment at any time and without notice. We do not maintain key person life insurance on any of our key employees. Any failure to attract and retain key personnel could have a material adverse effect on our business.

Charges to operations resulting from the possible future impairment of goodwill and intangible assets may adversely affect the market value of our common stock.

If we are unable to successfully develop new products based on our VeraTag technology, our financial results, including net income (loss) per common share, could be adversely affected. In accordance with United States generally accepted accounting principles, we have accounted for the merger with ACLARA as a business combination. We have allocated the total purchase price to the acquired net tangible assets, amortizable intangible assets, and in-process research and development based on their fair values as of the date of completion of the merger, and have recorded the excess of the purchase price over those fair values as goodwill.

To the extent the value of goodwill becomes impaired; we may be required to incur material non-cash charges relating to the impairment of those assets. The additional charges could adversely affect our financial results, including net income (loss) per common share, which could cause the market price of our common stock to decline.

Our current products may not continue to receive market acceptance and our potential future products may not achieve market acceptance, which could limit our future revenue. *

Our ability to establish our testing products, both current and potential, as the standard of care to guide and improve the treatment of viral diseases and cancer will depend on continued acceptance and use of our current testing products by physicians and clinicians and pharmaceutical companies, similar acceptance and use of our potential future products and the development and

commercialization of new drugs and drug classes that require or could benefit from testing services such as ours. While certain testing products for viral diseases are established, others are still relatively new, and testing products for the treatment of cancer have not yet been developed. We cannot predict the extent to which physicians and clinicians will accept and use these testing products. They may prefer competing technologies and products. The commercial success of these testing products will require demonstrations of their advantages and potential clinical and economic value in relation to the current standard of care, as well as to competing products. Market acceptance of our products will depend on:

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the success of Pfizer’s Selzentry , including whether Selzentry is approved by the FDA for use in treatment-naïve HIV patients, and the adoption of our Trofile Assay to select patients for Selzentry ;

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the development and commercialization of competitive products for the assessment of tropism related to the use of Selzentry and other CCR5 antagonists in development;

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the availability of third party reimbursement by Medicare, Medicaid and other public and private payers of healthcare costs;

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the success of clinical trials of additional CCR5 antagonists for HIV in which our testing services are being used, whether those drugs get approved by the FDA and whether our tests are required or recommended after those drugs are approved;

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our marketing efforts and continued ability to demonstrate the utility of PhenoSense products in guiding anti-viral drug therapy, especially in relation to genotyping technology;

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the effectiveness of Pfizer in developing the market and commercializing our Trofile Assay outside of the United States;

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our ability to demonstrate to potential customers the clinical benefits and cost effectiveness of our VeraTag technology, relative to competing technologies and products;

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the extent to which opinion leaders in the scientific and medical communities publish supportive scientific papers in reputable academic journals;

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the extent and success of our efforts to market, sell and distribute our testing products;

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the timing and willingness of potential collaborators to commercialize our virology and VeraTag products and other future testing product candidates;

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general and industry-specific economic conditions, which may affect our pharmaceutical customers’ research and development, clinical trial expenditures and the use of our products, including Trofile and VeraTag ;

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progress of clinical trials conducted by our pharmaceutical customers;

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our ability to generate clinical data indicating correlation between data recognized by VeraTag assays, including HERmark and clinical responses to particular drugs;

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changes in the cost, quality and availability of equipment, reagents and components required to manufacture or use our PhenoSense, Trofile, HERmark and future VeraTag products and other future testing product candidates;

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the development by the pharmaceutical industry of anti-viral drugs and targeted medicines for specific patient populations, the success of these targeted medicines in clinical trials and the adoption of our technological approach in these development activities; and

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our ability to develop new products.

If the market does not continue to accept our existing testing products, such as our Trofile, PhenoSense and HERmark products or does not accept our future testing products, our ability to generate revenue will be limited.

We have significant indebtedness and debt service obligations as a result of the issuance of our convertible note to Pfizer in the principal amount of $25 million, our issuance of 0% convertible senior unsecured notes, in the principal amount of $30 million, and our entry into a credit and security agreement with General Electric Capital Corporation (“GE”), which individually or in the aggregate, may adversely affect our cash flow, cash position and stock price. *

As a result of the sale and issuance of $30 million principal amount of 0% convertible senior unsecured notes in January 2007, to a single qualified institutional buyer, our entry into a credit and security agreement with GE, in September 2006, which provides us with a revolving credit line of up to $10 million, and our issuance of a convertible note to Pfizer in the principal amount of $25 million in May 2006, we increased our total debt and debt service obligations. If we issue other debt securities or enter into other debt obligations in the future, our debt service obligations will increase further.

We intend to fulfill our debt service obligations. In the future, if we are unable to generate cash or raise additional cash through financings sufficient to meet these obligations and need to use existing cash in order to fund these obligations, we may have to delay or curtail research, development and commercialization programs.

Our indebtedness could have significant additional negative consequences, including, without limitation:

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requiring the dedication of a portion of our expected cash flow to service our indebtedness, thereby reducing the amount of our expected cash flow available for other purposes, including funding our research and development programs and other capital expenditures;

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increasing our vulnerability to general adverse economic conditions;

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limiting our ability to obtain additional financing;

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placing us at a possible competitive disadvantage to less leveraged competitors and competitors that have better access to capital resources; and

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requiring us to reflect adjustments in our statement of operations to reflect changes in the fair value of the embedded derivatives in our outstanding convertible debt.

Our outstanding senior indebtedness to Pfizer and GE imposes restrictions on how we conduct our business, and if we fail to meet our obligations under this indebtedness, our payment obligations may be accelerated and collateral for our loans may be forfeited.

In May 2006, in connection with our entry into a Collaboration Agreement, we and Pfizer entered into a Note Purchase Agreement, which we amended in January 2007, pursuant to which we sold to Pfizer a 3% Senior Secured Convertible Note in the principal amount of $25 million, which we refer to as the Pfizer Note. The Pfizer Note is secured by a first priority security interest in favor of Pfizer in our assets related to our HIV testing business.

Under the terms of the Pfizer Note, we are prohibited from incurring certain types of indebtedness, from permitting certain liens on our assets, from entering into transactions with affiliates and from entering into certain capital transactions such as dividends, stock repurchases, capital distributions or other similar transaction without Pfizer’s prior consent. We are also subject to certain other covenants as set forth in the Pfizer Note, including limitations on our ability to enter into new lines of business. These limitations imposed by the Pfizer Note could impair our ability to operate or expand our business.

In addition, in September 2006, we entered into a credit and security agreement with GE. Our agreement with GE provides us with a $10 million revolving credit line and grants GE a security interest over certain of our assets, including our accounts receivable, intellectual property used or held for use in connection with our oncology testing business, and our inventory. Under the terms of this agreement, we are also prohibited from incurring certain types of indebtedness and certain liens on our assets.

If an event of default occurs under either of these loan arrangements, Pfizer or GE, as the case may be, may declare the outstanding principal balance and accrued but unpaid interest owed to them immediately due and payable, which would have a material adverse affect on our financial position. A default under either our Pfizer or GE indebtedness would also trigger a default under the terms of our convertible senior unsecured notes, in the principal amount of $30 million. We may not have sufficient cash to satisfy these obligations. If a default occurs under the Pfizer Note, and we are unable to repay Pfizer, Pfizer could seek to enforce its rights under its first priority security interest in our assets related to our HIV testing business. If this were to happen, Pfizer may receive some or all of the assets related to our HIV testing business in satisfaction of our debt, which could cause our business to fail. Similarly, if a default occurs under our agreement with GE, and we are unable to repay GE, GE could seek to enforce its security interest in the assets it has secured, including our accounts receivable, intellectual property used or held for use in connection with our oncology testing business, and our inventory, which could also cause our business to fail.

Billing complexities associated with health care payers could delay our accounts receivable collection, impair our cash flow and limit our ability to reach profitability. *

Billing for laboratory services is complex. Laboratories must bill various payers, such as Medicare, Medicaid, insurance companies, doctors, employer groups and patients, all of whom have different requirements. Our revenue derived from tests performed for beneficiaries of the Medicare and Medicaid programs represented approximately 23% and 20% of our revenue for the three month periods ending March 31, 2009 and 2008, respectively. In addition, gross accounts receivable balances from Medicare and Medicaid represented 30% and 35% of our gross accounts receivable balance at March 31, 2009 and December 31, 2008, respectively. Billing difficulties often result in a delay in collecting, or ultimately an inability to collect, the related receivable. This impairs cash flow and ultimately reduces profitability if we are required to record bad debt expense and/or contractual adjustments for these receivables. We recorded bad debt expense of $0.3 million and $0.2 million for the three months ended March 31, 2009, and 2008, respectively.

Among many other factors complicating billing are:

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complexity of procedures, and changes in procedures, for electronic processing of insurance claims;

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complications related to use of new or miscellaneous codes, as with Trofile and HERmark , for new products based on new technologies;

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cumbersome nature of manual processes at payers for processing claims where electronic processing is not possible;

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budget constraints for the federal Medicare, state Medicaid and other publicly funded programs, as well as cost containment efforts by public and private third party payers;

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pricing or reimbursement differences between our fee schedules and those of the payers;

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changes in or questions about how products are to be identified in the requisitions;

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disputes between payers as to which party is responsible for payment;

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disparity in coverage among various payers; and

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difficulties of adherence to specific compliance requirements and procedures mandated by various payers.

Ultimately, if such issues are not resolved in a timely manner, our cash flows could be impaired and our ability to reach profitability could be limited.

We face intense competition, and if our competitors’ existing products or new products are more effective than our products, the commercial opportunity for our products will be reduced or eliminated.

The commercial opportunity for our products will be reduced or eliminated if our competitors develop and market new testing products that are superior to, or are less expensive than, the testing products that we develop using our proprietary technology. The markets for life science research and diagnostic products are highly competitive and are subject to rapid technological change. In particular, approaches to personalized medicine are rapidly evolving and there are many companies attempting to establish their technological approaches and products as the standard of care.

For our HIV resistance testing products, genotypic tests are available through national laboratories such as Quest Diagnostics and Laboratory Corporation of America, as well as regional and hospital laboratories and commercial laboratories such as Mayo Laboratories and Kaiser Permanente. These tests are supplied by a number of manufacturers including Applied Biosystems Group, and Visible Genetics, a division of Siemens. While alternate approaches to phenotypic testing are commercialized, we believe that the primary competition for our phenotypic resistance tests is the alternate approach of genotyping. For our Trofile Co-Receptor Tropism Assay, we are not aware of any other clinically validated products currently available for this application. However, we are aware of efforts by third parties to develop competitive assays using phenotypic and genotypic approaches. We believe that genotypic approaches to the identification of tropism are significantly less precise than our phenotypic approach. Nevertheless, we expect that reference laboratories and academics may develop products based on genotypic approaches.

For diagnostic testing used for cancer therapies, we expect to compete with existing mass protein and RNA based technologies as well as with companies that are developing alternative technological approaches for patient testing in the cancer field. There are likely to be many technological approaches in the emerging field of testing for likely responsiveness to the new class of targeted cancer therapies, potentially from companies that currently commercialize testing products for guiding therapy of cancer patients, such as DakoCytomation A/S, Genzyme, Abbott Laboratories and Roche Diagnostics. Established national clinical laboratories such as Quest Diagnostics and Laboratory Corporation of America may also develop or commercialize services or products that are competitive with those that we anticipate developing and commercializing. In addition, there are likely alternative technology approaches being developed by competitors and evaluated by pharmaceutical and biotechnology companies as well as being studied by the oncology community. In particular, while products based on our VeraTag technology are based on the identification of protein-based differences among patients, there is significant interest in the oncology community for gene-based approaches that may be available from other companies.

We believe that the principal competitive factors in our markets are product capability supported by clinical validation, scientific credibility and reputation, customer service, cost effectiveness of the technology and the sales and marketing strength of the supplier.

Each of these competitors is attempting to establish its own test as the standard of care. Our competitors may successfully develop and market other testing products that are either superior to those that we may develop or that are marketed prior to marketing of our testing products. One or more of our competitors may render our technology obsolete or uneconomical by advances in existing technological approaches or the development of different approaches. Some of these competitors have substantially greater financial resources, market presence and research and development staffs than we do. In addition, some of these competitors have significantly greater experience in developing products, and in obtaining the necessary regulatory approvals of products and processing and marketing products.

Various testing materials that we use are purchased from single qualified suppliers, which could result in our inability to secure sufficient materials to conduct our business.

We purchase some of the testing materials used in our laboratory operations from single qualified suppliers. Although these materials could be purchased from other suppliers, we would need to qualify the suppliers prior to using their materials in our commercial operations. Although we believe we have ample inventory to allow validation of another source, in the event of a material interruption of these supplies, the quantity of our inventory may not be adequate.

Any extended interruption, delay or decreased availability of the supply of these testing materials could prevent us from running our business as contemplated and result in failure to meet our customers’ demands. If significant customer relationships were harmed by our failure to meet customer demands, our revenues may decrease. We might also face significant additional expenses if we are forced to find alternate sources of supplies, or change materials we use. Such expenses could make it more difficult for us to attain profitability, offer our products at competitive prices and continue our business as currently contemplated or at all.

The intellectual property protection for our technology and trade secrets may not be adequate, allowing third parties to use our technology or similar technologies, and thus reducing our ability to compete in the market. *

The strength of our intellectual property protection is uncertain. In particular, we cannot be sure that:

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we were the first to invent the technologies covered by our patents or pending patent applications;

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we were the first to file patent applications for these inventions;

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others will not independently develop similar or alternative technologies or duplicate any of our technologies;

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any of our pending patent applications will result in issued patents; or

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any patents issued to us will provide a basis for commercially viable products or will provide us with any competitive advantages or will not be challenged by third parties.

With respect to our viral disease portfolio, we have approximately 81 granted, issued, allowed and pending patent applications in the United States and in other countries, including 28 issued patents as of March 31, 2009. With respect to our VeraTag technology, including our current and planned oncology products, we have approximately 77 granted, issued, allowed and pending patent applications in the United States and in other countries, including 35 issued patents as of March 31, 2009.

We have 93 granted, issued, allowed and pending patent applications in the United States and in other countries as of March 31, 2009, including 72 issued or allowed patents, relating to the historic microfluidics business of ACLARA. These microfluidics patents and patent applications have been licensed to Caliper Life Sciences, Inc. and we may receive certain royalties pursuant to this license agreement. We have received and will receive cash payments, including up-front and annual payments for the outlicense. In addition, we will receive royalty payments relevant to exactly which of the outlicensed patents are implicated. For some of the outlicensed patents, we will receive a flat royalty on all products for which Caliper grants a sublicense. On others, we will share sublicensing revenue based upon a formula determined according to the quality and quantity of Caliper patents implicated in the Caliper sublicense.

Other companies may have patents or patent applications relating to products or processes similar to, competitive with or otherwise related to our current and planned products. Patent law relating to the scope of claims in the technology fields in which we operate, including biotechnology and information technology, is still evolving and, consequently, patent positions in these industries are generally uncertain. We will not be able to assure you that we will prevail in any lawsuits regarding the enforcement of patent rights or that, if successful, we will be awarded commercially valuable remedies. In addition, it is possible that we will not have the required resources to pursue offensive litigation or to otherwise protect our patent rights.

In addition to patent protection, we also rely on protection of trade secrets, know-how and confidential and proprietary information. We generally enter into confidentiality agreements with our employees, consultants and their collaborative partners upon commencement of a relationship with them. However, we cannot assure you that these agreements will provide meaningful protection against the unauthorized use or disclosure of our trade secrets or other confidential information or that adequate remedy would exist if unauthorized use or disclosure were to occur. The unintended disclosure of our trade secrets and other proprietary information would impair our competitive advantages and could have a material adverse effect on our operating results, financial condition and future growth prospects. Further, we cannot assure you that others have not or will not independently develop substantially equivalent know-how and technology.

In addition, there is a risk that some of our confidential information could be compromised during the discovery process of any litigation. During the course of any lawsuit, there may be public announcements of the results of hearings, motions and other interim proceedings or developments in the litigation. If securities analysts or investors perceive these results to be negative, it could have a substantial negative effect on the trading price of our common stock.

Our products could infringe on the intellectual property rights of others, which may cause us to engage in costly litigation and, if we are not successful defending any such litigation or cannot obtain necessary licenses, we may have to pay substantial damages and/or be prohibited from selling our products. *

Our commercial success depends upon our ability to develop, manufacture, market and sell our products and use our proprietary technologies without infringing the proprietary rights of others. Companies in our industry typically receive a higher than average number of claims and threatened claims of infringement of intellectual property rights. Numerous U.S. and foreign issued patents and pending patent applications owned by others exist in the fields in which we are selling and/or developing or expect to sell and/or develop products. We may be exposed to future litigation by third parties based on claims that our products, technologies or activities infringe the intellectual property rights of others. Because patent applications can take many years to issue, there may be currently pending applications, unknown to us, which may later result in issued patents that our products or technologies may infringe. There also may be existing patents, of which we are not aware, that our products or technologies may inadvertently infringe. Further, there may be issued patents and pending patent applications in fields relevant to our business, of which we may become aware from time to time, that we believe we do not infringe or that we believe are invalid or relate to immaterial portions of our overall business. We will not be able to assure you that third parties holding any of these patents or patent applications will not assert infringement claims against us for damages or seeking to enjoin our activities. We will also not be able to assure you that, in the event of litigation, we will be able to successfully assert any belief we may have as to non-infringement, invalidity or immateriality, or that any infringement claims will be resolved in our favor. Third parties have from time to time threatened to assert infringement or other intellectual property claims against us based on our patents or other intellectual property rights or informed us that they believe we required one or more licenses in order to perform certain of our tests. For instance, we were informed in 2002 by Bayer Diagnostics (now a unit of Siemens AG), or Bayer, that it believed we require one or more licenses to patents controlled by Bayer in order to conduct certain of our current and planned operations and activities. We, in turn, believe that Bayer may require one or more licenses to patents controlled by us. Although we believe we do not need a license from Bayer for our HIV products, we held preliminary discussions with Bayer, prior to and in 2004, concerning the possibility of entering into a cross-licensing or other arrangement. However, in the future, we may have to pay substantial damages, possibly including treble damages; for infringement if it is ultimately determined that our products infringe a third party’s patents. Further, we may be prohibited from selling our products before we obtain a license, which, if available at all, may require us to pay substantial royalties. Even if infringement claims against us are without merit, defending a lawsuit will take significant time, and may be expensive and divert management attention from other business concerns.

Our business operations and the operation of our clinical laboratory facility are subject to stringent regulations and if we are unable to comply with them, we may be prohibited from accepting patient samples or may incur additional expense to attain and maintain compliance, which would have an adverse impact on our revenue and profitability.

The operation of our clinical laboratory facilities is subject to a stringent level of regulation under the Clinical Laboratory Improvement Amendments of 1988. Laboratories must meet various requirements, including requirements relating to quality assurance, quality control and personnel standards. Our laboratories are also subject to regulations by the State of California and various other states. We have received accreditation by the College of American Pathologists and therefore are subject to their requirements and evaluation. Our failure to comply with applicable requirements could result in various penalties, including loss of certification or accreditation, and we may be prevented from conducting our business as we currently do or as we may wish to in the future.

If we do not comply with laws and regulations governing the confidentiality of medical information, we may lose the state licensure we need to operate our business, and may be subject to civil, criminal or other penalties. Compliance with such laws and regulations could be expensive.

The Department of Human Health and Services, or HHS, has issued final regulations under the Health Insurance Portability and Accountability Act of 1996, or HIPAA, designed to improve the efficiency and effectiveness of the health care system by facilitating the electronic exchange of information in certain financial and administrative transactions, while protecting the privacy and security of the information exchanged. Three principal regulations have been issued:

•

privacy regulations;

•

security regulations; and

•

standards for electronic transactions, or transaction standards.

We have implemented the HIPAA privacy regulations. In addition, we implemented measures we believe will reasonably and appropriately meet the specifications of the security regulations and the transaction standards.

These standards are complex, and subject to differences in interpretation. We will not be able to guarantee that our compliance measures will meet the specifications for any of these regulations. In addition, certain types of information, including demographic information not usually provided to us by physicians, could be required by certain payers. As a result of inconsistent application of requirements by payers, or our inability to obtain billing information, we could face increased costs and complexity, a temporary disruption in receipts and ongoing reductions in reimbursements and net revenues. We cannot estimate the potential impact of payers implementing (or failing to implement) the HIPAA transaction standards on our cash flows and results of operations.

In addition to the HIPAA provisions described above, there are a number of state laws regarding the confidentiality of medical information, some of which apply to clinical laboratories. These laws vary widely, and new laws in this area are pending, but they most commonly restrict the use and disclosure of medical information without patient consent. Penalties for violation of these laws include sanctions against a laboratory’s state licensure, as well as civil and/or criminal penalties. Compliance with such rules could require us to spend substantial sums, which could negatively impact our profitability.

We may be unable to build brand loyalty because our trademarks and trade names may not be protected. We may not be able to build brand loyalty in the new markets that we are entering and may enter in the future.

Our registered or unregistered trademarks or trade names such as the names PhenoSense, PhenoSense GT, PhenoScreen, Integrase, GeneSeq, Trofile, HERmark and VeraTag may be challenged, canceled, infringed, circumvented or declared generic or determined to be infringing on other marks. We may not be able to protect our rights to these trademarks and trade names, which we need to build brand loyalty. Brand recognition is critical to our short-term and long-term marketing strategies especially as we commercialize future enhancements to our products. In particular as we broaden our commercial focus from viral diseases to oncology and other serious diseases, we may not be able to establish any brand recognition and loyalty in oncology and other new markets that we may enter in the future.

Clinicians or patients using our products or services may sue us and our insurance may not sufficiently cover all claims brought against us, which would increase our expenses.

Clinicians, patients and others may at times seek damages from us if drugs are incorrectly prescribed for a patient based on testing errors or similar claims. Although we have obtained product liability insurance coverage of up to $6 million, and expect to continue to maintain product liability insurance coverage, we will not be able to guarantee that insurance will continue to be available to us on acceptable terms or that our coverage will be sufficient to protect us against all claims that may be brought against us. We may not be able to maintain our current coverage, or obtain new insurance coverage for our planned future testing services and products, such as planned testing service and kits for use in connection with the treatment of cancer patients, on acceptable terms with adequate coverage, or at reasonable costs. We may incur significant legal defense expenses in connection with a liability claim, even one without merit or for which we have coverage.

We may be subject to litigation, which would be time consuming and divert our resources and the attention of our management.

ACLARA, with which we merged in December 2004, and certain of its former officers and directors, referred to together as the ACLARA defendants, are named as defendants in a securities class action lawsuit filed in the United States District Court for the Southern District of New York. This action, which was filed on November 13, 2001, and is now captioned ACLARA BioSciences, Inc. Initial Public Offering Securities Litigation, also names several of the underwriters involved in ACLARA’s initial public offering, or IPO, as defendants. This class action is brought on behalf of a purported class of purchasers of ACLARA common stock from the time of ACLARA’s March 20, 2000 IPO through December 6, 2000. The central allegation in this action is that the underwriters in the ACLARA IPO solicited and received undisclosed commissions from, and entered into undisclosed arrangements with, certain investors who purchased ACLARA stock in the IPO and the after-market, and that the ACLARA defendants violated the federal securities laws by failing to disclose in the IPO prospectus that the underwriters had engaged in these allegedly undisclosed arrangements. More than 300 issuers who went public between 1998 and 2000 have been named in similar lawsuits. In February 2003, after the issuer defendants (including the ACLARA defendants) filed an omnibus motion to dismiss, the court dismissed the Section 10(b) claim as to the Company, but denied the motion to dismiss the Section 11 claim as to the Company and virtually all of the other issuer-defendants.

On June 26, 2003, the plaintiffs in the consolidated class action lawsuits announced a proposed settlement with ACLARA and the other issuer defendants. This proposed settlement was terminated on June 25, 2007, following the ruling by the United States Court of Appeals for the 2nd Circuit on December 5, 2006, reversing the District Court’s granting of class certification in the six focus cases currently being litigated in this proceeding. The proposed settlement, which had been approved by ACLARA’s board of directors, provided that the insurers of all settling issuers would guarantee that the plaintiffs recover $1 billion from non-settling defendants. Under the proposed settlement, the maximum amount that could have been charged to ACLARA’s insurance policy in the event that the plaintiffs recovered nothing from the investment banks would have been approximately $3.9 million. We believe that ACLARA had sufficient insurance coverage to cover the maximum amount that we may be responsible for under the proposed settlement.

The Company may be subject to other claims or litigation. In the past, the Company has received demand letters threatening possible legal action. We cannot be certain whether litigation will or will not be filed. Due to the inherent uncertainties of litigation the outcome of any such potential action cannot be predicted.

Our operating results may fluctuate from quarter to quarter, making it likely that, in some future quarter or quarters, we will fail to meet estimates of operating results or financial performance, causing our stock price to fall.

If revenue declines in a quarter, our losses will likely increase or our earnings will likely decline because many of our expenses are relatively fixed. Though our revenues may fluctuate significantly as we continue to build the market for our products, expenses such as research and development, sales and marketing and general and administrative are not affected directly by variations in revenue. The cost of our product revenue could also fluctuate significantly due to variations in the demand for our products and the relatively fixed costs to produce them. We may also experience operational difficulties in our clinical laboratory with interruption of test completion, which could adversely affect revenues. In addition, we could experience significant fluctuations in our consolidated statement of operations for stock-based compensation and fair value adjustments to our 0% Notes and Pfizer Note. We will not be able to accurately predict how volatile our future operating results will be because our past and present operating results, which reflect moderate sales activity, are not indicative of what we might expect in the future. Additionally, our revenues may fluctuate due to the timing of clinical trials utilizing our assays. As a result, it will be very difficult for us to forecast our revenues accurately and it is likely that in some future quarter or quarters, our operating results will be below the expectations of securities analysts or investors. In this event, the market price of our common stock may fall abruptly and significantly. Because our revenue and operating results will be difficult to predict, period-to-period comparisons of our results of operations may not be a good indication of our future performance.

We may lose some or all of the value of some of our marketable securities.

We engage one or more third parties to manage some of our cash consistent with an investment policy that allows a range of investments and maturities. The investments are intended to preserve principal while providing liquidity adequate to meet projected cash requirements. Risks of principal loss are intended to be minimized through diversified short and medium term investments of high quality, but the investments are not, in every case, guaranteed or fully insured. In light of recent changes in the credit market, some high quality short-term investment securities, similar to the types of securities that we invest in, have suffered illiquidity or events of default. From time to time, we may suffer losses on our marketable securities, which could have a material adverse impact on our operations. Due to current market conditions, our cash available for investing has been placed in money market accounts as of March 31, 2009.

If a natural disaster strikes our clinical laboratory facilities and we are unable to receive and or process our customers’ samples for a substantial amount of time, we would lose revenue.

We rely on a single clinical laboratory facility to process patient samples for our tests, which are received via delivery service or mail, and have no alternative facilities. We will also use this facility for conducting other tests we develop, including VeraTag assays, and even if we move into different or additional facilities they will likely be in close proximity to our current clinical laboratory. Our clinical laboratories and some pieces of processing equipment are difficult to replace and could require substantial replacement lead-time. Our facilities may be affected by natural disasters such as earthquakes and floods. Earthquakes are of particular significance because our facilities are located in the San Francisco Bay Area, an earthquake-prone area, and we do not have insurance against earthquake loss. Our insurance coverage, if any, may not be adequate to cover total losses incurred in a natural disaster. However, even if covered by insurance, in the event our clinical laboratory facilities or equipment is affected by natural disasters, we would be unable to process patient samples and meet customer demands or sales projections. If our patient sample processing operations were curtailed or ceased, we would not be able to perform tests, which would reduce our revenues, and may cause us to lose the trust of our customers or market share.

We use hazardous chemicals and biological materials in our business, and any claims relating to any alleged improper handling, storage, use or disposal of these materials could adversely harm our business.

Our research and development and manufacturing processes involve the use of hazardous materials, including chemicals and biological materials. Our operations also produce hazardous waste products. We will not be able to eliminate the risk of accidental contamination or discharge and any resultant injury from these materials. Federal, state and local laws and regulations govern the use, manufacture, storage, handling and disposal of these materials. We do not maintain insurance coverage for damage caused by accidental release of hazardous chemicals, or exposure of individuals to hazardous chemicals off of our premises. We could be subject to damages in the event of an improper or unauthorized release of, or exposure of individuals to, hazardous materials. In addition, claimants may sue us for injury or contamination that results from our use, or the use by third parties, of these materials, and our liability under a claim of this nature may exceed our total assets. Compliance with environmental laws and regulations is expensive, and current or future environmental regulations may impair our research, development or production efforts.

Concentration of ownership among some of our stockholders may prevent other stockholders from influencing significant corporate decisions. *

As of March 31, 2009, approximately 51% of our common stock is beneficially held by our directors, our executive officers, and greater than five percent stockholders. Consequently, a small number of our stockholders may be able to substantially influence our management and affairs. If acting together, they would be able to influence most matters requiring the approval by our stockholders, including the election of directors, any merger, consolidation or sale of all or substantially all of our assets and any other significant corporate transaction. The concentration of ownership may also delay or prevent a change in control of Monogram Biosciences at a premium price if these stockholders oppose it.

If our stockholders or convertible note holders sell substantial amounts of our common stock, the market price of our common stock may fall. *

If our stockholders or convertible note holders sell substantial amounts of our common stock, including shares issued upon the exercise of outstanding options, or conversion of our outstanding convertible debt, the market price of our common stock may fall. As of March 31, 2009, we had outstanding options under our employee stock options plan to purchase approximately 4.8 million shares of our common stock, which represents 21% of our common stock outstanding on March 31, 2009, at a weighted-average price of $10.59 per share. Our outstanding convertible notes are convertible at the option of the holders into shares of our common stock. We registered both the shares of common stock issuable upon conversion of the 0% Notes and the shares issuable upon conversion of the Pfizer Note. Accordingly, so long as these registration statements are effective, the common stock issued upon conversion of the 0% Notes and the Pfizer Note will be freely tradable in the public markets without restriction. The conversion of these notes into common stock could result in the issuance of a substantial number of shares and substantial dilution to our stockholders. Sales of substantial amounts of our common stock, including hedging activities by our convertible note holders, or the perception that such sales could occur, whether currently outstanding, or issued as the result of option exercises or conversion of convertible debt, might also make it more difficult for us to sell equity or equity-related securities in the future at a time and price that we deem appropriate. Sales of a substantial number of shares could occur at any time. This may decrease the price of our common stock and may impair our ability to raise capital in the future.

Provisions of our charter documents and Delaware law may make it difficult for our stockholders to replace our management and may inhibit a takeover, either of which could limit the price investors might be willing to pay in the future for our common stock.

Provisions in our certificate of incorporation and bylaws may make it difficult for our stockholders to replace or remove our management, and may delay or prevent an acquisition or merger in which we are not the surviving company. In particular:

•

Our board of directors is classified into three classes, with only one of the three classes elected each year, so that it would take at least two years to replace a majority of our directors;

•

Our bylaws contain advance notice provisions that limit the business that may be brought at an annual meeting and place procedural restrictions on the ability to nominate directors; and

•

Our common stockholders are not permitted to call special meetings or act by written consent.

Because we are incorporated in Delaware, we are governed by the provisions of Section 203 of the Delaware General Corporation Law. These provisions could discourage changes of our management and acquisitions or other changes in our control and otherwise limit the price that investors might be willing to pay in the future for our common stock.

We could adopt a stockholder rights plan, commonly referred to as a “poison pill,” at any time without seeking the approval of our stockholders. Stockholder rights plans can act through a variety of mechanisms, but typically would allow our board of directors to declare a dividend distribution of preferred share purchase rights on outstanding shares of our common stock. Each such share purchase right would entitle our stockholders to buy a newly created series of preferred stock in the event that the purchase rights

become exercisable. The rights would typically become exercisable if a person or group acquires over a predetermined portion of our common stock or announces a tender offer for more than a predetermined portion of our common stock. Under such a stockholder rights plan, if we were acquired in a merger or other business combination transaction which had not been approved by our board of directors, each right would entitle its holder to purchase, at the right’s then-current exercise price, a number of the acquiring company’s common shares at a price that is preferential to the holder of the right. If adopted by the our board of directors, a stockholder rights plan may have the effect of making it more difficult for a third party to acquire, or discourage a third party from attempting to acquire, control of us.

Our stock price may be volatile, and our common stock could decline in value or may be delisted from the NASDAQ Global Market. *

The market prices for securities of biotechnology companies in general have been highly volatile and may continue to be highly volatile in the future. Our stock price has fluctuated widely during the last few years from a low closing price of $1.64 per share in December 2008 to a high of $26.10 per share in January 2004. The following factors, in addition to other risk factors described in this section, may have a significant negative impact on the market price of our common stock:

•

period-to-period fluctuations in financial results;

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actions by the company (including investor’s perceptions) related to potential future needs to finance operations and repay or restructure our convertible debt;

•

hedging activities by holders of our convertible notes;

•

litigation;

•

delays in product introduction, launches or enhancements, including delays in completing the development of the VeraTag technology and products based on that technology;

•

announcements of technological innovations or new commercial products by our competitors;

•

results from clinical studies;

•

adverse developments in the clinical trials of drugs under development by our pharmaceutical company customers;

•

adverse clinical or regulatory developments related to drugs, such as Pfizer’s Selzentry , for which our tests are used in patient selection or monitoring;

•

developments concerning proprietary rights, including patents;

•

publicity regarding actual or potential clinical results relating to products under development by our competitors or our own products or products under development;

•

regulatory developments in the United States and foreign countries;

•

changes in payer reimbursement policies or developments related to the potential reimbursement of new products such as Trofile;

•

limitations on the ability to recognize revenue from complex collaborations; and

•

economic and other external factors or other disaster or crisis.

A low or volatile stock price may negatively impact our ability to raise capital and to attract and maintain key employees. Additionally, in order for our common stock to continue to be quoted on the NASDAQ Global Market, or NASDAQ, we must satisfy various listing maintenance standards established by the NASDAQ, including, among other things, requirements that our stock price consistently trades at or above $1.00 per share and that the total market value of our common stock exceed $50,000,000. We have had and may continue to have periods when our stock has not traded at, or the market value of our common stock has been below, the levels required by NASDAQ rules.

If we were to be delisted from the NASDAQ and move to an alternative market, which may be less efficient and less broad-based, we may have difficulty accessing capital markets for additional funding, and our stockholders may experience reduced liquidity. Delisting could also have other negative results, including the potential loss of confidence by employees, the loss of institutional investor interest and fewer business development opportunities. In addition, if at any time we are not listed on the NASDAQ, or approved for trading and/or eligible for quotation on an established automated over-the-counter trading market in the United States, including the OTC Bulletin Board, our outstanding convertible notes are subject to repurchase, which could have a severe adverse affect to our financial position.

Unstable market conditions may have serious adverse consequences on our business.

The recent economic downturn and market instability has made the business climate more volatile and more costly. Our general business strategy may be adversely affected by unpredictable and unstable market conditions. If the current equity and credit markets deteriorate further, or do not improve, it may make any necessary debt or equity financing more difficult, more costly, and more dilutive. While we believe we have adequate capital resources to meet current working capital and capital expenditure requirements, a radical economic downturn or increase in our expenses could require additional financing on less than attractive rates or on terms that are excessively dilutive to existing stockholders. Failure to secure any necessary financing in a timely manner and on favorable terms could have a material adverse effect on our growth strategy, financial performance and stock price and could require us to delay or abandon clinical development plans or plans to acquire additional technology.

There is a risk that one or more of our current service providers, manufacturers and other partners may encounter difficulties during challenging economic times, which would directly affect our ability to attain our operating goals on schedule and on budget.

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

The following sets forth the number of shares of our common issued in the third quarter of 2008. For these issuances, we relied on the exemption provided by Section 4(2) of the Securities Act of 1933, as amended (the “Securities Act”) as they did not involve any public offering:

On January 1, 2009, we issued 91,483 shares of our common stock to Pfizer Inc representing an interest payment of approximately $0.2 million under the 3.0% Senior Secured Convertible Note due May 19, 2010, as amended and restated January 12, 2007.

Item 3.

Defaults Upon Senior Securities

None.

Item 4.

Submission of Matters to a Vote of Security Holders

None.

Item 5.

Other Information

None.

Item 6.

Exhibits


Exhibit Footnote	Exhibit Number
(1)	2.1	Agreement and Plan of Merger and Reorganization, dated as of May 28, 2004, by and among ViroLogic, Inc., Apollo Acquisition Sub, Inc., Apollo Merger Subsidiary, LLC and ACLARA BioSciences, Inc.

(2)	2.2	Amendment No. 1 to Agreement and Plan of Merger and Reorganization, dated as of October 18, 2004, by and among ViroLogic, Inc., Apollo Acquisition Sub, Inc., Apollo Merger Subsidiary, LLC and ACLARA BioSciences, Inc.

(3)	3.1	Amended and Restated Certificate of Incorporation, filed July 17, 2000.

(3)	3.1.1	Certificate of Amendment to Amended and Restated Certificate of Incorporation, filed February 4, 2003.

(4)	3.1.2	Certificate of Amendment to Amended and Restated Certificate of Incorporation, filed December 10, 2004.

(5)	3.1.3	Certificate of Ownership and Merger, filed September 6, 2005.

(6)	3.1.4	Certificate of Amendment of Amended and Restated Certificate of Incorporation, filed November 3, 2008.

(3)	3.2	Certificate of Designations, Preferences and Rights of Series A Convertible Preferred Stock, filed June 29, 2001.

(3)	3.2.1	Certificate of Correction to Certificate of Designations, Preferences and Rights of Series A Convertible Preferred Stock, filed July 23, 2001.

(3)	3.3	Certificate of Designations, Preferences and Rights of Series B Convertible Preferred Stock, filed March 22, 2002.

(3)	3.4	Certificate of Designations, Preferences and Rights of Series C Convertible Preferred Stock, filed November 15, 2002.

(3)	3.4.1	Certificate of Amendment to Certificate of Designations, Preferences and Rights of Series C Convertible Preferred Stock, filed February 4, 2003.

(7)	3.5	Amended and Restated Bylaws.

	4.1	Reference is made to Exhibits 3.1 through 3.5.

(6)	4.2	Specimen Stock Certificate.

(4)	4.3	Contingent Value Rights Agreement, dated December 10, 2004, by and between ViroLogic, Inc., and U.S. Bank National Association as trustee.

(8)	4.4	Form of Indenture by and between Monogram Biosciences, Inc. and U.S. Bank National Association, as trustee.

(9)	4.5	Form of (Common) Stock Purchase Warrant issued to holders of Series A Redeemable Convertible Preferred Stock.

	31.1	Certification of Chief Executive Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a) promulgated under the Securities Exchange Act of 1934.

	31.2	Certification of Chief Financial Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a) promulgated under the Securities Exchange Act of 1934.

	32.1	Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350 and Rule 13a-14(b) or Rule 15d-14(b) promulgated under the Securities Exchange Act of 1934.

(1)	Filed as an exhibit to our Current Report on Form 8-K filed on June 1, 2004 and incorporated herein by reference.

(2)	Filed as an exhibit to our Current Report on Form 8-K filed on October 19, 2004 and incorporated herein by reference.

(3)	Filed as an exhibit to our Registration Statement on Form S-3 (No. 333-102995) filed on February 5, 2003 and incorporated herein by reference.

(4)	Filed as an exhibit to our Current Report on Form 8-K filed on December 10, 2004 and incorporated herein by reference.

(5)	Filed as an exhibit to our Current Report on Form 8-K filed on September 8, 2005 and incorporated herein by reference.

(6)	Filed as an exhibit to our Current Report on Form 8-K filed on November 4, 2008 and incorporated herein by reference.

(7)	Filed as an exhibit to our Current Report on Form 8-K on December 10, 2007 and incorporated herein by reference.

(8)	Filed as an exhibit to our Current Report on Form 8-K filed on January 12, 2007 and incorporated herein by reference.

(9)	Filed as an exhibit to our Current Report on Form 8-K filed on March 26, 2002 and incorporated herein by reference.

MONOGRAM BIOSCIENCES, INC.

SIGNATURES

Pursuant to the requirements of the Securities Act of 1934, as amended, the registrant has duly caused this Quarterly Report on Form 10-Q to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of South San Francisco, County of San Mateo, State of California, on May 6, 2009.


Monogram Biosciences, Inc.

By:		/s/ William D. Young
		William D. Young
		Chief Executive Officer
		(On Behalf of the Registrant)

		/s/ Alfred G. Merriweather
		Alfred G. Merriweather
		Senior Vice President and Chief Financial Officer
		(Principal Financial and Accounting Officer)

MONOGRAM BIOSCIENCES, INC.

EXHIBIT INDEX


Exhibit Footnote	Exhibit Number
(1)	2.1	Agreement and Plan of Merger and Reorganization, dated as of May 28, 2004, by and among ViroLogic, Inc., Apollo Acquisition Sub, Inc., Apollo Merger Subsidiary, LLC and ACLARA BioSciences, Inc.

(2)	2.2	Amendment No. 1 to Agreement and Plan of Merger and Reorganization, dated as of October 18, 2004, by and among ViroLogic, Inc., Apollo Acquisition Sub, Inc., Apollo Merger Subsidiary, LLC and ACLARA BioSciences, Inc.

(3)	3.1	Amended and Restated Certificate of Incorporation, filed July 17, 2000.

(3)	3.1.1	Certificate of Amendment to Amended and Restated Certificate of Incorporation, filed February 4, 2003.

(4)	3.1.2	Certificate of Amendment to Amended and Restated Certificate of Incorporation, filed December 10, 2004.

(5)	3.1.3	Certificate of Ownership and Merger, filed September 6, 2005.

(6)	3.1.4	Certificate of Amendment of Amended and Restated Certificate of Incorporation, filed November 3, 2008.

(3)	3.2	Certificate of Designations, Preferences and Rights of Series A Convertible Preferred Stock, filed June 29, 2001.

(3)	3.2.1	Certificate of Correction to Certificate of Designations, Preferences and Rights of Series A Convertible Preferred Stock, filed July 23, 2001.

(3)	3.3	Certificate of Designations, Preferences and Rights of Series B Convertible Preferred Stock, filed March 22, 2002.

(3)	3.4	Certificate of Designations, Preferences and Rights of Series C Convertible Preferred Stock, filed November 15, 2002.

(3)	3.4.1	Certificate of Amendment to Certificate of Designations, Preferences and Rights of Series C Convertible Preferred Stock, filed February 4, 2003.

(7)	3.5	Amended and Restated Bylaws.

	4.1	Reference is made to Exhibits 3.1 through 3.5.

(6)	4.2	Specimen Stock Certificate.

(4)	4.3	Contingent Value Rights Agreement, dated December 10, 2004, by and between ViroLogic, Inc., and U.S. Bank National Association as trustee.

(8)	4.4	Form of Indenture by and between Monogram Biosciences, Inc. and U.S. Bank National Association, as trustee.

(9)	4.5	Form of (Common) Stock Purchase Warrant issued to holders of Series A Redeemable Convertible Preferred Stock.

	31.1	Certification of Chief Executive Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a) promulgated under the Securities Exchange Act of 1934.

	31.2	Certification of Chief Financial Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a) promulgated under the Securities Exchange Act of 1934.

	32.1	Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350 and Rule 13a-14(b) or Rule 15d-14(b) promulgated under the Securities Exchange Act of 1934.

(1)	Filed as an exhibit to our Current Report on Form 8-K filed on June 1, 2004 and incorporated herein by reference.

(2)	Filed as an exhibit to our Current Report on Form 8-K filed on October 19, 2004 and incorporated herein by reference.

(3)	Filed as an exhibit to our Registration Statement on Form S-3 (No. 333-102995) filed on February 5, 2003 and incorporated herein by reference.

(4)	Filed as an exhibit to our Current Report on Form 8-K filed on December 10, 2004 and incorporated herein by reference.

(5)	Filed as an exhibit to our Current Report on Form 8-K filed on September 8, 2005 and incorporated herein by reference.

(6)	Filed as an exhibit to our Current Report on Form 8-K filed on November 4, 2008 and incorporated herein by reference.

(7)	Filed as an exhibit to our Current Report on Form 8-K on December 10, 2007 and incorporated herein by reference.

(8)	Filed as an exhibit to our Current Report on Form 8-K filed on January 12, 2007 and incorporated herein by reference.

(9)	Filed as an exhibit to our Current Report on Form 8-K filed on March 26, 2002 and incorporated herein by reference.

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