<PAGE>

                UNITED STATES SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

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

                                    FORM 10-K

(Mark One)
   [X]  ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
        ACT OF 1934

        FOR THE FISCAL YEAR ENDED DECEMBER 31, 2004,

                                       OR
   [ ]  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: 000-31745

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

                          THIRD WAVE TECHNOLOGIES, INC.
             (Exact name of Registrant as specified in its charter)

            DELAWARE                                           39-1791034
(State or other jurisdiction of                              (I.R.S. Employer
 incorporation or organization)                             Identification No.)

      502 S. ROSA ROAD, MADISON, WI                                53719
(Address of principal executive offices)                        (Zip Code)

                                 (888) 898-2357
              (Registrant's telephone number, including area code)

      SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE EXCHANGE ACT:
                                      NONE

      SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE EXCHANGE ACT:

                     COMMON STOCK, $.001 PAR VALUE PER SHARE
                         PREFERRED STOCK PURCHASE RIGHTS
                                (Title of Class)

      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 if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. Yes [ ] No [X]

      Indicate by check whether the Registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2 of the Exchange Act). Yes [X] No [ ]

      The aggregate market value of the registrant's voting stock held by
non-affiliates of the registrant (without admitting that any person whose shares
are not included in such calculation is an affiliate), computed by reference to
the last sale price of the common stock of the registrant on June 30, 2004, as
reported by The Nasdaq Stock Market, was $153,402,137.

      As of the close of business on March 10, 2005, the registrant had
41,152,891 shares of common stock outstanding.

                       DOCUMENTS INCORPORATED BY REFERENCE

      The following documents (or parts thereof) are incorporated by reference
into the following parts of this Form 10-K: Certain information required in Part
III of this Annual Report on Form 10-K is incorporated from the Registrant's
Proxy Statement for the Annual Meeting of Stockholders to be held on June 14,
2005.

<PAGE>

                             THIRD WAVE TECHNOLOGIES

                                    FORM 10-K
                      FOR THE YEAR ENDED DECEMBER 31, 2004

                                TABLE OF CONTENTS

<TABLE>
<CAPTION>
                                                                            PAGE
<S>                                                                         <C>
     PART I

Item 1.  Business........................................................     3
Item 2.  Properties......................................................    22
Item 3.  Legal Proceedings...............................................    22
Item 4.  Submission of Matters to a Vote of Security Holders.............    22
     PART II
Item 5.  Market for Registrant's Common Equity, Related
         Stockholder Matters and Issuer Purchases of Equity Securities ..    22
Item 6.  Selected Financial Data.........................................    23
Item 7.  Management's Discussion and Analysis of Financial
         Condition and Results of Operations.............................    23
Item 7A. Quantitative and Qualitative Disclosures about Market
         Risk............................................................    28
Item 8.  Financial Statements and Supplementary Data.....................    30
Item 9.  Changes in and Disagreements with Accountants on
         Accounting and Financial Disclosure.............................    47
Item 9A. Controls and Procedures.........................................    47
Item 9B. Other Information...............................................    49
     PART III
Item 10. Directors and Executive Officers of the Registrant..............    49
Item 11. Executive Compensation..........................................    49
Item 12. Security Ownership of Certain Beneficial Owners and
         Management and Related Stockholder Matters......................    49
Item 13. Certain Relationships and Related Transactions..................    49
Item 14. Principal Accountant Fees and Services..........................    49
     PART IV
Item 15. Exhibits and Financial Statements Schedules.....................    49
Signatures...............................................................    50
</TABLE>

FORWARD-LOOKING STATEMENTS

      This Form 10-K contains forward-looking statements within the meaning of
Section 21E of the Securities Exchange Act of 1934, as amended, and Section 27A
of the Securities Act of 1933, as amended. When used in this Form 10-K, the
words "believe," "anticipates," "intends," "plans," "estimates," and similar
expressions are forward-looking statements. Such forward-looking statements
contained in this Form 10-K are based on management's current expectations.
Forward-looking statements may address the following subjects: results of
operations; customer growth and retention; development of technologies; losses
or earnings; operating expenses, including, without limitation, marketing
expense and technology and development expense; and revenue growth. We caution
investors that there can be no assurance that actual results, outcomes or
business conditions will not differ materially from those projected or suggested
in such forward-looking statements as a result of various factors, including,
among others, our limited operating history, unpredictability of future revenues
and operating results, competitive pressures and also the potential risks and
uncertainties set forth in the "Overview" section of Item 7 hereof and in the
"Risk Factors" section of Item 1 hereof.

      You should also carefully consider the factors set forth in other reports
or documents that we file from time to time with the Securities and Exchange
Commission. Except as required by law, we undertake no obligation to update any
forward-looking statements.

      In this Form 10-K, we refer to information regarding our potential markets
and other industry data. We believe that all such information has been obtained
from reliable sources that are customarily relied upon by companies in our
industry. However, we have not independently verified any such information.

                                       2
<PAGE>

      In this Form 10-K, the terms "we," "us," "our," "Company" and "Third Wave"
each refer to Third Wave Technologies, Inc. and its subsidiaries, unless the
context requires otherwise.

      In the United States, France and the United Kingdom our registered
trademarks are Cleavase(R) and Invader(R). Cleavase, CFLP and Invader are
registered in Germany. CFLP and Invader are also registered in Japan. A
trademark application for InvaderCreator(TM) is pending in the United States,
France, Germany, the United Kingdom and Japan. A trademark application is
pending in the United States for Third Wave and Invader Plus.

                                     PART I

ITEM 1.  BUSINESS

OVERVIEW

      Third Wave Technologies, Inc. develops and markets molecular diagnostics
for a variety of DNA and RNA analysis applications, providing clinicians and
researchers with superior molecular solutions. Our products are based on our
proprietary Invader(R) chemistry. It is a novel, chemistry-based platform that
we believe is easier to use, more accurate and cost-effective, and enables
higher throughput compared to other methods of DNA and RNA analysis. Third Wave
was incorporated in California in 1993 and reincorporated in Delaware in 2000.

      The market of greatest application and commercial opportunity for Third
Wave's Invader(R) chemistry is molecular diagnostics. We believe this market is
approximately $1.4 billion worldwide today, growing to $2.4 billion by 2008.
Within this market, there are a number of diverse segments, including genetics/
pharmacogenetics, infectious disease/women's health, and oncology/chromosomal
analysis, for which the Company's chemistry is particularly well-suited. In
addition to this market of primary focus, the utility of the Invader(R)
chemistry extends beyond molecular diagnostics to include research,
agriculture/biotechnology ("Agbio") and other applications.

TECHNOLOGY

The Invader(R) Chemistry

      The Invader(R) chemistry is a simple, scalable and accurate DNA and RNA
analysis solution designed to enable any size highly-complex laboratory licensed
under the Clinical Laboratory Improvement Amendments of 1988 ("CLIA") to provide
patient results more quickly, increase throughput, and lower costs. The
Invader(R) chemistry is a simple, isothermal, DNA probe-based reaction that
detects specific genomic sequences or variations.

      The Company announced during 2004 that it will enhance its product
capabilities through the coupling of the performance and flexibility of the
Invader(R) chemistry with the sensitivity of a rudimentary form of polymerase
chain reaction whose patents expire at the end of March 2005. The Company
believes that the combination of these two fundamental chemistries will bring
the best of both to its customers, enabling them to perform complicated
molecular testing more easily and more rapidly.

      Third Wave has developed, and plans to continue to develop, a line of
high-value, molecular diagnostic products based on its Invader chemistry for the
following applications:

Clinical Applications

The Invader(R) chemistry is highly flexible and can be used for a number of
clinical applications:

      -     Genetics/Pharmacogenetics - Detecting genetic variation associated
            with inherited conditions such as cystic fibrosis, hemostasis and
            cardiovascular risk factors, and those associated with drug efficacy
            and adverse drug reactions.

      -     Infectious Disease/Women's Health - Confirming diagnosis,
            quantifying viral load and genotyping to optimize therapy for
            infectious diseases such as hepatitis B and C, HIV and the human
            herpes virus family, and for detecting human papilloma virus (HPV)
            strains.

                                       3
<PAGE>

      -     Oncology/Chromosomal Analysis - Prenatal detection of genetic
            variation associated with chromosomal disorders and oncology
            applications including cancer detection and disease monitoring.

Other Applications

      The Invader(R) chemistry is a universal detection and analysis solution
for DNA and RNA. In addition to our growing menu of clinical products, there are
a number of other Invader(R) applications including:

      -     Research - Tools and assays to facilitate research in existing and
            emerging applications.

      -     AgBio - Multiple DNA and RNA analysis tools for use in the field of
            agriculture.

      -     Other Applications - Potential application in areas including food
            and water testing, bioterrorism and blood screening.

THIRD WAVE MISSION AND CORPORATE STRATEGY

      Third Wave's mission is to be a leading provider of superior molecular
solutions. The Company seeks to achieve this mission by continuing to convert
its proprietary Invader(R) molecular chemistry into valuable molecular
diagnostic and research products.

      To achieve our mission, we have implemented a strategy to:

      -     Grow our U.S. clinical molecular diagnostic revenue through our
            growing product menu by using our strong U.S. distribution and
            thought leader networks.

      -     Continue to expand our pipeline of molecular diagnostic products and
            enhance our product capabilities.

      -     Assess and, where appropriate, pursue incremental opportunities,
            e.g., the European and Japanese markets or additional product
            applications, above and beyond our primary focus of growing U.S.
            clinical molecular diagnostic revenue.

      -     Partner where necessary to optimize our opportunities in molecular
            diagnostics and in markets where the Invader(R) chemistry can create
            unique competitive advantages.

INDUSTRY BACKGROUND

      Prior to the late 1990s, many diagnostic testing methods had limited
accuracy and served primarily as guides to analysis. This is changing with the
emergence of nucleic acid testing, also referred to as NAT or molecular
diagnostic testing.

      Nucleic acid testing is the direct analysis of DNA or RNA. Nucleic acid
testing is accomplished through genotyping, determining whether a variation or
series of variations are present in an individual, or gene expression analysis,
determining the level of activity of a specific gene by quantitating the
messenger RNA, or mRNA, it is producing. The accuracy and sensitivity advantages
of this testing method allow for the direct detection of DNA and RNA, hereditary
diseases, and pathogens, rather than monitoring antigens or antibodies. NAT was
initially used primarily for HIV and blood screening, but it is rapidly
displacing conventional testing methods as the industry standard for a variety
of applications. For example, the need to perform accurate and high-throughput
blood screening and tests for infectious diseases/viral loads has resulted in
NAT replacing immunotechnology (immuno assays) as the solution of choice among
many clinical labs.

      Ongoing scientific research has helped determine that a majority of human
diseases have genetic components. The monumental mapping and sequencing of the
entire human genome, through the Human Genome Project and subsequent research
initiatives, are being translated into precise clinical applications to diagnose
and treat disease. As a result, hundreds of molecular diagnostic tests based on
NAT technology are now being used to identify variations in DNA sequence to
detect disease or highlight genetic predispositions. Furthermore, researchers'
continuing progress in understanding disease and definitively linking particular
diseases to an individual's DNA and RNA have caused key medical thought leaders
to introduce new screening guidelines that incorporate NAT.

                                       4
<PAGE>
      The availability of the human genome sequence, combined with an
ever-growing list of known variations in DNA sequence and advances in our
understanding of the cause and progression of disease, will likely result in the
emergence of additional NAT applications. As a result, we believe that a
significant increase in demand for gene-based tests will occur in the coming
years.

LIMITATIONS OF CONVENTIONAL METHODS VERSUS THE THIRD WAVE SOLUTION

      A limited number of chemistry platforms are presently capable of
performing NAT, including the following:

<TABLE>
<CAPTION>
     NAME                   PLATFORM                              STATUS
--------------     ---------------------------   -------------------------------------------
<S>                <C>                           <C>
PCR                Target Amplification          Most commonly used technology
TMA/NASBA          Target Amplification          Market leader for blood screening
Hybrid Capture     Signal Amplification          Currently used primarily for HPV testing
Ligation           Signal Amplification          Primarily used in cystic fibrosis testing
INVADER(R)         Signal Amplification          Rapid adoption across multiple applications
Invader Plus(TM)   Target/Signal Amplification   New capability for widespread applications
</TABLE>

      Today, many methods for analyzing genetic variations are based on
hybridization in combination with polymerase chain reaction ("PCR").

      We believe the Invader(R) and Invader Plus chemistries offer competitive
advantages compared to the other forms of NAT, including:

      -     Exceptional Accuracy - The Invader(R) chemistry has demonstrated a
            level of accuracy surpassing the accuracy of other genetic analysis
            methods in multiple studies (see, e.g., Patnaik et. al. J. Mol
            Diagn 2004, 6:137-144).

      -     Ease of Use - Invader(R) products are extremely easy to use for
            technicians of any skill level. Assays are performed at a single
            temperature and require no laborious washing steps or gels. Assay
            setup requires a simple addition of the reagents to the sample and
            can be completed with minimal hands-on time. Following setup, the
            Invader(R) chemistry is hands-off. During the incubation at a single
            temperature, technicians are free to perform additional duties.

      -     Flexibility/Scalability - The Invader(R) chemistry is highly
            scalable, allowing any CLIA-high complexity lab, regardless of size,
            to take advantage of its benefits.

      -     Throughput - The Invader(R) chemistry offers customers a higher
            throughput potential than other methods, providing cost and
            time-saving benefits.

PRODUCTS AND PRODUCT CANDIDATES

      Third Wave has applied the Company's proprietary Invader(R) chemistry to a
number of molecular diagnostic, research and other applications. The Company has
a pipeline of new products under development, which it anticipates releasing
during 2005 and beyond. The Company is assessing the feasibility of a number of
other applications.

Molecular Diagnostics

PRODUCTS ON THE MARKET

      -     HCV (Hepatitis C virus)

      -     CFTR (cystic fibrosis gene)

      -     CYP450 2D6 (drug response variability, adverse drug reactions)

      -     HPV (human papilloma virus)

      -     Connexin 26 (congenital hearing loss)

                                       5
<PAGE>

      -     Factor V Leiden (mutations associated with risk of increased
            coagulation)

      -     Factor II (mutations associated with risk of increased coagulation)

      -     MTHFR (metabolic enzyme associated with cardiovascular disease)

      -     ApoE (mutations associated with cardiovascular disease)

PRODUCTS IN DEVELOPMENT OR BEING ASSESSED FOR FEASIBILITY

      -     CFTR with microfluidic format (2005 release)

      -     Herpes Simplex Viruses 1 and 2 (2005 release)

      -     Varicella-Zoster Virus (2005 release)

      -     Cytomegalovirus (2005 release)

      -     Epstein-Barr Virus (2005 release)

      -     HCV Viral Load (quantification of virus multiplication for prognosis
            and therapy optimization)

      -     Chlamydia

      -     Gonorrhea

      -     HIV Viral Load

      -     HBV (strain determination and therapy optimization for Hepatitis B)

      -     Group B Streptococcus

      -     Subtelomere Scan (2006-2008 release)

      -     Microdeletion Syndromes (2006-2008 release)

      -     UGT1A1

      -     Fragile X

      -     Ashkenazi Jewish Mutations

      -     Various additional CYP450 Products (identification of drug response
            variability to minimize adverse drug reactions and optimize therapy)

The Company also has developed a number of DNA and RNA analysis products for the
research and agricultural biotechnology markets.

Incremental Product Application Opportunities

      We believe the Invader(R) chemistry has demonstrated potential for a
number of additional applications outside of our primary area of focus. The
Company has strategically chosen to approach each of these applications
opportunistically instead of initiating active programs. These areas of
incremental opportunity include:

      -     Blood screening

      -     Bioterrorism

                                       6
<PAGE>

      -     Food and water safety

      -     Environmental health and safety

      -     Wellness

MANUFACTURING

      We currently manufacture products at our facility in Madison, Wisconsin.
We also outsource the manufacture of select components intended for research
applications. We work closely with the vendor of these components to optimize
the manufacturing process, monitor quality control and ensure compliance with
our product specifications.

      Third Wave has sufficient capacity to meet our customer requirements,
scalable manufacturing systems, and possesses the expertise to manufacture the
Company's products.

      Our molecular diagnostics products are produced in environmentally
controlled rooms isolated from the rest of the facility. We have registered the
facility used for manufacturing our clinical products with the U.S. Food and
Drug Administration, or FDA, as a Device Manufacturer and we believe we are in
substantial compliance with the FDA's quality system requirements or QSRs. The
Company also has achieved ISO 13485:2003 Certification, a stringent,
globally-recognized standard of quality management for medical device
manufacturers.

MARKETING AND SALES

      We currently market and sell our products in the United States through a
combination of direct sales personnel, who are focused primarily on the
clinical market, and through collaborative relationships. Our clinical sales
force is comprised of 31 direct sales representatives and technical support
personnel. We plan to increase our sales force as market demand requires. The
clinical sales force targets high volume clinical and reference laboratories
that meet the criteria for highly-complex CLIA laboratories.

      Third Wave has more than 110 clinical testing customers in the United
States. We serve most major clinical laboratories that perform molecular
testing. Third Wave has established a strong and direct presence in Japan. Our
products for the research market are sold primarily through collaborative
relationships with research institutions and pharmaceutical companies focused on
the life sciences in humans, plants, and animals. We also appear at industry
trade shows in connection with our marketing efforts.

      During 2004, the majority of our product sales were to international end
customers, primarily in Japan. We intend to continue to pursue domestic and
international market opportunities through a combination of direct sales,
distribution arrangements and collaborative relationships. In 2002, we
established a wholly-owned subsidiary for the purpose of working more directly
with our customers, collaborators, and distributors in the Japanese market. We
have two employees based in Japan. We also may establish direct international
sales organizations in other select major markets. In 2004, Third Wave entered
into a limited-term distribution arrangement for a limited number of its
products in the European market with Innogenetics, N.V.

      For a description of our industry segment and our product revenues by
geographic area, see Note 11 of the Notes to the Consolidated Financial
Statements included under Item 8 of this Form 10-K.

      The Company's business is generally not seasonal.

COLLABORATIVE RELATIONSHIPS

      Our business involves collaborations with clinical laboratory companies,
instrument companies, pharmaceutical companies and academic institutions. We
have entered into a number of collaboration agreements and continue to assess
additional relationships for the supply, distribution and development of our
products. The following is a summary of our principal collaborative
relationships.

                                       7
<PAGE>

BML

      In December 2000, Third Wave entered into a development and
commercialization agreement with BML, Inc., ("BML"), one of the two largest
clinical reference laboratories in Japan. Through this agreement, the companies
are collaborating to develop and commercialize molecular diagnostics for
infectious disease, genetic testing and pharmacogenomics. Under the agreement,
Third Wave develops mutually agreed upon clinical assays, and BML reimburses
development expenses and purchases final product. As provided by the terms of
the agreement, Third Wave develops and supplies BML with clinical assays at
preferential prices. Third Wave has certain rights to commercialize the
developed assays worldwide; however, such commercialization rights are limited
in Japan depending on BML's intellectual property surrounding the specific
assay. Further, BML has the right to negotiate the terms and conditions under
which BML would have the right to use the developed assays for providing
clinical testing services in Japan. The term of the agreement is until December
31, 2009.

ACLARA BIOSCIENCES, INC./VIROLOGIC, INC.

      In October 2002, Third Wave entered into limited license and supply
agreements with ACLARA BioSciences, Inc. ("Aclara") under which Aclara has
nonexclusive rights to incorporate our proprietary Invader(R) chemistry and
Cleavase(R) enzyme with Aclara's eTag(TM) technology platform for multiplexed
gene expression applications for the research market.

      In exchange for the license, Aclara made up-front payments and will make
royalty payments based on sales of the Aclara product. The license, supply and
Invader Creator software access agreements supercede the research, development
and collaboration agreement between the parties that was announced and executed
in October 2001. On December 10, 2004, Aclara was acquired by Virologic, Inc.

UNIVERSITY OF TOKYO/RIKEN

      In 2003, Third Wave entered into a collaboration with the University of
Tokyo to support the genetic research efforts directed by Dr. Yusuke Nakamura,
group director of the Research Group for Personalized Medicine at RIKEN and
director of the Genome Center at the University of Tokyo. Dr. Nakamura is widely
regarded as one of the world's leading genetic researchers and he is the leader
of the Japanese portion of the International HapMap Project as well as other
large-scale genotyping projects.

      The HapMap Project is a worldwide initiative intended to create a map of
common patterns of single nucleotide polymorphisms, or SNPs. SNPs are
single-based variations scattered throughout the human genome and are believed
to be the cause of most genetic variations from hair color to disease
susceptibility. Researchers believe that mapping SNPs will assist in the
understanding and analysis of human disease and drug response. In addition to
its ongoing support of the HapMap related research, Third Wave also will support
Dr. Nakamura for other research projects.

INTELLECTUAL PROPERTY

      We have implemented a patent strategy designed to provide us with freedom
to operate and facilitate commercialization of our current and future products.
We currently own 34 issued U.S. patents, and hold exclusive licenses to two
issued patents in the United States, own five issued patents in Australia, two
issued patents in Canada and one issued European Cooperative patent. We have
received notices of allowance for 6 additional U.S. patent applications. We have
53 additional U.S. patent applications pending. In addition, we have licensed
rights to patent applications pending in the United States, Japan and other
major industrialized nations, covering genetic variations associated with drug
metabolism. We also have licensed rights to patents and/or patent applications
covering genetic variations associated with certain diseases for which we have
designed clinical diagnostic products. Reflecting our international business
strategy, we have foreign filings in major industrialized nations corresponding
to each major technology area represented in our U.S. patent and application
claims.

      Our issued, allowed and pending patents distinguish us from competitors by
claiming proprietary methods and compositions for analysis of DNA and RNA,
either genomic or amplified, using structure-specific cleavage processes and
compositions. Issued and pending claims are included for assay design methods
and compositions, as well as for use of the technology in various read-out
formats such as fluorescence resonance energy transfer, mass spectrometry or in
conjunction with solid supports such as micro latex beads or chips. We also have
issued and pending claims covering oligonucleotide design production systems and
methods. These methods also allow multiplexing or analysis of more than one
sample in a single reaction, enabling the system to be easily amenable to a wide
range of automated and non-automated detection methods.

                                       8
<PAGE>
      The Company's issued U.S. patents will expire between 2012 and 2020. Our
success depends, to a significant degree, on our ability to develop proprietary
products and technologies. We intend to continue to file patent applications as
we develop new products, technologies and patentable enhancements. Prosecution
practices have been implemented to avoid any applicant delays that could
compromise the guaranteed minimum patent term. There can be no guarantee,
however, that such procedures will prevent the loss of a potential patent term.

      Complex legal and factual determinations and evolving laws make patent
protection uncertain. As a result, we cannot be certain that patents will be
issued from any of our pending patent applications or from applications licensed
to us or that any issued patents will have sufficient breadth to offer
meaningful protection. In addition, our issued patents or patents licensed to us
may be successfully challenged, invalidated, circumvented or found unenforceable
so that our patent rights would not create an effective competitive barrier.
Moreover, the laws of some foreign countries may not protect our proprietary
rights to the same extent as do U.S. patent laws.

      In addition to patent protection, we rely on copyright and trade secret
protection of our intellectual property. We attempt to protect our trade secrets
by entering into confidentiality agreements with third parties, employees and
consultants. Our employees and consultants are required to sign agreements to
assign to us their interests in discoveries, inventions, patents and copyrights
arising from their work for us. They are also required to maintain the
confidentiality of our intellectual property, and refrain from unfair
competition with us during their employment and for a period of time after their
employment with us, including solicitation of our employees and customers. We
cannot be certain that these agreements will not be breached or invalidated. In
addition, we cannot assure you that third parties will not independently
discover or invent competing technologies or reverse engineer our trade secrets
or other technologies.

      In October 2000, we settled a dispute with ID Biomedical Corporation in
which ID Biomedical had claimed that our products and processes infringed their
patents. In the ID Biomedical settlement, we paid $4.0 million in cash and
issued 545,454 shares of common stock and, in exchange, ID Biomedical dismissed
its lawsuit against us and agreed not to sue us, our affiliates, our customers
and certain others for infringement of patents held by ID Biomedical. In
December 2000, we entered into a licensing arrangement with Dade Behring in
order to resolve an intellectual property dispute between us and Dade Behring.

      In September 2002, we filed a patent infringement suit against EraGen
Biosciences, Inc. The suit was filed in the U.S. District Court for the Western
District of Wisconsin, located in Madison, Wisconsin. The complaint alleged that
EraGen Biosciences, Inc. was infringing certain claims of two Company patents.
In March 2003, the Court issued a favorable ruling confirming our interpretation
of the patent claims at issue, resulting in a settlement between the two
companies. As part of the EraGen settlement, we agreed to dismiss the lawsuit
and to issue a covenant not to sue under certain of our patents. In exchange,
EraGen agreed to cease and desist from the development and sale of its Gene Code
products 1.0, 1.2 and 1.3 and agreed not to use technologies employing invasive
cleavage.

      In September 2004, we filed a patent infringement suit against Stratagene
Corporation. This suit was filed in the same court as the EraGen case. The
complaint alleges that Stratagene is infringing certain claims of the same two
patents that the Company asserted against EraGen Biosciences, Inc. Stratagene
counter-claimed for invalidity and non-infringement. Trial is currently
scheduled for August 2005.

      In the future, we may become involved in lawsuits in which third parties
file claims asserting that our technologies or products infringe on their
patents. We cannot predict whether third parties will assert such claims against
us or against the licensors of technologies licensed to us, or whether those
claims will harm our business. We may be forced to defend against such claims,
whether they are with or without any merit or whether they are resolved in favor
of or against us or our licensors, and may face costly litigation and diversion
of management's attention and resources. As a result of such disputes, we may
have to develop costly non-infringing technologies, or enter into licensing
agreements. These agreements, if necessary, may be unavailable on terms
acceptable to us, if at all, which could seriously harm our business and
financial condition. We may also become involved in lawsuits in which third
parties file claims asserting that our technologies or products infringe on
their intellectual property. Certain technologies and product areas may relate
to genes and genetic variations that are the subject of aggressive patent rights
acquisitions by other parties. As a result, certain technologies and product
areas can be characterized by complicated intellectual property considerations
and overlapping rights between multiple independent parties. We are currently
marketing and developing products to which some risk of intellectual property
infringement litigation pertains. We cannot predict whether third parties may
assert claims of infringement against us or against the licensors of
technologies licensed to us.

                                       9
<PAGE>

COMPETITION

      The markets for our technologies and products are very competitive, and we
expect the intensity of competition to increase. Currently, we compete primarily
with other companies that are pursuing technologies and products that provide
alternatives to our technologies and products. Many of our competitors have
greater financial, operational, sales and marketing resources and more
experience in research and development than we have. Moreover, competitors may
have greater name recognition than we do and may offer discounts as a
competitive tactic. These competitors and other companies may have developed or
could in the future develop new technologies that compete with our products or
render our products obsolete.

      We compete with many companies in the United States and abroad engaged in
the development, commercialization and distribution of similar products intended
for clinical molecular diagnostic applications. These companies may have or
develop products competitive with the products offered by us. Also,
clinical laboratories may offer testing services that are competitive with our
products. Clinical laboratories may use reagents purchased from us or others to
develop their own diagnostic tests. Such laboratory-developed tests may not be
subject to the same requirements for clinical trials and FDA submission
requirements that may apply our products.

      In the clinical market, we potentially compete with several companies
offering alternative technologies that differ from the Invader(R) chemistry.
These companies include, among others: Abbott Laboratories, Bayer Corporation,
Becton, Dickinson and Company, BioRad Laboratories, Inc., Digene Corp., Roche
Diagnostics Corporation, Gen-Probe, Applera Corporation companies including
Applied Biosystems and Celera, Innogenetics, Inc., TM Bioscience Corporation,
and Ventana Medical Systems Inc.

      In the research market, we compete with several companies offering
alternative technologies that differ from the Invader(R) chemistry. These
companies include, among others: Affymetrix, Inc., Illumina, Inc., and Applied
Biosystems.

GOVERNMENT REGULATION

      We are subject to regulation by the FDA under the Food, Drug and
Cosmetic Act and other laws. The Food, Drug and Cosmetic Act requires that
medical devices introduced to the U.S. market, unless otherwise exempted, be the
subject of either a premarket notification clearance, known as a 510(k), or a
premarket approval, known as a PMA. Some of our clinical products may require a
PMA, others may require a 510(k). Other products, like analyte specific
reagents, or ASRs, may be exempt from regulatory clearance or approval, but
still subject to restrictions.

      With respect to products reviewed through the 510(k) process, we may not
market a product until an order is issued by the FDA finding our product to be
substantially equivalent to a legally marketed product known as a predicate
device. A 510(k) submission may involve the presentation of a substantial volume
of data, including clinical data, and may require a substantial review. The FDA
may agree that the product is substantially equivalent to a predicate device and
allow the product to be marketed in the United States. The FDA, however, may
determine that the device is not substantially equivalent and require a PMA, or
require further information, such as additional test data, including data from
clinical studies, before it is able to make a determination regarding
substantial equivalence. If the FDA determines there is no predicate device, we
may request that the FDA use the process known as de novo classification and
then clear the device through a 510(k) filing, rather than a PMA. De novo
classification is intended to be used for lower-risk products. By requesting
additional information, the FDA can further delay market introduction of our
products.

      If the FDA indicates that a PMA is required for any of our clinical
products, the application will require extensive clinical studies, manufacturing
information and likely review by a panel of experts outside the FDA. Clinical
studies to support either a 510(k) submission or a PMA application would need to
be conducted in accordance with FDA requirements. Failure to comply with FDA
requirements could result in the FDA's refusal to accept the data or the
imposition of regulatory sanctions. There can be no assurance that we will be
able to meet the FDA's requirements or receive any necessary approval or
clearance.

                                       10
<PAGE>
      Once granted, a 510(k) clearance or PMA approval may place substantial
restrictions on how our device is marketed or to whom it may be sold. Even in
the case of devices like ASRs, most of which are exempt from 510(k) clearance or
PMA approval requirements, the FDA will impose restrictions on marketing. Our
ASR products may be sold only to clinical laboratories certified under CLIA to
perform high complexity testing. In addition to requiring approval or clearance
for new products, the FDA may require approval or clearance prior to marketing
products that are modifications of existing products. We cannot be assured that
any necessary 510(k) clearance or PMA approval will be granted on a timely
basis, or at all. Delays in receipt of or failure to receive any necessary
510(k) clearance or PMA approval or the imposition of stringent restrictions on
the labeling and sales of our products could have a material adverse effect on
us. We do not anticipate that our products that will be labeled for research use
only, or RUO, or those products used in drug discovery or genomics research will
be subject to significant government regulation. Our products labeled as ASRs or
labeled for clinical use will be regulated as medical devices by the FDA and in
certain other countries. We believe our products currently marketed pursuant to
FDA regulations as ASRs, as well as those products we intend to market in the
future as ASRs, are exempt from the 510(k) premarket notification and premarket
approval requirements. However, certain of our products or their applications
may require that we obtain, or we may choose to obtain, regulatory clearances or
approvals. These products would include, for example, clinical products that we
choose to market as in vitro diagnostic products rather than as ASRs. We expect
that we will apply for FDA clearances or approvals for some of our future
products.

      As a medical device manufacturer, we are also required to register and
list our products with the FDA. In addition, we are required to comply with the
FDA's quality systems regulations, or QSRs, which require that our devices be
manufactured and records be maintained in a prescribed manner with respect to
manufacturing, testing and control activities. Further, we are required to
comply with FDA requirements for labeling and promotion. For example, the FDA
prohibits cleared or approved devices from being promoted for uncleared or
unapproved uses. In addition, the medical device reporting regulation requires
that we provide information to the FDA whenever there is evidence to reasonably
suggest that one of our devices may have caused or contributed to a death or
serious injury or that there has occurred a malfunction that would be likely to
cause or contribute to a death or serious injury if the malfunction were to
recur. Under FDA regulatory requirements, we may not make claims about the
intended clinical use or efficacy of ASR products.

      Our manufacturing facility is subject to periodic and unannounced
inspections by the FDA for compliance with quality system regulations.
Additionally, the FDA often will conduct a preapproval inspection for PMA
devices. Although we believe we are in compliance with the FDA's quality system
regulations, we have never been inspected by the FDA and cannot assure that we
will be able to maintain compliance in the future. If the FDA believes that we
are not in compliance with applicable laws or regulations, it can issue a
warning letter, detain or seize our products, issue a recall notice, seek to
enjoin future violations and assess civil and criminal penalties against us. In
addition, approvals or clearances could be withdrawn under certain
circumstances. Failure to comply with regulatory requirements or any adverse
regulatory action could have a material adverse effect on us.

      Any customers using our products for clinical use in the U.S. will be
regulated under CLIA. CLIA is intended to ensure the quality and reliability of
clinical laboratories in the United States by mandating specific standards in
the areas of personnel qualifications, administration, participation in
proficiency testing, patient test management, quality control, quality assurance
and inspections. The regulations promulgated under CLIA establish three levels
of diagnostic tests, namely, waived, moderately complex and highly complex, and
the standards applicable to a clinical laboratory depend on the level of the
tests it performs. We cannot assure you that the CLIA regulations and future
administrative interpretations of CLIA will not have a material adverse impact
on us by limiting the potential market for our products.

      Medical device laws and regulations are also in effect in many of the
countries in which we may do business outside the United States. These range
from comprehensive device approval requirements for some or all of our medical
device products, to requests for product data or certifications. The number and
scope of these requirements are increasing. Medical device laws and regulations
are also in effect in some states in which we do business. There can be no
assurance that we will obtain regulatory approvals in such countries or that we
will not incur significant costs in obtaining or maintaining foreign regulatory
approvals. In addition, export of certain of our products that have not yet been
cleared or approved for domestic commercial distribution may be subject to FDA
export restrictions.

      We are also subject to numerous environmental and safety laws and
regulations, including those governing the use and disposal of hazardous
materials. Any violation of and the cost of compliance with these regulations
could have a material adverse effect on our business.

EMPLOYEES

      As of December 31, 2004, we employed 140 persons, of whom 27 hold
doctorate degrees and 93 hold other advanced degrees. Approximately 41 employees
are engaged in research and development, 42 in business development, sales and
marketing, 26 in operations and manufacturing and 31 in intellectual property,
finance and other administrative functions. Our success will depend in large
part on our ability to attract and retain qualified employees. We face
competition in this regard from other companies, research and academic
institutions, government entities and other organizations. We believe that we
maintain good relations with our employees.

                                       11
<PAGE>

RISK FACTORS

RISKS RELATED TO OUR BUSINESS

      WE HAD AN ACCUMULATED DEFICIT OF $135.8 MILLION AT DECEMBER 31, 2004, AND
      EXPECT TO CONTINUE TO INCUR SUBSTANTIAL OPERATING LOSSES FOR THE
      FORESEEABLE FUTURE.

      We have had substantial operating losses since our inception in 1993, and
we expect our operating losses to continue over the foreseeable future. We
experienced net losses of $1.9 million in 2004, $8.1 million in 2003, and $40.9
million in 2002. In order to further develop our products and technologies,
including development of new products for the clinical market, we will need to
incur significant expenses in connection with our internal research and
development and commercialization programs. As a result, we expect to incur
annual operating losses for the foreseeable future. In addition, there is no
assurance that we will ever become profitable or that we will sustain
profitability if we do become profitable. Should we experience protracted or
unforeseen operating losses, our capital requirements would increase and our
stock price would likely decline.

      FLUCTUATIONS IN OUR QUARTERLY REVENUES AND OPERATING RESULTS MAY
      NEGATIVELY IMPACT OUR STOCK PRICE.

      Our revenues and results of operations have fluctuated significantly in
the past and we expect significant fluctuations to continue in the future due to
a variety of factors, many of which are outside of our control. These factors
include:

      -     the volume and timing of orders for our products;

      -     changes in the mix of our products offered;

      -     the timing of payments we receive under collaborative agreements, as
            well as our ability to recognize these payments as revenues;

      -     the number, timing and significance of new products and technologies
            introduced by our competitors;

      -     third-party intellectual property that may impede our ability to
            sell products;

      -     our ability to develop, obtain regulatory clearance, market and
            introduce new and enhanced products on a timely basis;

      -     changes in the cost, quality and availability of equipment, reagents
            and components required to manufacture or use our products;

      -     availability of commercial and government funding to researchers who
            use our products and services, including our single-largest
            research customer in Japan; and

      -     availability of third-party reimbursement to users of our clinical
            products.

      Research and development costs associated with our products and
technologies, as well as facilities costs, personnel costs, marketing programs
and overhead account for a substantial portion of our operating expenses.
Research and development expenses for the years ended December 31, 2004, 2003,
and 2002 were $11.6 million, $12.0 million, and $13.9 million, respectively. We
cannot adjust these expenses quickly in the short term. If our revenues decline
or do not grow as anticipated, we may not be able to reduce our operating
expenses accordingly. Failure to achieve anticipated levels of revenues could
significantly harm our operating results for one or more fiscal periods. Due to
the possibility of fluctuations in our revenues and expenses, we believe that
quarter-to-quarter comparisons of our operating results are not a good
indication of our future performance. In addition, our operating results in a
future fiscal quarter may not meet the expectations of stock market analysts and
investors. In that case, our stock price would likely decline and investors
would experience a decline in the value of their investment.

      OUR TECHNOLOGIES AND COMMERCIAL PRODUCTS MAY NOT BE COMMERCIALLY VIABLE OR
      SUCCESSFUL, WHICH COULD ADVERSELY AFFECT OUR BUSINESS.

      We are currently developing and commercializing a limited number of
products based on our technologies. We plan to develop additional products. We
cannot assure you that we will be able to complete development of our products
that are currently under

                                       12
<PAGE>
development or that we will be able to develop additional new products. In
addition, for our genetic and pharmacogentic products, some of the genetic
variations for which we develop our products may not be useful or cost effective
in assisting therapeutic selection, patient monitoring or diagnostic
applications. In this event, our sales of products for these genetic variations
would diminish significantly or cease, and we would not be able to recoup our
investment in developing these products. Accordingly, if we fail to successfully
develop our products and technologies or if our technologies are not useful in
the development of commercially successful products, we may not achieve a
competitive position in the market. If we fail to do so, our revenues will be
seriously harmed and it is unlikely that we will ever achieve profitability.
Market acceptance of our products will depend on widespread acceptance of such
products by doctors and clinicians. The use of products to assess genetic
variation, gene expression or identify infectious diseases is relatively new and
remains uncertain. If clinicians and doctors do not adopt our products, our
business, financial condition and results of operation could be adversely
affected. In these events, our stock price would likely decline.

      WE HAVE LIMITED MANUFACTURING EXPERIENCE AND MAY NEED TO MODIFY, EXPAND OR
      ESTABLISH NEW MANUFACTURING FACILITIES AS WE COMMERCIALIZE OUR PRODUCTS.

      We have limited experience manufacturing our products and have limited
experience manufacturing our products in the volumes that will be necessary for
us to achieve significant commercial sales. We may need to establish new
manufacturing processes or facilities, modify existing facilities and processes,
or outsource product component manufacturing. Facilities expansion and
development, process improvements, and outsourcing manufacturing can be delayed
by unforeseen circumstances, including inability to obtain needed manufacturing
equipment on a timely basis, difficulties with facility construction and
completion of improvements and difficulties incorporating new processes and
vendor supply issues associated with component outsourcing. If we fail to meet
our manufacturing needs, we may not be able to provide our customers with the
quantity of products they require, which would damage customer relations and
result in reduced revenues. Additionally, some of our products must be
manufactured in accordance with the FDA's QSRs. We have limited experience in
manufacturing our products in compliance with QSRs and cannot guarantee that our
manufacturing and production systems are in compliance with the QSRs.

      Key components of our products may be sourced from single suppliers or a
limited number of suppliers. Specifically, oligonucleotides for many of our
research use only products are sourced from a single supplier. In addition, some
of the components incorporated into our products may be proprietary and
unavailable from secondary sources. Finally, to comply with QSRs, we must verify
that our suppliers of key components are in compliance with all applicable FDA
regulations and meet our standards for quality. The above factors all contribute
to scenarios where we may not be able to arrange for alternative supply sources.
If our suppliers are unable or unwilling to supply us on commercially acceptable
terms with these components, we may be unable to satisfy demand for our product
on reasonable terms, if at all, which may have an adverse effect on our
business, financial condition and results of operations.

      OUR LIMITED SALES AND MARKETING EXPERIENCE AND CAPACITY MAY ADVERSELY
      AFFECT OUR ABILITY TO GROW AND TO COMPETE SUCCESSFULLY IN COMMERCIALIZING
      OUR POTENTIAL PRODUCTS.

      We currently have a relatively small sales force, consisting of 15
individuals focused on direct sales and 16 individuals focused on service and
support in the clinical market. We will need to increase the size of our sales
force as we further commercialize our products. In particular, as we introduce
new clinical products, we will need to increase our clinical applications sales
force. We are not currently able to estimate the number of new sales personnel
we will require. However, this number could be significant and we may not be
able to recruit, hire and train a sufficient number of sales personnel in a
short time frame. We may also market our products through collaborations and
distribution agreements with diagnostics, biopharmaceutical and life science
companies. We cannot guarantee that we will be able to establish a successful
sales force or to establish collaboration or distribution arrangements to market
our products. If we are unable to implement an effective marketing and sales
strategy, we will be unable to grow our revenues and execute our business plan.
This would have an adverse effect on our business, financial condition and
results of operations.

      With respect to our clinical molecular diagnostics business, we have
limited experience with sales of our products outside of the U.S. We cannot
guarantee that we will successfully develop sales, distribution, product and
customer support capabilities internationally that will enable us to generate
significant revenue from sales outside the United States. In addition, sales
made outside the U.S. are subject to foreign regulations typical to the sale and
marketing of our products that may pose an additional risk for us. If we fail to
increase our revenues from sales outside of the United States, this would have
an adverse effect on our business, financial condition and results of
operations.

                                       13
<PAGE>
      Our clinical customer base is dominated by a small number of large
clinical testing laboratories including Quest Diagnostics, Inc., Mayo Medical
Laboratories, Specialty Laboratories, Inc., and Laboratory Corporation of
America. If we are unable to increase sales, maintain current pricing levels, or
if our new product introductions are not accepted by this small number of large
clinical laboratory customers in the United States, our revenues and business
may suffer materially.

      WE MAY REQUIRE ADDITIONAL FINANCING FOR OUR FUTURE OPERATING PLANS.
      FINANCING MAY NOT BE AVAILABLE ON ACCEPTABLE TERMS, IF AT ALL.

      We anticipate that our existing capital resources together with cash from
product sales will be sufficient to fund our operating and capital requirements
for at least the next 12 months. We may, however, need to raise additional
capital. We have expended significant resources and expect to continue to expend
significant resources in our research and product development and
commercialization activities and to improve production processes, litigate
intellectual property disputes, and seek FDA clearance or approvals. The amount
of additional capital we will need to raise will depend on many factors,
including:

      -     our progress with our research and development programs;

      -     the needs we may have to pursue FDA clearances or approvals of our
            products;

      -     our level of success in selling our products and technologies;

      -     our ability to establish and maintain successful collaborations;

      -     the costs we incur in enforcing and defending our patent claims and
            other intellectual property rights; and

      -     the timing of purchases of additional capital.

      In addition, we may require additional financing in less than 12 months if
we:

      -     decide to expand faster than planned;

      -     develop new or enhanced products ahead of schedule;

      -     need to respond to competitive pressures; or

      -     decide to acquire complementary products, businesses or
            technologies.

      If we raise additional funds through the sale of equity, convertible debt
or other equity-linked securities, our shareholders' percentage ownership in the
Company will be reduced. In addition, these transactions may dilute the value of
our outstanding stock. We may issue securities that have rights, preferences and
privileges senior to our common stock. If we raise additional funds through
collaborations or licensing arrangements, we may relinquish rights to certain of
our technologies or products, or grant licenses to third parties on terms that
are unfavorable to us. If future financing is not available to us or is not
available on terms acceptable to us, we may not be able to fund our future needs
that would have an adverse effect on our business, financial condition and
results of operations.

      COMMERCIALIZATION OF OUR TECHNOLOGIES MAY DEPEND ON STRATEGIC PARTNERSHIPS
      AND COLLABORATIONS WITH OTHER COMPANIES, AND IF OUR CURRENT OR FUTURE
      PARTNERSHIPS AND COLLABORATIONS ARE NOT SUCCESSFUL, WE MAY EXPERIENCE
      DIFFICULTY COMMERCIALIZING OUR TECHNOLOGIES AND PRODUCTS.

      In order to augment our internal sales and marketing efforts and to reach
additional product and geographic markets, we have entered into or may enter
into strategic partnerships and collaborations for the development, marketing,
sales or distribution of our products. These agreements provide us, in some
instances, with distribution of our products, access to products and
technologies that are complementary to ours and funding for development of our
products. We may also be dependent on collaborators for regulatory approvals and
clearances, and manufacturing in particular geographic and product markets. If
our strategic partnerships and collaborations are not successful, we may not be
able to develop or successfully commercialize the products that are the subject
of the collaborations on a timely basis, if at all, or effectively distribute
our

                                       14
<PAGE>

products. In addition, if we do not enter into additional partnership
agreements, or if these agreements are not successful, our ability to develop,
commercialize and distribute products will be negatively affected which will
harm our future operating results.

      We have no control over the resources that any partner or collaborator may
devote to our products. Any of our present or future partners or collaborators
may not perform their obligations as expected. These partners or collaborators
may breach or terminate their agreements with us or otherwise fail to meet their
obligations or perform their collaborative activities successfully and in a
timely manner. Further, any of our partners or collaborators may elect not to
develop products arising out of our partnerships or collaborations or devote
sufficient resources to the development, manufacture, commercialization or
distribution of these products. If any of these events occur, we may not be able
to develop our products and technologies and our ability to generate revenues
will decrease.

      THE EARLY TERMINATION OF ANY OF OUR STRATEGIC COLLABORATION OR CUSTOMER
      SUPPLY AGREEMENTS COULD SERIOUSLY HARM OUR BUSINESS AND FINANCIAL
      CONDITION.

      Certain of our strategic, research collaboration, customer supply
agreements may be terminated with little or no notice. In particular, the supply
of products to Japanese customers may be terminated upon specified notice at any
time. These customers will likely account for a significant portion of our
revenues for 2005. Accordingly, early termination of these relationships and
supply agreements would seriously harm our revenues, and in turn, our business,
and financial condition.

      WE RELY ON A SINGLE CUSTOMER FOR A MAJORITY OF OUR BUSINESS AND THE LOSS
      OF THAT CUSTOMER, OR A REDUCTION OR CANCELLATION OF A SIGNIFICANT ORDER,
      COULD HARM OUR FINANCIAL CONDITION.

      Approximately $27.6 million, or 59%, of our revenue in 2004 was derived
from sales to a major Japanese research institute, for use by several end-users.
Sales to that research institute accounted for 69% and 51% of our revenue in
2003 and 2002, respectively. If we lose this customer, or if it significantly
reduces purchases of our product, our business, financial condition and results
of operations could be harmed.

      WE ARE IN A HIGHLY COMPETITIVE INDUSTRY AND MARKETPLACE. COMPETITIVE
      DEVELOPMENTS, INCLUDING NEW TECHNOLOGIES THAT RENDER OURS LESS COMPETITIVE
      OR OBSOLETE, COULD SERIOUSLY HARM OUR BUSINESS.

      The biotechnology and life sciences industries generally and the genetic
analysis and molecular diagnostics markets specifically are highly competitive,
and we expect the intensity of competition to increase. We compete with
organizations in the United States and abroad that develop and manufacture
products and provide services for the analysis of genetic information for
research and/or clinical applications. These organizations include:

      -     diagnostic, biotechnology, pharmaceutical, healthcare, chemical and
            other companies;

      -     academic and scientific institutions;

      -     governmental agencies;

      -     public and private research organizations; and

      -     clinical labs.

      Many of our competitors have greater financial, technical, research,
marketing, sales, distribution, service and other resources than we do.
Moreover, our competitors may offer broader product lines and have greater name
recognition than we do, and may offer discounts as a competitive tactic. In
addition, several development stage companies are currently making or developing
technologies, products or services that compete with or are being designed to
compete with our technologies and products. Our competitors may develop or
market technologies, products or services that are more effective or
commercially attractive than our current or future products, or that may render
our technologies or products less competitive or obsolete. Competitors may make
rapid technological developments which may result in our technologies and
products becoming obsolete before we recover the expenses incurred to develop
them or before they generate significant revenue or market acceptance.
Competitors may also obtain regulatory advances or approvals of their diagnostic
products more rapidly than we do. Accordingly, if competitors introduce superior
technologies or products or obtain regulatory approvals or clearances quicker
than we do, and we cannot make enhancements to our technologies and

                                       15
<PAGE>

products necessary for them to remain competitive, our competitive position, and
in turn our business, revenues and financial condition, will be seriously
harmed. This, in turn, would likely cause our stock price to decline.

      Our existing and potential competitors may be in the process of seeking
FDA or foreign regulatory approval for their respective products or may also
enjoy substantial advantages over us in terms of research and development
expertise, clinical trial expertise, experience in submission of products to
regulatory authorities and the marketing or commercialization of FDA approved or
cleared products. In addition, many of our competitors may have or will
establish third-party reimbursement for their products. We may not be able to
compete effectively against competitors that hold such an advantage which may
have a material adverse effect on our business, financial condition and results
of operations.

      IF WE ARE UNABLE TO PROTECT OUR PROPRIETARY METHODS AND TECHNOLOGIES, WE
      MAY NOT BE ABLE TO COMMERCIALIZE PRODUCTS.

      Our commercial success will depend, to a significant degree, on our
ability to obtain patent protection on many aspects of our business, including
the products, methods and services we develop. Patents issued to us may not
provide us with substantial protection or be commercially beneficial to us. The
issuance of a patent is not conclusive as to its validity or its enforceability.

      In addition, our patent applications or those we have licensed, may not
result in issued patents. If our patent applications do not result in issued
patents, our competitors may obtain rights to commercialize our discoveries
which would harm our competitive position.

      We also may apply for patent protection on novel genetic variations in
known genes and their uses, as well as novel uses for previously identified
genetic variations discovered by third parties. In the latter cases or in the
area of new product development, we may need a license from the holder of the
patent with respect to such genetic variations in order to make, use or sell any
related products. We may not be able to acquire such licenses on terms
acceptable to us, if at all.

      Certain parties are attempting to rapidly identify and characterize genes
and genetic variations through the use of sequencing and other technologies. To
the extent any patents are issued to other parties on such partial or
full-length genes or genetic variations or uses for such genes or genetic
variations, the risk increases that the sale of products developed by us or our
collaborators may give rise to claims of patent infringement against us. Others
may have filed and, in the future, are likely to file patent applications
covering many genetic variations and their uses. Others may file and, in the
future, may file, patent applications covering improvements to our technologies.
Any such patent application may have priority over our patent applications and
could further restrict our ability to market our products. We cannot assure you
that any license that we may require under any such patent will be made
available to us on commercially acceptable terms, if at all.

      We may be sued for infringing on the intellectual property rights of
others. We could also become involved in interference proceedings in the U.S.
Patent and Trademark Office to determine the relative priority of our patents or
patent applications and those of the other parties involved in the interference
proceeding. Intellectual property proceedings are costly, and could affect our
results of operations. We could also become involved in disputes regarding the
ownership of intellectual property rights that relate to our technologies. These
disputes could arise out of collaboration relationships, strategic partnerships
or other relationships. These disputes and proceedings could also divert the
attention of managerial and technical personnel. If we do not prevail in any
intellectual property proceeding, in addition to any damages we might have to
pay, we could be required to stop the infringing activity, or obtain a license
to or design around the intellectual property in question. In interference
proceedings, our patent rights could be invalidated and the scope of our patents
could be limited. If we are unable to obtain licenses to intellectual property
rights that we need to conduct our business, or are unable to design around any
third party patent, we may be unable to sell some of our products, which will
result in reduced revenue. Although the company has taken steps to respect the
intellectual property of third parties and believes that its products do not
infringe valid claims of other parties' patents, we may nevertheless be forced
to defend against claims of patent infringement. In particular, third parties
own multiple patents relating to the hepatitis C virus and the human papilloma
virus. As a result, we may become involved in patent litigation relating to our
HCV or HPV ASRs.

      We have in the past and may in the future become a party to litigation
involving patents and intellectual property rights. In October 2000, we settled
a dispute with ID Biomedical Corporation in which ID Biomedical had claimed that
our products and processes infringed their patents. In the ID Biomedical
settlement, we paid $4.0 million in cash and issued 545,454 shares of common
stock and, in exchange, ID Biomedical dismissed its lawsuit against us and
agreed not to sue us, our affiliates, our customers and certain others for
infringement of patents held by ID Biomedical. In December 2000, we entered into
a licensing arrangement with Dade Behring in order to resolve an intellectual
property dispute between us and Dade Behring. In September 2002, we filed a
patent infringement suit against EraGen Biosciences, Inc. alleging that certain
activities and products of the defendant infringes upon U.S. Patents issued to
us. On April 9, 2003, we settled this litigation with EraGen's agreement to
cease and desist from the development and sale of certain products and
technologies. In September 2004, we filed a patent infringement suit against
Stratagene Corporation. The complaint

                                       16
<PAGE>

alleges that Stratagene is infringing certain claims on two of the Company's
patents. Trial is scheduled for August 2005. If we do not prevail in this
litigation, Stratagene's products could diminish sales of our products.

      We may in the future receive claims of infringement of intellectual
property rights from other parties. If we do not prevail in any future legal
proceedings, we may be required to pay significant monetary damages. In
addition, we could also be enjoined from use of certain processes or prevented
from selling certain configurations of our products that were found to be within
the scope of the patent claims. In the event we did not prevail in any future
proceeding, we would either have to obtain licenses from the other party, avoid
certain product configurations or modify some of our products and processes to
design around the patents. Licenses could be costly or unavailable on
commercially reasonable terms. Designing around patents or focusing efforts on
different configurations could be time consuming, and we would have to remove
some of our products from the market while we were completing redesigns.
Accordingly, if we are unable to settle future intellectual property disputes
through licensing or similar arrangements, or if any such future disputes are
determined adversely to us, our ability to market and sell our products could be
seriously harmed. This would in turn harm our business, financial condition and
results of operations.

      In addition, in order to protect or enforce our patent rights or to
protect our ability to operate our business, we may need to initiate other
patent litigation against third parties. These lawsuits could be expensive, take
significant time, and could divert management's attention from other business
concerns. These lawsuits could result in the invalidation or limitation in the
scope of our patents or forfeiture of the rights associated with our patents. We
cannot assure you that we would prevail in any such proceedings or that a court
will not find damages or award other remedies in favor of our opposing party in
any of these suits. During the course of any future proceedings, there may be
public announcements of the results of hearings, motions and other interim
proceedings or developments in the litigation. Securities analysts or investors
may perceive these announcements to be negative, which could cause the market
price of our stock to decline.

      OTHER RIGHTS AND MEASURES THAT WE RELY UPON TO PROTECT OUR INTELLECTUAL
      PROPERTY MAY NOT BE ADEQUATE TO PROTECT OUR PRODUCTS AND COULD REDUCE OUR
      ABILITY TO COMPETE IN THE MARKET.

      In addition to patents, we rely on a combination of trade secrets,
copyright and trademark laws, nondisclosure agreements and other contractual
provisions and technical measures to protect our intellectual property rights.
While we require employees, collaborators, consultants and other third parties
to enter into confidentiality and/or non-disclosure agreements where
appropriate, any of the following could still occur:

      -     the agreements may be breached;

      -     we may have inadequate remedies for any breach;

      -     the employees, collaborators, consultants and other third parties
            may apply for patents on improvements to our technologies without
            assigning ownership rights to us;

      -     proprietary information could be disclosed to our competitors; or

      -     others may independently develop substantially equivalent
            proprietary information and techniques or otherwise gain access to
            our trade secrets or disclose such technologies.

      If for any of the above reasons our intellectual property is disclosed,
invalidated or misappropriated, it would harm our ability to protect our rights
and our competitive position.

      IF WE FAIL TO RETAIN OUR KEY PERSONNEL AND HIRE, TRAIN AND RETAIN
      QUALIFIED EMPLOYEES, WE MAY NOT BE ABLE TO COMPETE EFFECTIVELY, WHICH
      COULD RESULT IN REDUCED REVENUES.

      Our future success will depend on the continued services and on the
performance of our senior management, scientific staff, and key employees.

      If a competitor hired members of our senior management staff, scientific
staff, or key employees, or if for any reason these employees would not continue
to work for us, we would have difficulty hiring employees with equivalent
skills.

                                       17
<PAGE>

      In addition, our researchers, scientists and technicians have significant
experience in research and development related to the analysis of genetic
variations. If we were to lose these employees to our competitors, we could
spend a significant amount of time and resources to replace them, which could
impair our research and development efforts. Further, in order to scale up our
commercialization activity and to further our research and development efforts,
we will need to hire, train and retain additional sales, marketing, research,
scientific, and technical personnel. If we are unable to hire, train and retain
the personnel we need, we may experience delays in the research, development and
commercialization of our technologies and products. This would result in reduced
revenues and would harm our results of operations.

      WE PLAN TO CONTINUE TO INTRODUCE PRODUCTS FOR THE CLINICAL MARKET, AND WE
      MAY NEED TO OBTAIN FDA CLEARANCES AND APPROVALS AND COMPLY WITH FDA
      QUALITY SYSTEM REGULATIONS AND OTHER REGULATIONS RELATING TO THE
      MANUFACTURING, MARKETING AND SALE OF CLINICAL PRODUCTS.

      We anticipate that the manufacturing, labeling, distribution and marketing
of a number of our clinical diagnostic products will be subject to extensive
regulation in the United States and in certain other countries.

      In the United States, the FDA regulates, as medical devices, most
diagnostic tests and in vitro reagents that are marketed as finished test kits.
Some clinical laboratories, however, purchase products that are marketed under
FDA regulations as analyte specific reagents, and develop and prepare their own
finished diagnostic tests. FDA also considers ASRs to be medical devices. The
FDA restricts the sale of these products to clinical laboratories certified
under CLIA to perform high complexity testing and also restricts the types of
products that can be sold as ASRs. We currently market our diagnostic products
as ASRs. Consequently, these clinical products will be regulated as medical
devices. Should the FDA modify the ASR rules or its interpretation and
enforcement of them in a fashion that makes it difficult or impossible for us to
market some or all of our products, we may be required to terminate those ASR
product sales, conduct clinical studies and make submissions of our products to
the FDA for clearance or approval. In that event, we could experience
significant revenue loss, additional expenses and loss of our clinical customer
base which would cause the market price of our stock to decline.

      Unless otherwise exempt, medical devices require FDA approval or clearance
prior to marketing in the United States. Although we believe our currently
marketed products, as well as those ASRs we intend to market in the future, are
exempt from 510(k) premarket notification and premarket approval requirements,
the process of obtaining approvals and clearances necessary to market our
proposed clinical products can be time-consuming, expensive and uncertain. To
date, we have not applied for FDA or any other regulatory approvals or
clearances with respect to any of our clinical diagnostic products. We plan to
seek FDA approvals or clearances for certain products starting in 2005, and we
cannot predict the likelihood of obtaining those approvals or clearances. Also,
clinical products that we may seek to introduce in the future may require FDA
approvals or clearances prior to commercial sale in the United States. We may
experience difficulties that could delay or prevent the successful development,
introduction and marketing of new clinical products. In particular, the FDA may
look closely at our HCV product, our HPV product when released as an ASR and our
CFTR gene ASR when released in a microfluidic card format. In addition, we
cannot assure that regulatory approval or clearance of any clinical products for
which we seek such approvals will be granted by the FDA or foreign regulatory
authorities on a timely basis, if at all. Furthermore, in the event that the
regulatory safe-haven provided to ASRs is eliminated by the FDA, we could
experience significant revenue loss, additional expenses and loss of our
clinical customer base which would cause the market price of our stock to
decline.


      If approval or clearance is obtained we will be subject to continuing FDA
obligations. When manufacturing medical devices, including ASRs, we will be
required to adhere to Quality System Regulations, which will require us to
manufacture our products and maintain records in a prescribed manner. We have
never been subject to an FDA Quality System inspection, and we cannot assure
that we can pass an FDA audit or maintain compliance in the future. Further, the
FDA may place substantial restrictions on the indications for which our products
may be marketed or to whom they may be marketed. Additionally, there can be no
assurance that FDA will not require us to conduct clinical studies as a
condition of approval or clearance. Failure to comply with applicable FDA
requirements can result in, among other things:

      -     administrative or judicially imposed sanctions;

      -     injunctions, civil penalties, recall or seizure of our products;

      -     total or partial suspension of production;

      -     failure of the government to grant premarket clearance or premarket
            approval for our products;

                                       18
<PAGE>

      -     withdrawal of marketing clearances or approvals; and

      -     criminal prosecution.

      Any of our customers using our products for clinical use in the United
States may be regulated under CLIA. CLIA is intended to ensure the quality and
reliability of clinical laboratories in the United States by mandating specific
standards in the areas of personnel qualification, administration, participation
in proficiency testing, patient test management, quality control, quality
assurance and inspections. The regulations promulgated under CLIA establish
three levels of clinical tests and the standards applicable to a clinical
laboratory depend on the level of the tests it performs. CLIA requirements may
prevent some clinical laboratories, including those laboratories that do not
comply with those requirements, from using some or all of our products. In
addition, CLIA regulations and future administrative interpretations of CLIA
could harm our business by limiting the potential market for some or all of our
products.

      OUR FAILURE TO COMPLY WITH ANY APPLICABLE ENVIRONMENTAL, HEALTH, SAFETY
      AND RELATED GOVERNMENT REGULATIONS MAY AFFECT OUR ABILITY TO DEVELOP,
      PRODUCE OR MARKET OUR POTENTIAL PRODUCTS AND MAY ADVERSELY AFFECT OUR
      RESULTS OF OPERATIONS.

      Our research, development and manufacturing activities involve the use,
transportation, storage and disposal of hazardous materials and are subject to
related environmental and health and safety statutes and regulations. As we
expand our operations, our increased use of hazardous substances will lead to
additional and more stringent requirements. This may cause us to incur
substantial costs to maintain compliance with applicable statutes and
regulations. In addition, we are obligated to file a report to the U.S.
Environmental Protection Agency, or EPA, regarding specified types of
microorganisms we use in our operations. The EPA could, upon review of our use
of these microorganisms, require us to discontinue its use. If this were to
occur, we would have to substitute a different microorganism from the EPA's
approved list. We could experience delays or disruptions in production while we
convert to the new microorganism. In addition, any failure to comply with laws
and regulations and any costs associated with unexpected and unintended releases
of hazardous substances by us into the environment, or at disposal sites used by
us, could expose us to substantial liability in the form of fines, penalties,
remediation costs or other damages and could require us to shut down our
operations. Any of these events would seriously harm our business and operating
results.

      WE MAY BE HELD LIABLE FOR ANY INACCURACIES ASSOCIATED WITH GENETIC
      ANALYSIS TESTS PERFORMED USING OUR PRODUCTS, WHICH MAY REQUIRE US TO
      DEFEND OURSELVES IN COSTLY LITIGATION.

      We may be subject to claims resulting from incorrect results of analysis
of genetic variations or other screening tests performed using our products.
Litigation of these claims can be costly. We could expend significant funds
during any litigation proceeding brought against us. Further, if a court were to
require us to pay damages to a plaintiff, the amount of such damages could
significantly harm our business, financial condition and results of operations.

      IF OUR VENDORS FAIL TO SUPPLY US WITH COMPONENTS FOR WHICH AVAILABILITY IS
      LIMITED, WE MAY EXPERIENCE DELAYS IN OUR PRODUCT DEVELOPMENT AND
      COMMERCIALIZATION.

      Certain key components of our manufacturing equipment and products are
currently available only from a single source or a limited number of sources. We
currently rely on outside vendors to manufacture certain components of our
products and certain reagents we provide in our products. Some or all of these
key components may not continue to be available in commercial quantities at
acceptable costs. It could be time consuming and expensive for us to seek
alternative sources of supply. Consequently, if any events cause delays or
interruptions in the supply of our components, we may not be able to supply our
customers with our products on a timely basis which would adversely affect our
results of operations.

      RELIANCE ON COMPUTER HARDWARE, SOFTWARE AND APPLICATIONS FOR OPERATIONS

      We depend on the continuous, effective, reliable and secure operation of
our computer hardware, software, networks, servers, related infrastructure and
applications for the successful operations of our business. Should we encounter
difficulties with such systems, our business, financial condition and results of
operations could be negatively impacted.

      FUTURE ISSUANCE OF OUR PREFERRED STOCK MAY DILUTE THE RIGHTS OF OUR COMMON
      STOCKHOLDERS.

                                       19
<PAGE>

      Our Board of Directors has the authority to issue up to 10,000,000 shares
of preferred stock and to determine the price, privileges and other terms of
these shares without any further approval of our stockholders. The rights of the
holders of common stock may be adversely affected by the rights of our holders
of our preferred stock that may be issued in the future.

      AUTHORIZED STOCK BUY BACK PROGRAM MAY DIMINISH OUR CASH RESERVES

      Our Board of Directors has authorized the Company to acquire on behalf of
the Company, from time to time, in the open market or through private
transactions, shares of the common stock of the Company at prices approximating
then existing market prices, provided that such repurchase program does not
exceed 5% of the outstanding common stock of the Company. The use of the
Company's cash for such a repurchase program may or may not have a negative
impact on company performance or stock price.

      WE HAVE VARIOUS MECHANISMS IN PLACE THAT A STOCKHOLDER MAY NOT CONSIDER
      FAVORABLE AND WHICH MAY DISCOURAGE UNSOLICITED TAKEOVER ATTEMPTS.

      Certain provisions of our certificate of incorporation and bylaws, as well
as Section 203 of the Delaware General Corporation Law, may discourage, delay or
prevent changes in our board of directors, executive officers or other senior
management. These provisions may also be used by incumbent management to delay a
change of control or acquisition of our Company. These provisions include:

      -     authorizing our Board of Directors to issue preferred stock and to
            determine the price, privileges and other terms of these shares
            without any further approval of our stockholders, which could
            increase the number of outstanding shares or thwart an unsolicited
            takeover attempt;

      -     establishing a classified Board of Directors with staggered,
            three-year terms, which may lengthen the time required to gain
            control of our Board of Directors;

      -     prohibiting cumulative voting in the election of directors, which
            would allow a majority of stockholders to control the election of
            all directors;

      -     requiring super-majority voting to effect certain amendments to our
            certificate of incorporation and bylaws;

      -     limiting who may call special meetings of stockholders;

      -     prohibiting stockholder action by written consent, which requires
            all actions to be taken at a meeting of stockholders; and

      -     establishing advance notice requirements for nominations of
            candidates for election to the Board of Directors or for proposing
            matters that can be acted upon by stockholders at stockholder
            meetings.

      A change of control could be beneficial to stockholders in a situation in
which the acquisition price being paid by the party seeking to acquire us
represented a substantial premium over the prevailing market price of our common
stock. If our board of directors were not in favor of such a transaction, the
provisions of our certificate of incorporation and bylaws described above could
be used by our board of directors to delay or reduce the likelihood of
completion of the acquisition.

      OUR DIRECTORS, EXECUTIVE OFFICERS AND PRINCIPAL STOCKHOLDERS WILL HAVE
      SUBSTANTIAL CONTROL OVER OUR AFFAIRS.

      As of February 14, 2005, our directors, executive officers and principal
stockholders beneficially owned, in the aggregate, approximately 21% of our
common stock. These stockholders, acting together, will have the ability to
exert substantial influence over all matters requiring approval by our
stockholders. These matters include the election and removal of directors and
any merger, consolidation or sale of all or substantially all of our assets. In
addition, they may dictate the management of our business and affairs. This
concentration of ownership could have the effect of delaying, deferring or
preventing a change in control, or impeding a merger or consolidation, takeover
or other business combination of which you might otherwise approve.

RISKS RELATED TO THE BIOTECHNOLOGY INDUSTRY

                                       20
<PAGE>

      PUBLIC OPINION REGARDING ETHICAL ISSUES SURROUNDING THE USE OF GENETIC
      INFORMATION MAY ADVERSELY AFFECT DEMAND FOR OUR PRODUCTS.

      Public opinion regarding ethical issues related to the confidentiality and
appropriate use of genetic testing results may influence governmental
authorities to call for limits on, or regulation of the use of, genetic testing.
In addition, such authorities could prohibit testing for genetic predisposition
to certain conditions, particularly for those that have no known cure.
Furthermore, adverse publicity or public opinion relating to genetic research
and testing, even in the absence of any governmental regulation, could harm our
business. Any of these scenarios could reduce the potential markets for our
products, which could materially and adversely affect our revenues.

      GOVERNMENT REGULATION OF GENETIC RESEARCH OR TESTING MAY ADVERSELY AFFECT
      THE DEMAND FOR OUR PRODUCTS AND IMPAIR OUR BUSINESS AND OPERATIONS.

      Federal, state and local governments may adopt further regulations
relating to the conduct of genetic research and genetic testing. These new
regulations could limit or restrict genetic research activities as well as
genetic testing for research or clinical purposes. In addition, if state and
local regulations are adopted, these regulations may be inconsistent with, or in
conflict with, regulations adopted by other state or local governments.
Regulations relating to genetic research activities could adversely affect our
ability to conduct our research and development activities. Regulations
restricting genetic testing could adversely affect our ability to market and
sell our products. Accordingly, any regulations of this nature could harm our
business.

      HEALTH CARE COST CONTAINMENT INITIATIVES COULD LIMIT THE ADOPTION OF
      GENETIC TESTING AS A CLINICAL TOOL, WHICH WOULD HARM OUR REVENUES AND
      PROSPECTS.

      In recent years, health care payors as well as federal and state
governments have focused on containing or reducing health care costs. We cannot
predict the effect that any of these initiatives may have on our business, and
it is possible that they will adversely affect our business. Health care cost
containment initiatives focused on genetic testing could cause the growth in the
clinical market for genetic testing to be curtailed or slowed. In addition,
health care cost containment initiatives could also cause pharmaceutical
companies to reduce research and development spending. In either case, our
business and our operating results would be harmed. In addition, genetic testing
in clinical settings is often billed to third-party payors, including private
insurers and governmental organizations. If our current and future clinical
products are not considered cost-effective by these payors, reimbursement may
not be available to users of our products. In this event, potential customers
would be much less likely to use our products, and our business and operating
results would be seriously harmed.

      REIMBURSEMENT FOR USE OF OUR TESTS

      Sales of our products will depend, in large part, on the availability of
adequate reimbursement to users of those products from government insurance
plans, managed care organizations and private insurance plans. Physicians'
recommendations to use our products are likely to be influenced by the
availability of reimbursement by insurance companies and other third-party
payors. There can be no assurance that insurance companies or third-party payors
will provide or continue to provide coverage for our products or that
reimbursement levels will be adequate for the reimbursement of the providers of
our products. In addition, outside the United States, reimbursement systems vary
from country to country and there can be no assurances that third-party
reimbursement will be made available at an adequate level, if at all, for our
products under any other reimbursement system. Lack of or inadequate
reimbursement by government or other third-party payors for our products would
have a material adverse effect on our business, financial condition and results
of operations.

AVAILABLE INFORMATION

      The Company makes available financial information, news releases and other
information on its Web site at www.twt.com. The Company's annual reports on Form
10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, its Code of
Business Conduct, and any amendments to those reports filed or furnished
pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 are
available free of charge on its Web site as soon as reasonably practicable after
the Company files such reports and amendments with, or furnishes them to, the
Securities and Exchange Commission.

                                       21
<PAGE>

ITEM 2.  PROPERTIES

      Our facility consists of space for research and development,
manufacturing, product support operations, marketing and corporate headquarters
and administration. Our facility is located in Madison, Wisconsin. Our facility
is leased and described by the following:

<TABLE>
<CAPTION>
                                    APPROX.
                                    SQUARE
        TYPE OF FACILITY            FOOTAGE          LEASE EXPIRATION
------------------------------      -------     --------------------------------
<S>                                 <C>         <C>
Headquarters, research and
development, manufacturing,
selling, marketing, and
administration.................     95,000      September 2011, with option to
                                                extend for three 5-year periods.
</TABLE>

      Under the terms of the existing lease, we pay rent of approximately
$173,000 per month. We believe that our current facility will be adequate to
meet our near-term space requirements and are currently seeking to sublease some
of our existing corporate office space. We also believe that suitable additional
space will be available to us, when needed, on commercially reasonable terms.

ITEM 3.  LEGAL PROCEEDINGS

      From time to time, we may be involved in litigation relating to claims
arising out of our operations in the usual course of business. There are no
material legal proceedings filed in which we are a defendant as of December 31,
2004.

      In September 2004, we filed a patent infringement suit against Stratagene
Corporation in Madison the U. S. District Court for the Western District of
Wisconsin, located in Madison, Wisconsin. The complaint alleges that Stratagene
is infringing certain  claims of two of our patents. Trial is currently
scheduled for August 2005.

ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

      None.

                                     PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY SECURITIES

      Our common stock is quoted on the NASDAQ National Market under the symbol
"TWTI" and has been publicly traded since February 2001. The following table
sets forth for each quarter in 2004 and 2003 the high and low sales prices per
share, based on closing prices, for our common stock as reported on the NASDAQ
National Market.

<TABLE>
<CAPTION>
    FISCAL YEAR ENDED
    DECEMBER 31, 2004       HIGH        LOW
------------------------  -------     -------
<S>                       <C>         <C>
First Quarter..........   $  4.82     $  3.37
Second Quarter.........   $  5.40     $  4.21
Third Quarter..........   $  6.88     $  3.19
Fourth Quarter.........   $  8.94     $  6.88
</TABLE>

<TABLE>
<CAPTION>
    FISCAL YEAR ENDED
    DECEMBER 31, 2003       HIGH        LOW
------------------------  -------     -------
<S>                       <C>         <C>
First Quarter..........   $  3.70     $  2.64
Second Quarter.........   $  5.30     $  3.29
Third Quarter..........   $  4.65     $  3.13
Fourth Quarter.........   $  4.75     $  3.25
</TABLE>

      As of March 10, 2005, approximately 345 shareholders of record held our
common stock.

      We have never declared or paid any dividends on our capital stock. We
currently expect to retain future earnings, if any, to support the development
of our business and do not anticipate paying any cash dividends in the
foreseeable future.

                                       22
<PAGE>

ITEM 6.  SELECTED FINANCIAL DATA

      The following table summarizes certain selected financial data that is
derived from the Company's audited financial statements. All the information
should be read in conjunction with the Company's audited financial statements
and notes thereto and with Management's Discussion and Analysis of Financial
Condition and Results of Operations, which are included elsewhere in this
Form 10-K. The Company's audited statements of operations for the years ended
December 31, 2004, 2003, and 2002 and the audited balance sheets as of December
31, 2004 and 2003 are included elsewhere in this filing. The corresponding
selected financial data set forth below should be read in conjunction with such
audited financial statements.

<TABLE>
<CAPTION>
                                                                FOR YEAR ENDED DECEMBER 31,
                                                        (IN THOUSANDS, EXCEPT FOR PER SHARE AMOUNTS)
                                             -----------------------------------------------------------------
                                                2004         2003           2002           2001         2000
                                             ---------    ---------      ---------      ---------    ---------
<S>                                          <C>          <C>            <C>            <C>          <C>
STATEMENT OF OPERATIONS DATA:
Revenues                                     $  46,493    $  36,320      $  32,355      $  34,092    $  11,417
Operating expenses:
  Cost of goods sold                            12,492       12,840         21,320         32,746       11,518
  Research and development                      11,637       12,035         13,934         16,179        7,337
  Selling and marketing                         10,803        8,859          9,578          9,200        4,983
  General and administrative                    13,262       10,363         11,984         14,521        7,408
  Restructuring and other charges                  (98)           -         11,087              -            -
  Impairment of goodwill and other
   intangible assets                                 -            -          4,810              -        5,789
  Impairment of equipment                          795            -              -              -            -
  Merger costs                                       -            -              -              -          833
                                             ---------    ---------      ---------      ---------    ---------
     Total operating expenses                   48,891       44,097         72,713         72,646       37,868
                                             ---------    ---------      ---------      ---------    ---------
Loss from operations                            (2,398)      (7,777)       (40,358)       (38,554)     (26,451)
Other income (expense), net                        513         (339)          (506)         1,762          877
                                             ---------    ---------      ---------      ---------    ---------
Loss before income taxes                        (1,885)      (8,116)       (40,864)       (36,792)     (25,574)
  Provision for income taxes                        57            -              -              -            -
                                             ---------    ---------      ---------      ---------    ---------
Net loss                                        (1,942)      (8,116)       (40,864)       (36,792)     (25,574)
Deemed dividend upon issuance of
  convertible preferred stock                        -            -              -              -      (17,023)
                                             ---------    ---------      ---------      ---------    ---------
Net loss attributable to common
shareholders                                 $  (1,942)   $  (8,116)     $ (40,864)     $ (36,792)   $ (42,597)
                                             =========    =========      =========      =========    =========

Basic and diluted net loss per share         $   (0.05)   $   (0.20)     $   (1.04)     $   (1.03)   $   (2.83)
                                             =========    =========      =========      =========    =========
Shares used in computing basic and diluted
 net loss per share                             40,463       39,749         39,457         35,714       15,078
Pro forma basic and diluted net loss per
 share (a)                                                                              $   (0.98)   $   (0.98)
Shares used in computing pro forma basic
and diluted net loss per share                                                             37,483       26,120
</TABLE>

<TABLE>
<CAPTION>
                                                                     DECEMBER 31,
                                                                    (IN THOUSANDS)
                                        ----------------------------------------------------------------------
                                           2004           2003            2002          2001            2000
                                        ----------     ----------      ----------     ---------      ---------
<S>                                     <C>            <C>             <C>            <C>            <C>
BALANCE SHEET DATA:
Cash, cash equivalents, and short term
 investments                            $   66,690     $   57,816      $   60,315     $  73,299      $  47,179
Working capital                             52,901         42,655          43,518        64,834         29,122
Total assets                                88,068         80,422          89,223       131,615         83,193
Long-term obligations, net of current
 portion                                       487             13              13         6,694         12,095
Accumulated deficit                       (135,774)      (133,832)       (125,715)      (84,852)       (48,149)
Total shareholders' equity                  62,735         59,288          65,287       104,753         47,039
</TABLE>

(a) Pro forma basic and diluted net loss per common share for 2001 and 2000
    gives effect to common stock equivalent shares arising, assuming that the
    preferred stock and convertible note payable were converted to common stock
    upon issuance using the "if converted" method. This pro forma disclosure has
    been included because the preferred stock and convertible note payable
    automatically converted to common stock upon closing of our initial public
    offering in February 2001.

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

      This Management's Discussion and Analysis of Financial Condition and
Results of Operations should be read in conjunction with "Selected Financial
Data" and our financial statements, including the notes thereto, included
elsewhere in this Form 10-K.

                                       23
<PAGE>

OVERVIEW

      Third Wave Technologies, Inc. is a leading molecular diagnostics company.
We believe our proprietary Invader(R) chemistry, a novel, proprietary molecular
chemistry, is easier to use, more accurate and cost-effective, and enables
higher testing throughput. These and other advantages conferred by our chemistry
are enabling us to provide clinicians and researchers with superior molecular
solutions.

      More than 110 clinical laboratory customers are using Third Wave's
molecular diagnostic reagents. Other customers include pharmaceutical and
biotechnology companies, academic research centers and major health care
providers.

      Third Wave markets a growing number of products, including
analyte specific reagents (ASRs). These ASRs allow certified clinical reference
laboratories to create assays to perform hepatitis C virus genotyping, to screen
for cystic fibrosis and other inherited disorders, and to test for the Factor V
Leiden and a host of other mutations associated with predisposition to
cardiovascular and other diseases. The Company has developed or plans to develop
a menu of molecular diagnostic products for clinical applications that include
genetic testing, pharmacogenetics, oncology/chromosomal analysis, and infectious
disease/women's health. The Company also has a number of other Invader(R)
products including those for research, agricultural and other applications.

      Our financial results may vary significantly from quarter to quarter due
to fluctuations in the demand for our products, timing of new product
introductions and deliveries made during the quarter, the timing of research,
development and grant revenues, and increases in spending, including expenses
related to our product development.

CRITICAL ACCOUNTING POLICIES

      Management's discussion and analysis of our financial condition and
results of operations are based upon our consolidated financial statements,
which have been prepared in accordance with accounting principles generally
accepted in the United States. We review the accounting policies we use in
reporting our financial results on a regular basis. The preparation of these
financial statements requires us to make estimates and judgments that affect the
reported amounts of assets, liabilities, revenues and expenses and related
disclosure of contingent assets and liabilities. On an ongoing basis, we
evaluate our estimates, including those related to accounts receivable,
inventories, equipment and leasehold improvements and intangible assets. We base
our estimates on historical experience and on various other assumptions that are
believed to be reasonable under the circumstances, the results of which form the
basis for making judgments about the carrying value of assets and liabilities
that are not readily apparent from other sources. Results may differ from these
estimates due to actual outcomes being different from those on which we based
our assumptions. These estimates and judgments are reviewed by management on an
ongoing basis, and by the Audit Committee at the end of each quarter prior to
the public release of our financial results. We believe the following critical
accounting policies affect our more significant judgments and estimates used in
the preparation of our consolidated financial statements.

RESTRUCTURING AND OTHER CHARGES

      The restructuring and other charges resulting from the restructuring plan
in the third quarter of 2002 was recorded in accordance with Emerging Issues
Task Force ("EITF") Issue No. 94-3, "Liability Recognition for Certain Employee
Termination Benefits and Other Costs to Exit an Activity (including Certain
Costs Incurred in a Restructuring)," Staff Accounting Bulletin No. 100,
"Restructuring and Impairment Charges," and Financial Accounting Standards Board
("FASB") Statement No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets." The restructuring charge was comprised primarily of costs to
consolidate facilities, impairment charges for abandoned leasehold improvements
and equipment to be sold or abandoned, prepayment penalties related mainly to
capital lease obligations on equipment to be sold or abandoned, and other costs
related to the restructuring. In calculating the cost to consolidate the
facilities, we estimated the future lease and operating costs to be paid until
the leases are terminated and the amount, if any, of sublease receipts for each
location. This required us to estimate the timing and costs of each lease to be
terminated, the amount of operating costs, and the timing and rate at which we
might be able to sublease the site. To form our estimates for these costs, we
performed an assessment of the affected facilities and considered the current
market conditions for each site. Estimates were also used in our calculation of
the estimated realizable value on equipment that was held for sale. These
estimates were formed based on recent history of sales of similar equipment and
market conditions. Our assumptions on the lease termination payments, operating
costs until terminated, and the offsetting sublease receipts may turn out to be
incorrect and our actual cost may be materially different from our estimates.

                                       24
<PAGE>

LONG-LIVED ASSETS -- IMPAIRMENT

      Equipment, leasehold improvements and amortizable identifiable intangible
assets are reviewed for impairment whenever events or changes in circumstances
indicate that the carrying amount may not be recoverable. For assets held and
used, if the sum of the expected undiscounted cash flows is less than the
carrying value of the related asset or group of assets, a loss is recognized for
the difference between the fair value and carrying value of the asset or group
of assets. For assets removed from service and held for sale, we estimate the
fair market value of such assets and record an adjustment if fair value less
costs to sell is lower than carrying value.

      Goodwill and intangible assets deemed to have indefinite lives are not
amortized, but are subject to annual impairment tests under Statement of
Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets."
The annual impairment test was completed in the quarters ended September 2004,
2003, and 2002.

DERIVATIVE INSTRUMENTS

      We sell products in a number of countries throughout the world. During
2004, 2003 and 2002, we sold certain products with the resulting accounts
receivable denominated in Japanese Yen. We purchased foreign currency forward
contracts to manage the risk associated with collections of receivables
denominated in foreign currencies in the normal course of business. These
derivative instruments have maturities of less than one year and are intended to
offset the effect of transaction gains and losses. There were no contracts
outstanding at December 31, 2004. Contracts outstanding at December 31, 2003
represented a combined U.S. dollar equivalent commitment of approximately $9.5
million. The changes in the fair value of the derivatives and the loss or gain
on the hedged asset relating to the risk being hedged are recorded currently in
earnings.

INVENTORIES -- SLOW MOVING AND OBSOLESCENCE

      Significant management judgment is required to determine the reserve for
obsolete or excess inventory. Inventory on hand may exceed future demand either
because of process improvements or technology advancements, the amount on hand
is more than can be used to meet future need, or estimates of shelf lives may
change. We currently consider all inventory that we expect will have no activity
within one year as well as any additional specifically identified inventory to
be subject to a provision for excess inventory. We also provide for the total
value of inventories that we determine to be obsolete based on criteria such as
changing manufacturing processes and technologies. At December 31, 2004, our
inventory reserves were $650,000, or 34% of our $1.9 million total gross
inventories.

RESULTS OF OPERATIONS

YEARS ENDED DECEMBER 31, 2004 AND 2003

      Revenues. Revenues for the year ended December 31, 2004 of $46.5 million
represented an increase of $10.2 million as compared to revenues of $36.3
million for the year ended December 31, 2003.

      Product revenues increased to $46.0 million for the year ended December
31, 2004, from $35.1 million in the year ended December 31, 2003. The increase
in product sales during 2004 resulted from an increase in U.S. molecular
diagnostic sales and higher genomic research product sales to a Japanese
research institute for use by several end users compared to prior year. We
expect our molecular diagnostic revenues to increase in 2005.

      There were no development revenues in the year ended December 31, 2004,
compared to $0.9 million for the year ended December 31, 2003. The decrease was
due to the transition from development revenue to product revenue in our
development and commercialization agreement with BML, Inc. (BML). Under the
agreement, we develop assays in accordance with a mutually agreed development
program for use in clinical applications by BML.

      License and royalty revenue was $0.2 million in the years ended December
31, 2004 and 2003. In the years ended December 31, 2004 and 2003, we
received royalty revenue of $150,000 and $100,000 respectively, from Aclara, per
the license and supply agreement.

      Significant Customer. We generated $27.6 million, or 59% of our revenues,
from sales to a major Japanese research institute for use by several end-users
during the year ended December 31, 2004. As of December 31, 2004, $2.1 million
of our accounts receivable were attributable to this customer. This customer
will continue to purchase our products in 2005; however, the timing and
total of such purchases will be influenced by the funding process and amounts
which are unpredictable and unknown to us.

                                       25
<PAGE>

      Cost of Goods Sold. Cost of goods sold consists of materials used in the
manufacture of product, depreciation on manufacturing capital equipment,
salaries and related expenses for management and personnel associated with our
manufacturing and quality control departments and amortization of licenses and
settlement fees. For the year ended December 31, 2004, cost of goods sold
decreased to $12.5 million, compared to $12.8 million for the year ended
December 31, 2003. The decrease was due to improved efficiencies. We expect
gross margin to improve as clinical revenues increase.

      Research and Development Expenses. Our research activities are focused on
moving our technology into broader markets. Our development activities are
focused on new products to expand our molecular diagnostics menu. Research and
development expenses consist primarily of salaries and related personnel costs,
material costs for assays and product development, fees paid to consultants,
depreciation and facilities costs and other expenses related to the design,
development, testing and enhancement of our products and acquisition of
technologies used or to be used in our products. Research and development costs
are expensed as they are incurred. Research and development expenses for the
year ended December 31, 2004 were $11.6 million, compared to $12.0 million for
the year ended December 31, 2003. The decrease in research and development
expenses was primarily attributable to decreased material costs for assay and
product development and a decrease in personnel related expenses. We will
continue to invest in research and development, and expenditures in this area
may increase as we expand our product development efforts.

      Selling and Marketing Expenses. Selling and marketing expenses consist
primarily of salaries and related personnel costs for our sales and marketing
management and field sales force, commissions, office support and related costs,
and travel and entertainment. Selling and marketing expenses for the year ended
December 31, 2004 were $10.8 million, an increase of $1.9 million, as compared
to $8.9 million for the year ended December 31, 2003. The increase was
attributable to an increase in personnel related expenses. We anticipate selling
and marketing expenses to be at or above 2004 levels.

      General and Administrative Expenses. General and administrative expenses
consist primarily of salaries and related expenses for executive, finance and
other administrative personnel, legal and professional fees, office support and
depreciation. General and administrative expenses increased to $13.3 million for
the year ended December 31, 2004, from $10.4 million for the year ended December
31, 2003. The increase was due to an increase in personnel related expenses and
professional and consulting fees in 2004 compared to 2003. We anticipate general
and administrative expenses to be at or above 2004 levels.

      Impairment Loss. In the year ended December 31, 2004, an impairment charge
of $0.8 million was recorded for equipment written down to fair value.

      Restructuring. In the year ended December 31, 2004, a $98,000 reduction to
the restructuring reserve was recorded due to a change in assumptions. The
estimate of the amount of sublease income expected was reduced. In addition, the
estimated lease and operating expenses were also reduced, based on a portion of
the office space being utilized.

      Interest Income. Interest income for the year ended December 31, 2004 was
$0.8 million, compared to $0.6 million for the year ended December 31, 2003.
This increase was primarily due to higher interest rates and higher cash
balances in 2004 compared to 2003.

      Interest Expense. Interest expense for the years ended December 31, 2004
and 2003 was approximately $0.3 million.

      Provision for Income Taxes. Income tax expense for the year ended December
31, 2004 of $57,000 was due to alternative minimum tax.

YEARS ENDED DECEMBER 31, 2003 AND 2002

      Revenues. Revenues for the year ended December 31, 2003 of $36.3 million
represented an increase of $3.9 million as compared to revenues of $32.4 million
for the year ended December 31, 2002.

      Product revenues increased to $35.1 million for the year ended December
31, 2003, from $28.9 million in the year ended December 31, 2002. The increase
in product sales during 2003 resulted from an increase in U.S. molecular
diagnostic sales and higher genomic research product sales to the Japanese
government compared to prior year.

      Development revenues decreased to $0.9 million for the year ended December
31, 2003, from $1.6 million for the year ended December 31, 2002. The decrease
was primarily due to a decrease in funding amounts per our development and
commercialization

                                       26
<PAGE>
agreement with BML.

      License and royalty revenue decreased to $0.2 million in the year ended
December 31, 2003, from $1.5 million for 2002. The decrease was due to a
decrease in license revenue from Aclara. In the year ended December 31, 2003, we
received royalty revenue of $0.1 million from Aclara, per the license and supply
agreement, compared to revenue of $1.5 million for the license granted to Aclara
in the year ended December 31, 2002.

      Significant Customer. We generated $25.0 million, or 69% of our revenues,
from sales to a major Japanese research institute for use by several end-users
during the year ended December 31, 2003. As of December 31, 2003, $1.0 million
of our accounts receivable were attributable to this customer.

      Cost of Goods Sold. Cost of goods sold consists of materials used in the
manufacture of product, depreciation on manufacturing capital equipment,
salaries and related expenses for management and personnel associated with our
manufacturing and quality control departments and amortization of licenses and
settlement fees. For the year ended December 31, 2003, cost of goods sold
decreased to $12.8 million, compared to $21.3 million for the year ended
December 31, 2002. The decrease was due to lower fixed costs as a result of the
restructuring that occurred in the third quarter of 2002.

      Research and Development Expenses. Our research activities are focused on
moving our technology into broader markets. Our development activities are
focused on new products to expand our molecular diagnostics menu. Research and
development expenses consist primarily of salaries and related personnel costs,
material costs for assays and product development, fees paid to consultants,
depreciation and facilities costs and other expenses related to the design,
development, testing and enhancement of our products and acquisition of
technologies used or to be used in our products. Research and development costs
are expensed as they are incurred. Research and development expenses for the
year ended December 31, 2003 were $12.0 million, compared to $13.9 million for
the year ended December 31, 2002. The decrease in research and development
expenses was primarily attributable to decreased material costs for assay and
product development and a decrease in fees paid for consulting, development, and
other services.

      Selling and Marketing Expenses. Selling and marketing expenses consist
primarily of salaries and related personnel costs for our sales and marketing
management and field sales force, commissions, office support and related costs,
and travel and entertainment. Selling and marketing expenses for the year ended
December 31, 2003 were $8.9 million, a decrease of $0.7 million, as compared to
$9.6 million for the year ended December 31, 2002. The decrease was attributable
to a combination of a reduction in distributor commissions and consulting fees
and an increase in personnel related expenses.

      General and Administrative Expenses. General and administrative expenses
consist primarily of salaries and related expenses for executive, finance and
other administrative personnel, legal and professional fees, office support and
depreciation. General and administrative expenses decreased to $10.4 million for
the year ended December 31, 2003, from $12.0 million for the year ended December
31, 2002. The decrease was due to a decrease in personnel related expenses and
consulting fees in 2003 compared to 2002.

      Interest Income. Interest income for the year ended December 31, 2003 was
$0.6 million, compared to $1.0 million for the year ended December 31, 2002.
This decrease was primarily due to lower interest rates and lower cash balances
in 2003 compared to 2002.

      Interest Expense. Interest expense for the year ended December 31, 2003
was approximately $0.3 million, compared to $1.1 million in the year ended
December 31, 2002. The decrease in interest expense was primarily due to lower
interest rates on debt.

LIQUIDITY AND CAPITAL RESOURCES

      Since our inception, we have financed our operations primarily through
private placements of equity securities, research grants from federal and state
government agencies, payments from strategic collaborators, equipment loans,
capital leases, sale of products, a convertible note and an initial public
offering. As of December 31, 2004, we had cash, cash equivalents and short-term
investments of $66.7 million.

      Net cash provided by operations for the year ended December 31, 2004 was
$6.6 million, compared with net cash used of $3.2 million in 2003 and $14.0
million in 2002. The change was primarily due to lower operating losses.

                                       27
<PAGE>
      Net cash used in investing activities for the year ended December 31, 2004
was $0.8 million, compared to cash provided of $0.2 million in 2003 and a cash
usage of $8.7 million in 2002. Capital expenditures were $0.6 million in the
year ended December 31, 2004, compared to $0.2 million in 2003 and $2.3 million
in 2002. Investing activities included proceeds from the sale of equipment of
less than $0.1 million in the year ended December 31, 2004, $0.3 million in the
year ended December 31, 2003 and $4.4 million in 2002. The proceeds from the
sale of equipment in 2002 was primarily in connection with our restructuring. In
the year ended December 31, 2004, the net cash usage from the purchases, sales
and maturities of short-term investments was $0.3 million, compared to net cash
proceeds of $0.2 million in 2003 and a net cash usage of $10.8 million in 2002.
In 2004, 2003 and 2002, we purchased certificates of deposit to collateralize
our term loan with the bank.

      Net cash provided by financing activities was $2.8 million in the year
ended December 31, 2004, compared to net cash provided by financing activities
of $0.7 million in the year ended December 31, 2003 and net cash used in
financing activities of $1.1 million in 2002. Cash used in financing activities
in the year ended December 31, 2004 consisted of $34,000 to repay debt, compared
to $15,000 in 2003 and $6.6 million in 2002. Additionally, in 2004 and 2002,
$12,000 and $4.4 million was used for capital lease obligation payments,
respectively. In 2004 and 2002, cash provided by financing activities included
proceeds from long-term debt of $0.5 million and $9.5 million, respectively.
During 2002, we entered into a term loan agreement due on July 31, 2003 to pay
off the then existing debt and capital lease obligations. Upon expiration in
2003 and 2004, we renewed the term loan for an additional year. The Company
intends to renew this term loan obligation upon expiration in 2005. The term
loan is collateralized with a 12-month certificate of deposit. Proceeds from the
issuance of common stock were $2.4 million in 2004, compared to $0.7 million in
2003 and $0.3 million in 2002.

      As of December 31, 2004 and 2003, a valuation allowance equal to 100% of
our net deferred tax assets had been recognized since future realization is not
assured. At December 31, 2004, we had federal and state net operating loss
carryforwards of approximately $113 million. The net operating loss
carryforwards will expire at various dates beginning in 2008, if not utilized.
Utilization of the net operating losses to offset future taxable income may be
subject to an annual limitation due to the change of ownership provisions of
federal tax laws and similar state provisions as a result of the initial public
offering in February 2001.

      We cannot assure you that our business or operations will not change in a
manner that would consume available resources more rapidly than anticipated. We
also cannot assure you that we will not require substantial additional funding
before we can achieve profitable operations. Our capital requirements depend on
numerous factors, including the following:

      -     our progress with our research and development programs;

      -     our level of success in selling our products and technologies;

      -     our ability to establish and maintain successful collaborative
            relationships;

      -     the costs we incur in enforcing and defending our patent claims and
            other intellectual property rights; and

      -     the timing of purchases of additional capital.

CONTRACTUAL OBLIGATIONS

      The following summarizes our contractual obligations at December 31, 2004
and the effect those obligations are expected to have on our liquidity and cash
flow in future periods (in thousands):

<TABLE>
<CAPTION>
                                         LESS THAN    YEARS    YEARS     OVER
                               TOTAL      1 YEAR      2 - 3    4 - 5    5 YEARS
                              --------   ---------   ------   ------    -------
<S>                           <C>        <C>         <C>      <C>       <C>
CONTRACTUAL OBLIGATIONS
  Non-cancelable operating
    lease obligation          $ 13,697   $   1,806   $3,833   $ 4,145   $ 3,913
  Capital lease obligations        268          76      128        55         9
  Long-term debt                 9,949       9,614      228       107         -
                              --------   ---------   ------   -------   -------
Total obligations             $ 23,914   $  11,496   $4,189   $ 4,307   $ 3,922
                              --------   ---------   ------   -------   -------
</TABLE>

      We also have an available and unused $1.3 million letter of credit.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

      Our exposure to market risk is currently confined to changes in foreign
exchange and interest rates. The securities in our investment portfolio are not
leveraged and, due to their short-term nature, are subject to minimal interest
rate risk. We currently do not

                                       28
<PAGE>

hedge interest rate exposure. Due to the short-term maturities of our
investments, we do not believe that an increase in market rates would have any
negative impact on the realized value of our investment portfolio.

      To reduce foreign exchange risk, we selectively use financial instruments.
Our earnings are affected by fluctuations in the value of the U.S. Dollar
against foreign currencies as a result of the sales of our products in foreign
markets. Forward foreign exchange contracts are used to hedge against the
effects of such fluctuations. Our policy prohibits the trading of financial
instruments for profit. A discussion of our accounting policies for derivative
financial instruments is included in the notes to the financial statements.

                                       29
<PAGE>

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

CONSOLIDATED FINANCIAL STATEMENTS

Third Wave Technologies, Inc.
Years ended December 31, 2004, 2003 and 2002

                          Third Wave Technologies, Inc.

                   Index to Consolidated Financial Statements

                                    CONTENTS
<Table>
<S>                                                                              <C>
Report of Independent Registered Public Accounting Firm......................... 31
Consolidated Financial Statements
Consolidated Balance Sheets as of December 31, 2004 and 2003.................... 32
Consolidated Statements of Operations for the years ended
   December 31, 2004, 2003 and 2002............................................. 33
Consolidated Statements of Shareholders' Equity for the years ended December
   31, 2004, 2003 and 2002...................................................... 34
Consolidated Statements of Cash Flows for the years ended December 31, 2004,
   2003 and 2002................................................................ 35
Notes to Consolidated Financial Statements...................................... 36
</Table>
                                       30
<PAGE>

             Report of Independent Registered Public Accounting Firm

To the Board of Directors and Shareholders of
Third Wave Technologies, Inc.

We have audited the accompanying consolidated balance sheets of Third Wave
Technologies, Inc. (the Company) as of December 31, 2004 and 2003, and the
related consolidated statements of operations, shareholders' equity and cash
flows for each of the three years in the period ended December 31, 2004. Our
audits also included the financial statement schedule listed in the index at
Item 15(a). These financial statements and schedule are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements and schedule based on our audits.

We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Third Wave
Technologies, Inc. at December 31, 2004 and 2003, and the consolidated results
of its operations and its cash flows for each of the three years in the period
ended December 31, 2004, in conformity with U.S. generally accepted accounting
principles. Also, in our opinion, the related financial statement schedule, when
considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.

We also have audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the effectiveness of Third Wave
Technologies, Inc.'s internal control over financial reporting as of December
31, 2004, based on criteria established in Internal Control--Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission and our report dated March 4, 2005 expressed an unqualified
opinion thereon.

                                 Ernst & Young LLP

Milwaukee, Wisconsin
March 4, 2005

                                       31

<PAGE>


                          Third Wave Technologies, Inc.

                           Consolidated Balance Sheets

<TABLE>
<CAPTION>
                                                                               DECEMBER 31
                                                                       2004                   2003
                                                                 ----------------       -----------------
<S>                                                              <C>                    <C>
ASSETS
Current assets:
   Cash and cash equivalents                                     $     55,619,981       $      47,015,746
   Short-term investments                                              11,070,000              10,800,000
   Accounts receivable, net of allowance for doubtful
     accounts of $300,000 and $140,000 in 2004 and 2003,
     respectively                                                       5,784,679               2,061,054
   Inventories                                                          1,236,392               1,394,046
   Prepaid expenses and other                                             260,316                 485,680
                                                                 ----------------       -----------------
Total current assets                                                   73,971,368              61,756,526
Equipment and leasehold improvements:
   Machinery and equipment                                             15,832,489              18,544,956
   Leasehold improvements                                               2,277,604               2,099,104
                                                                 ----------------       -----------------
                                                                       18,110,093              20,644,060
   Less accumulated depreciation                                       12,139,423              12,116,813
                                                                 ----------------       -----------------
                                                                        5,970,670               8,527,247
Assets held for sale                                                      269,000                       -
Amortizable intangible assets                                           4,146,372               5,651,124
Indefinite-lived intangible assets                                      1,007,411               1,007,411
Goodwill                                                                  489,873                 489,873
Other assets                                                            2,212,935               2,989,752
                                                                 ----------------       -----------------
Total assets                                                     $     88,067,629       $      80,421,933
                                                                 ================       =================
</TABLE>

<TABLE>
<CAPTION>
                                                                               DECEMBER 31
                                                                       2004                   2003
                                                                 ----------------       -----------------
<S>                                                              <C>                    <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
   Accounts payable                                              $      6,519,005       $       4,955,434
   Accrued payroll and related liabilities                              2,873,506               2,802,297
   Other accrued liabilities                                            1,867,361               1,776,250
   Deferred revenue                                                       129,530                  67,760
   Long-term debt due within one year                                   9,614,127               9,500,000
   Capital lease obligations due within one year                           66,867                       -
                                                                 ----------------       -----------------
Total current liabilities                                              21,070,396              19,101,741
Deferred revenue                                                          254,434                       -
Long-term debt                                                            335,069                  13,333
Capital lease obligations                                                 151,885                       -
Other liabilities                                                       3,520,948               2,019,024
Commitments (Note 6)
Shareholders' equity:
   Participating preferred stock, Series A, $.001
     par value, 100,000 shares authorized, 0 shares
     issued and outstanding                                                     -                       -
   Common stock, $.001 par value, 100,000,000 shares
     authorized, 41,102,764 and 40,021,244 shares issued
     and outstanding in 2004 and 2003, respectively                        41,103                  40,021
   Additional paid-in capital                                         198,990,162             193,356,121
   Unearned stock compensation                                           (554,293)               (309,996)
   Foreign currency translation adjustment                                 31,949                  33,307
   Accumulated deficit                                               (135,774,024)           (133,831,618)
                                                                 ----------------       -----------------
Total shareholders' equity                                             62,734,897              59,287,835
                                                                 ----------------       -----------------
Total liabilities and shareholders' equity                       $     88,067,629       $      80,421,933
                                                                 ================       =================
</TABLE>

See accompanying notes.

                                       32

<PAGE>

                          Third Wave Technologies, Inc.

                      Consolidated Statements of Operations

<TABLE>
<CAPTION>
                                                                                       YEAR ENDED DECEMBER 31
                                                                            2004                 2003              2002
                                                                     -----------------    ----------------    -----------------
<S>                                                                  <C>                  <C>                 <C>
Revenues:
   Product sales                                                     $      46,016,127    $     35,148,297    $      28,880,942
   Development revenues                                                              -             916,664            1,641,567
   Grant revenues                                                              242,032              61,098              332,453
   License and royalty revenue                                                 234,841             193,792            1,500,000
                                                                     -----------------    ----------------    -----------------
                                                                            46,493,000          36,319,851           32,354,962
Operating expenses:
   Cost of goods sold (including amortization of capitalized legal
     settlement costs and reacquired marketing and distribution
     rights of $1,504,752, $1,504,752 and $1,930,557
      in 2004, 2003 and 2002, respectively)                                 12,491,783          12,839,502           21,320,133
   Research and development                                                 11,636,620          12,035,375           13,933,864
   Selling and marketing                                                    10,803,381           8,858,678            9,577,122
   General and administrative                                               13,262,373          10,363,139           11,984,104
   Impairment of goodwill and other intangible
     assets                                                                          -                   -            4,809,902
   Impairment of equipment                                                     794,716                   -                    -
   Restructuring and other charges                                             (98,000)                  -           11,087,233
                                                                     -----------------    ----------------    -----------------
Total operating expenses                                                    48,890,873          44,096,694           72,712,358
                                                                     -----------------    ----------------    -----------------
Loss from operations                                                        (2,397,873)         (7,776,843)         (40,357,396)
Other income (expense):
   Interest income                                                             776,295             571,282            1,006,231
   Interest expense                                                           (283,240)           (298,182)          (1,089,497)
   Other                                                                        19,753            (612,493)            (423,003)
                                                                     -----------------    ----------------    -----------------
                                                                               512,808            (339,393)            (506,269)
                                                                     -----------------    ----------------    -----------------
Loss before income taxes                                                    (1,885,065)         (8,116,236)         (40,863,665)
Provision for income taxes                                                      57,341                   -                    -
                                                                     -----------------    ----------------    -----------------
Net loss                                                             $      (1,942,406)   $     (8,116,236)   $     (40,863,665)
                                                                     =================    ================    =================
Net loss per share - basic and diluted                               $           (0.05)   $          (0.20)   $           (1.04)
</TABLE>

See accompanying notes.

                                       33

<PAGE>

Third Wave Technologies
Consolidated Statement of Shareholders' Equity

<TABLE>
<CAPTION>
                                                                           Common Stock
                                                                    ------------------------                      Foreign
                                                                                 Additional                       Currency
                                                                                  Paid in       Unearned Stock   Translation
                                                                      Par         Capital        Compensation     Adjustment
                                                                    -------     ------------    --------------   -----------
<S>                                                                 <C>         <C>             <C>              <C>
Balance at December 31, 2001                                        $39,374     $191,426,698     $(1,861,566)     $       -
   Common stock issued for stock options and stock purchase plan
   - 185,560 shares                                                     186          300,931               -
   Unearned stock compensation                                            -          147,932        (147,932)             -
   Amortization of unearned stock compensation                            -                -       1,248,154              -
   Reversal of unearned stock compensation related to terminated
   employees                                                              -         (294,425)        143,098              -
   Net loss and comprehensive loss                                        -                -               -              -
                                                                    -------     ------------     -----------      ---------
Balance at December 31, 2002                                         39,560      191,581,136        (618,246)             -
   Common stock issued for stock options and stock purchase plan
   - 461,670 shares                                                     461          721,568               -
   Unearned stock compensation                                            -        1,162,477      (1,162,477)             -
   Amortization of unearned stock compensation                            -                -       1,374,377              -
   Reversal of unearned stock compensation related to terminated
   employees                                                              -         (109,060)         96,350              -
   Net loss                                                               -                -               -              -
   Foreign currency translation adjustment                                -                -               -         33,307
   Comprehensive loss
                                                                    -------     ------------     -----------      ---------
Balance at December 31, 2003                                         40,021      193,356,121        (309,996)        33,307
   Common stock issued for stock options and stock purchase plan
   - 1,081,520 shares                                                 1,082        2,363,289               -              -
   Unearned stock compensation                                            -        3,270,752      (3,270,752)             -
   Amortization of unearned stock compensation                            -                -       3,026,455              -
   Net loss                                                               -                -               -
   Foreign currency translation adjustment                                -                -               -         (1,358)
   Comprehensive loss
                                                                    -------     ------------     -----------      ---------
Balance at December 31, 2004                                        $41,103     $198,990,162     $  (554,293)     $  31,949
                                                                    =======     ============     ============     =========
</TABLE>

<TABLE>
<CAPTION>
                                                                     Accumulated
                                                                       Deficit           Total
                                                                    ------------      ------------
<S>                                                                 <C>               <C>
Balance at December 31, 2001                                        $ (84,851,717)    $104,752,789
   Common stock issued for stock options and stock purchase plan
   - 185,560 shares                                                             -          301,117
   Unearned stock compensation                                                  -                -
   Amortization of unearned stock compensation                                  -        1,248,154
   Reversal of unearned stock compensation related to terminated
   employees                                                                    -         (151,327)
   Net loss and comprehensive loss                                    (40,863,665)     (40,863,665)
                                                                    -------------     ------------
Balance at December 31, 2002                                         (125,715,382)      65,287,068
   Common stock issued for stock options and stock purchase plan
   - 461,670 shares                                                             -          722,029
   Unearned stock compensation                                                  -                -
   Amortization of unearned stock compensation                                  -        1,374,377
   Reversal of unearned stock compensation related to terminated
   employees                                                                    -          (12,710)
   Net loss                                                            (8,116,236)      (8,116,236)
   Foreign currency translation adjustment                                      -           33,307
                                                                                      ------------
   Comprehensive loss                                                                   (8,082,929)
                                                                    -------------     ------------
Balance at December 31, 2003                                         (133,831,618)      59,287,835
   Common stock issued for stock options and stock purchase plan
   - 1,081,520 shares                                                           -        2,364,371
   Unearned stock compensation                                                  -                -
   Amortization of unearned stock compensation                                  -        3,026,455
   Net loss                                                            (1,942,406)      (1,942,406)
   Foreign currency translation adjustment                                      -           (1,358)
                                                                                      ------------
   Comprehensive loss                                                                   (1,943,764)
                                                                    -------------     ------------
Balance at December 31, 2004                                        $(135,774,024)    $ 62,734,897
                                                                    =============     ============
</TABLE>

<PAGE>

                          Third Wave Technologies, Inc.

                      Consolidated Statements of Cash Flows

<TABLE>
<CAPTION>
                                                                                 YEAR ENDED DECEMBER 31
                                                                    2004                  2003                  2002
                                                              ---------------       ----------------       ---------------
<S>                                                           <C>                   <C>                    <C>
OPERATING ACTIVITIES
Net loss                                                      $    (1,942,406)      $     (8,116,236)      $   (40,863,665)
Adjustments to reconcile net loss to net
   cash provided by (used in) operating activities:
     Depreciation                                                   2,107,466              2,607,096             7,100,496
     Amortization of intangible assets                              1,504,752              1,504,752             1,968,558
     Amortization of licensed technology                              623,956                480,633               415,017
     Noncash stock compensation                                     3,026,455              1,361,667             1,096,827
     Noncash charge for impairment and restructuring                        -                      -            12,151,817
     Impairment charge and (gain) loss on disposal of equipment       888,817                   (410)              (68,898)
     Amortization of deferred gain                                          -                      -               (23,871)
     Change in operating assets and liabilities:
       Receivables                                                 (3,724,983)               697,109              (895,734)
       Inventories                                                    157,654                266,298             4,788,630
       Prepaid expenses and other assets                              390,645                809,031             1,554,514
       Accounts payable                                             1,563,571             (2,133,528)           (4,187,993)
       Accrued expenses and other liabilities                       1,664,244                224,512             4,498,178
       Deferred revenue                                               316,204               (877,904)           (1,506,954)
                                                              ---------------       ----------------       ---------------
Net cash provided by (used in) operating activities                 6,576,375             (3,176,980)          (13,973,078)
INVESTING ACTIVITIES
Purchases of equipment and leasehold improvements                    (578,472)              (249,916)           (2,277,114)
Proceeds on sale of equipment                                          88,320                321,264             4,391,389
Purchases of licensed technology                                            -               (100,000)                    -
Purchases of short-term investments                               (11,070,000)           (10,800,000)          (10,941,000)
Sales and maturities of short-term investments                     10,800,000             11,013,000                96,000
                                                              ---------------       ----------------       ---------------
Net cash provided by (used in) investing activities                  (760,152)               184,348            (8,730,725)
FINANCING ACTIVITIES
Proceeds from long-term debt                                          470,000                      -             9,500,000
Payments on long-term debt                                            (34,137)               (15,152)           (6,556,494)
Proceeds from issuance of common stock, net                         2,364,371                722,029               301,117
Payments on capital lease obligations                                 (12,222)                     -            (4,370,442)
                                                              ---------------       ----------------       ---------------
Net cash provided by (used in) financing activities                 2,788,012                706,877            (1,125,819)
                                                              ---------------       ----------------       ---------------
Increase (decrease) in cash and cash equivalents                    8,604,235             (2,285,755)          (23,829,622)
                                                              ---------------       ----------------       ---------------
Cash and cash equivalents at beginning of year                     47,015,746             49,301,501            73,131,123
                                                              ---------------       ----------------       ---------------
Cash and cash equivalents at end of year                      $    55,619,981       $     47,015,746       $    49,301,501
                                                              ===============       ================       ===============
Supplemental disclosure of cash flows information-
   Cash paid for interest                                     $       277,226       $        301,817       $     1,075,940
                                                              ===============       ================       ===============
</TABLE>

Noncash investing and financing activities:

During the year ended December 31, 2004, the Company entered into capital lease
obligations of $230,974.

See accompanying notes.

<PAGE>

                          Third Wave Technologies, Inc.

                   Notes to Consolidated Financial Statements

                                December 31, 2004

1. NATURE OF OPERATIONS AND PRINCIPLES OF CONSOLIDATION

PRINCIPLES OF CONSOLIDATION

The accompanying consolidated financial statements include the accounts of Third
Wave Technologies, Inc. (the Company) and its wholly owned subsidiaries, Third
Wave-Japan KK and Third Wave Agbio, Inc. (Agbio). All significant intercompany
balances and transactions are eliminated in consolidation.

NATURE OF OPERATIONS

The Company is a leading molecular diagnostics company. The Company believes its
proprietary Invader(R) technology platform is easier to use, more accurate and
cost-effective, and enables higher testing throughput than conventional methods.
These and other advantages conferred by the Company's technology platform are
enabling the Company to provide physicians and researchers with superior
molecular solutions for the analysis and treatment of disease.

The Company currently markets products domestically and internationally to
clinical and research markets using an internal sales force as well as
collaborative relationships with pharmaceutical companies and research
institutions. Revenues to a major Japanese research institute for use by several
end users during 2004, 2003 and 2002 were 59%, 69% and 51% of total revenues,
respectively. The Company performs periodic credit evaluations of its customers'
financial condition and generally does not require collateral. The Company
evaluates the collectibility of its accounts receivable based on a combination
of factors. For accounts greater than 60 days past due, an allowance for
doubtful accounts is recorded based on a customer's ability and likelihood to
pay based on management's review of the facts. For all other accounts, the
Company recognizes an allowance based on the length of time the receivable is
past due and the anticipated future write offs based on historical experience.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

A summary of the significant accounting policies applied in the preparation of
the accompanying financial statements follows.

CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS

The Company considers highly liquid money market investments and short-term
investments with maturities of 90 days or less from the date of purchase to be
cash equivalents.

Short-term investments consist of certificates of deposit with maturities less
than one year. The cost of these securities, which are considered
"available-for-sale" for financial reporting purposes, approximates fair value
at December 31, 2004 and 2003.

INVENTORIES

Inventories are carried at the lower of cost or market using the first-in,
first-out method for determining cost and consist of the following:

<TABLE>
<CAPTION>
                                                                    DECEMBER 31
                                                             2004                     2003
                                                       ---------------        ----------------
<S>                                                    <C>                    <C>
Raw material                                           $     1,318,771        $      1,609,866
Finished goods and work in process                             567,621                 534,180
Reserve for excess and obsolete inventory                     (650,000)               (750,000)
                                                       ---------------        ----------------
Total inventories                                      $     1,236,392        $      1,394,046
                                                       ===============        ================
</TABLE>

                                       36

<PAGE>

ADVERTISING COSTS

Advertising costs are expensed as incurred. Advertising costs were $85,069,
$165,854 and $511,685 in 2004, 2003 and 2002, respectively.

FOREIGN CURRENCY TRANSLATION

The Company's Japanese subsidiary uses the local currency as its functional
currency. Accordingly, assets and liabilities are translated into U.S. dollars
at year-end exchange rates, and revenues and expenses are translated at
weighted-average exchange rates. The resulting translation adjustment is
recorded as a separate component of shareholders' equity.

EQUIPMENT AND LEASEHOLD IMPROVEMENTS

Equipment and leasehold improvements are recorded at cost less accumulated
depreciation. Depreciation of purchased equipment is computed by the
straight-line method over the estimated useful lives of the assets which are
generally three to ten years. Depreciation of leasehold improvements and leased
equipment is computed by the straight-line method over the shorter of the
estimated useful lives of the assets or the remaining lease term.

PATENTS

Patent-related development costs are expensed in the period incurred and are
included in general and administrative expenses in the statements of operations.
These costs were $844,110, $780,959 and $509,598 in 2004, 2003 and 2002,
respectively.

GOODWILL AND OTHER INTANGIBLE ASSETS

Under Statement of Financial Accounting Standards (SFAS) No. 142, "Goodwill and
Other Intangible Assets" goodwill and intangible assets deemed to have
indefinite lives are no longer amortized, but are subject to annual impairment
tests. Remaining intangible assets at December 31, 2004, 2003 and 2002 consist
primarily of costs of settling patent litigation, which are amortized over their
estimated useful life of seven years.

In connection with the adoption of SFAS No. 142, on January 1, 2002 the Company
completed the first step of the transitional impairment test of goodwill. Based
on this analysis, the Company concluded that no impairment existed at the time
of adoption, and accordingly, the Company did not recognize any transitional
impairment loss for goodwill. For intangible assets with indefinite lives, the
fair values of these assets were compared to their carrying values as of January
1, 2002, also resulting in no transitional impairment.

The Company completed its annual impairment tests in the third quarter of 2002,
2003, and 2004. In addition, an interim impairment test was performed in the
second quarter of 2004 due to a change in the Company's forecast. For goodwill,
this analysis is based on the comparison of the fair value of its reporting
units to the carrying value of the net assets of the respective reporting units.
The fair value of the reporting units was determined using a combination of
discounted cash flows method and other common valuation methodologies. For
intangible assets with indefinite lives, the fair values of these assets
determined using the income based approach were compared to their carrying
values.

Based on the analyses, in 2002 the Company determined that goodwill and
intangible assets deemed to have indefinite lives were impaired and accordingly,
recognized an impairment charge of $4,676,902 (Goodwill - $4,210,313,
Indefinite-lived intangible assets - $466,589). In addition, in 2002, the
Company recognized an impairment charge related to its customer agreements of
$133,000. The Company concluded that no impairment existed at the time of the
annual impairment test in 2003 and 2004 or at the time of the additional
impairment test in the second quarter of 2004.

Identifiable intangible assets with indefinite lives consist of the following at
December 31, 2004 and 2003:

<TABLE>
<S>                        <C>
Technology license         $       915,828
Trademark                           91,583
                           ---------------
                           $     1,007,411
                           ===============
</TABLE>

                                       37

<PAGE>

Amortizable intangible assets consist of the following:

<TABLE>
<CAPTION>
                                                      DECEMBER 31, 2004                               DECEMBER 31, 2003
                                           ----------------------------------------        --------------------------------------
                                                                         GROSS                                         GROSS
                                               CARRYING                ACCUMULATED              CARRYING            ACCUMULATED
                                                AMOUNT                AMORTIZATION               AMOUNT             AMORTIZATION
                                           -----------------         --------------        -----------------       --------------
<S>                                        <C>                       <C>                   <C>                     <C>
Costs of settling patent litigation        $      10,533,248         $    6,386,876        $      10,533,248       $    4,882,124
Reacquired marketing and distribution
  rights                                           2,211,111              2,211,111                2,211,111            2,211,111
Customer agreements                                   38,000                 38,000                   38,000               38,000
                                           -----------------         --------------        -----------------       --------------
                                           $      12,782,359         $    8,635,987        $      12,782,359       $    7,131,235
                                           =================        ===============        =================       ==============
</TABLE>

The estimated future amortization expense related to intangible assets for the
years subsequent to December 31, 2004 is as follows:

<TABLE>
<S>                                                 <C>
                             2005                   $1,504,752
                             2006                    1,504,752
                             2007                    1,136,868
</TABLE>

IMPAIRMENT OF LONG-LIVED ASSETS

Equipment, leasehold improvements and amortizable identifiable intangible assets
are reviewed for impairment whenever events or changes in circumstances indicate
that the carrying amount may not be recoverable. If the sum of the expected
undiscounted cash flows is less than the carrying value of the related asset or
group of assets, a loss is recognized for the difference between the fair value
and carrying value of the asset or group of assets. Such analyses necessarily
involve significant judgment. During 2004, the Company recorded a charge of
$795,000 to write down certain equipment to its fair value. During 2002, the
Company recorded a charge of approximately $7,176,000 associated with its
restructuring activities (described further in Note 7) to write-off leasehold
improvements related to vacated leased facilities and to write down certain
equipment to its fair value.

PREPAID LICENSE FEES

Other assets at December 31, 2004 and 2003 include $1,223,005 and $1,846,961,
respectively, of prepaid license fees (which is net of $2,072,033 and
$1,448,077, respectively, of accumulated amortization) paid to third parties for
the use of patented technology. The assets are being amortized to expense over
the shorter of the term of the license or the estimated useful lives of the
assets (generally three to ten years).

DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES

The Company sells its products in a number of countries throughout the world.
During 2004, 2003 and 2002, the Company sold certain products with the resulting
accounts receivable denominated in Japanese Yen. The Company purchases foreign
currency forward contracts to manage the risk associated with collections of
receivables denominated in foreign currencies in the normal course of business.
These derivative instruments have maturities of less than one year and are
intended to offset the effect of currency gains and losses on the underlying Yen
receivables. There were no contracts outstanding at December 31, 2004. Forward
contracts outstanding at December 31, 2003, represented a U.S. dollar equivalent
commitment of approximately $9,500,000. The negative fair value of these
derivative instruments of approximately $631,000 at December 31, 2003 is
included in accrued liabilities in the accompanying balance sheets. The changes
in the fair value of the Company's derivatives and the loss or gain on the
hedged asset relating to the risk being hedged both are recorded currently in
operations. Aggregate losses (gains) from foreign currency transactions were
approximately ($71,000), $708,000, and $117,000 in 2004, 2003 and 2002,
respectively.

REVENUE RECOGNITION

Revenue from product sales is recognized upon delivery which is generally when
the title passes to the customer, provided that the Company has completed all
performance obligations and the customer has accepted the products. Customers
have no contractual rights of return or refunds associated with product sales.

                                       38

<PAGE>

Grant and development revenues consist primarily of research grants from
agencies of the federal government and revenue from companies with which the
Company has established strategic alliances, the revenue from which is
recognized as research is performed. Payments received which are related to
future performance are deferred and recorded as revenue when earned. Grant
payments designated to purchase specific assets to be used in the performance of
a contract are recognized as revenue over the shorter of the useful life of the
asset acquired or the contract.

License and royalty revenue includes amounts earned from third parties for
licenses of the Company's intellectual property and are recognized when earned
under the terms of the related agreements. License revenues are generally
recognized upon receipt unless the Company has continuing performance
obligations, in which case the license revenue is recognized ratably over the
period of expected performance. Consideration received in multiple element
arrangements is allocated to the separate units based upon their relative fair
values. Royalty revenues are recognized under the terms of the related
agreements, generally upon manufacture or shipment of a product by a licensee.

RESEARCH AND DEVELOPMENT

All costs for research and development activities are expensed in the period
incurred.

SHIPPING AND HANDLING COSTS

Shipping and handling costs incurred are classified as cost of goods sold in the
accompanying statements of operations.

INCOME TAXES

Deferred income taxes are recognized for the tax consequences in future years of
differences between the tax bases of assets and liabilities and their financial
reporting amounts at each year-end based on enacted tax laws and statutory tax
rates applicable to the periods in which the differences are expected to affect
taxable income. Valuation allowances are established when necessary to reduce
deferred tax assets to the amount expected to be realized. Income tax expense is
the current tax payable for the period plus or minus the change during the
period in deferred tax assets and liabilities. Prior to 2004, no current or
deferred income taxes have been provided because of the net operating losses
incurred by the Company since its inception (see Note 5).

STOCK-BASED COMPENSATION

The Company has stock-based employee compensation plans (see Note 4). SFAS No.
123, "Accounting for Stock-Based Compensation," encourages, but does not require
companies to record compensation cost for stock-based employee compensation
plans at fair value. The Company has chosen to continue using the intrinsic
value method prescribed in Accounting Principles Board (APB) Opinion No. 25,
"Accounting for Stock Issued to Employees," and related interpretations, in
accounting for its stock option plans.

Had compensation cost been determined based upon the fair value method
prescribed by SFAS No. 123 at the grant date for awards under the plans, the
Company's SFAS No. 123 pro forma net loss and net loss per share would have been
as follows:

<TABLE>
<CAPTION>
                                                                               YEAR ENDED DECEMBER 31
                                                               2004                     2003                   2002
                                                        ------------------      ------------------      ------------------
<S>                                                     <C>                     <C>                     <C>
Net loss:
   As reported                                          $       (1,942,406)     $       (8,116,236)     $      (40,863,665)
   Less: Stock-based compensation, as recognized                 3,026,455               1,361,667               1,096,827
   Add: Stock-based compensation expense related
        to stock options determined under SFAS
        No. 123                                                 (4,347,817)             (4,216,913)             (3,373,035)
   Add: Stock-based compensation related to the
         employee stock purchase plan determined
         under SFAS No. 123                                       (283,898)               (172,571)                (43,314)
                                                        ------------------      ------------------      ------------------
   SFAS No. 123 Pro forma                               $       (3,547,666)     $      (11,144,053)     $      (43,183,187)
                                                        ==================      ==================      ==================
Net loss per share:
   As reported, basic and diluted                       $            (0.05)     $            (0.20)     $            (1.04)
   SFAS No. 123 pro forma, basic and diluted            $            (0.09)     $            (0.28)     $            (1.09)
</TABLE>

                                       39

<PAGE>

Stock compensation expense for options granted to nonemployees has been
determined in accordance with SFAS No. 123 and Emerging Issues Task Force (EITF)
Issue No. 96-18, "Accounting for Equity Instruments That Are Issued to Other
Than Employees for Acquiring, or in Conjunction with Selling, Goods or
Services," and represents the fair value of the consideration received or the
fair value of the equity instruments issued, whichever may be more reliably
measured. For options that vest over future periods, the fair value of options
granted to nonemployees is periodically remeasured as the underlying options
vest.

FAIR VALUE OF FINANCIAL INSTRUMENTS

The carrying amounts of the Company's financial instruments, which include cash
and cash equivalents, short-term investments, accounts receivable, foreign
currency forward contracts, accounts payable and long-term debt are considered
to approximate their respective fair values.

USE OF ESTIMATES

The preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.

NET LOSS PER SHARE

Basic and diluted net loss per share has been computed using the
weighted-average number of shares of common stock outstanding during the
respective periods. The effect of stock options is antidilutive for all periods
presented due to the existence of net losses.

The following table presents the calculation of basic and diluted net loss per
share.

<TABLE>
<CAPTION>
                                                                                        YEAR ENDED DECEMBER 31
                                                                             2004                 2003               2002
                                                                       -----------------    -----------------   ----------------
<S>                                                                    <C>                  <C>                 <C>
Net loss                                                               $      (1,942,406)   $      (8,116,236)  $    (40,863,665)
                                                                       =================    =================   ================
Weighted-average shares of common stock outstanding
   - basic and diluted                                                        40,463,000           39,749,000         39,457,000
                                                                       =================    =================   ================
Basic and diluted net loss per share                                   $           (0.05)   $           (0.20)  $          (1.04)
                                                                       =================    =================   ================
Weighted-average shares from options that could
   potentially dilute basic earnings per share in the future that
   are not included in the computation of diluted loss per share as
   their impact is antidilutive (computed under the
   treasury stock method)                                                      2,091,000            1,213,000            506,000
</TABLE>

NEW ACCOUNTING PRONOUNCEMENTS

On December 16, 2004, the Financial Accounting Standards Board (FASB) issued
SFAS No. 123 (revised 2004), "Share-Based Payment," which is a revision of SFAS
No. 123. SFAS No. 123(R) supersedes APB Opinion No. 25 and amends SFAS No. 95,
"Statement of Cash Flows." Generally, the approach in SFAS No. 123(R) is similar
to the approach described in SFAS No. 123. However, SFAS No. 123(R) requires all
share-based payments to employees, including grants of employee stock options,
to be recognized in the income statement based on their fair values. Pro forma
disclosure is no longer an alternative.

SFAS No. 123(R) must be adopted no later than July 1, 2005. Early adoption will
be permitted in periods in which financial statements have not yet been issued.
The Company expects to adopt SFAS No. 123(R) on July 1, 2005. SFAS No. 123(R)
permits public companies to adopt its requirements using one of two methods: (1)
a "modified prospective" method in which compensation cost is recognized
beginning with the effective date (a) based on the requirements of SFAS No.
123(R) for all-share based payments granted after the effective date and (b)
based on the requirements of SFAS No. 123 for all awards granted to employees
prior to the effective date of SFAS No. 123(R) that remain unvested on the
effective date; or (2) a "modified retrospective" method which includes the
requirements of the modified prospective method described above, but also
permits entities to restate based on the amounts previously recognized under
SFAS No. 123 for purposes of pro forma disclosures either (a) all prior periods
presented or (b) prior interim periods of the year of adoption. The Company has
not yet determined which method it will adopt.

                                       40

<PAGE>

As permitted by SFAS No. 123, the Company currently accounts for share-based
payments to employees using APB Opinion No. 25's intrinsic value method and, as
such, generally recognizes no compensation cost for employee stock options when
granted as the number of shares is fixed and the exercise price of the stock
options equals the market price of the underlying stock on the date of grant.
Accordingly, the adoption of SFAS No. 123(R)'s fair value method will have a
significant impact on the Company's results of operations, although it will have
no impact on the Company's overall financial position. The impact of adoption of
SFAS No. 123(R) cannot be predicted at this time because it will depend on
levels of share-based payments granted in the future. However, had the Company
adopted SFAS No. 123(R) in prior periods, the impact of that standard would have
approximated the impact of SFAS No. 123 as described in the disclosure of pro
forma net loss and net loss per share earlier in this note. SFAS No. 123(R) also
requires the benefits of tax deductions in excess of recognized compensation
cost to be reported as a financing cash flow, rather than as an operating cash
flow as required under current literature.

3. LONG-TERM DEBT

Long-term debt is as follows:

<TABLE>
<CAPTION>
                                             DECEMBER 31
                                    2004                  2003
                            --------------------     ---------------
<S>                         <C>                      <C>
Notes payable               $          9,935,863     $     9,500,000
Other                                     13,333              13,333
                            --------------------     ---------------
                                       9,949,196           9,513,333
Less current portion                   9,614,127           9,500,000
                            --------------------     ---------------
                            $            335,069     $        13,333
                            ====================     ===============
</TABLE>

Future long-term debt payments by year are as follows:

<TABLE>
<S>                                        <C>
                       2005                $9,614,127
                       2006                   132,878
                       2007                    95,305
                       2008                    57,110
                       2009                    49,776
</TABLE>

The Company has a $9,500,000 note payable with a bank due on August 14, 2005,
bearing annual interest at 3.36%. The Company also entered into two additional
notes payable in the original amounts of $200,000 and $270,000. The notes have a
final maturity date of July 1, 2007 and October 1, 2009, bear annual interest at
4.25% and 4.93%, respectively, and require monthly principal and interest
payments. The borrowings under the notes payable are secured by short-term
investments consisting of certificates of deposit, of $9,770,000. The Company
has an available and unused $1,300,000 letter of credit with the same bank that
expires on September 1, 2005.

4. SHAREHOLDERS' EQUITY

The Board of Directors has authorized a program for the repurchase by the
Company of up to 5% of its outstanding common stock. As of December 31, 2004, no
shares of common stock have been repurchased.

STOCK PURCHASE PLAN

The Company has an Employee Stock Purchase Plan (Purchase Plan) under which an
aggregate of 1,256,800 common shares may be issued. The Purchase Plan also
provides for annual increases in the number of shares available for issuance,
beginning in 2001, equal to the lesser of 1% of the outstanding shares of common
stock on the first day of the fiscal year, 428,400 shares or an amount
determined by the Board of Directors. During 2004, 400,000 additional shares
were authorized for issuance under the plan. During 2004, 2003 and 2002,
306,211, 254,421 and 122,423 shares, respectively, were issued. Employees are
eligible to participate in the Purchase Plan if they work at least 20 hours per
week and more than five months in any calendar year. Eligible employees may make
contributions through payroll deductions of up to 10% of their compensation. The
price of common stock purchased under the Purchase Plan is 85% of the lower of
the fair market value of the common stock at the beginning or end of the
offering period. The Plan is considered noncompensatory under APB Opinion No. 25
and, therefore, no expense is recorded for the 15% discount.

                                       41

<PAGE>

STOCK OPTION PLANS

The Company has Incentive Stock Option Plans for its employees and Nonqualified
Stock Option Plans (the Plans) for employees and non-employees under which an
aggregate of 11,413,183 options may be granted. Annual increases in the number
of shares available for issuance are allowed beginning in 2001, limited to the
lesser of 4.5% of the outstanding shares of common stock on the first day of the
fiscal year, 2,571,600 shares or an amount determined by the Board of Directors.
During 2004 and 2002, 1,500,000 and 1,771,831 additional shares, respectively,
were authorized for grant. There were no additional shares authorized for grant
in 2003. Options under the Plans have a maximum life of ten years. Options vest
at various intervals, as determined by the Board of Directors at the date of
grant.

The rollforward of shares available for grant through December 31, 2004, is as
follows:

<TABLE>
<S>                                                                   <C>
Shares available for grant at December 31, 2001                       2,670,631
   Options granted                                                   (2,307,950)
   Options forfeited                                                  1,064,075
   Increase in options available for grant                            1,771,831
                                                                     ----------
Shares available for grant at December 31, 2002                       3,198,587

   Options granted                                                   (2,813,300)
   Options forfeited                                                  1,093,405
                                                                     ----------
Shares available for grant at December 31, 2003                       1,478,692
   Options granted                                                   (2,127,255)
   Options forfeited                                                  1,161,928
   Increase in options available for grant                            1,500,000
                                                                     ----------
Shares available for grant at December 31, 2004                       2,013,365
                                                                     ==========
</TABLE>

The Company's option activity is as follows:

<TABLE>
                                                             WEIGHTED-AVERAGE
                                        NUMBER OF SHARES      EXERCISE PRICE
                                        ----------------      --------------
<S>                                     <C>                   <C>
Outstanding at December 31, 2001           4,563,121              6.85
   Granted                                 2,307,950              2.31
   Exercised                                 (63,137)             0.84
   Forfeited                              (1,064,075)             5.63
                                          ----------            ------
Outstanding at December 31, 2002           5,743,859              5.29
   Granted                                 2,813,300              3.42
   Exercised                                (207,249)             1.75
   Forfeited                              (1,093,405)             7.32
                                          ----------            ------
Outstanding at December 31, 2003           7,256,505              4.37
   Granted                                 2,127,255              4.97
   Exercised                                (775,309)             2.42
   Forfeited                              (1,161,928)             5.57
                                          ----------            ------
Outstanding at December 31, 2004           7,446,523              4.55
                                          ----------            ------
Exercisable at December 31, 2004           3,022,212            $ 5.23
                                          ==========            ======
</TABLE>

<TABLE>
<CAPTION>
                                                   Number of        Weighted
                                              Shares Outstanding     Average     Remaining       Number of Shares      Weighted
                                                at December 31,     Exercise    Contractual       Exercisable at        Average
                                                     2004             Price         Life         December 31, 2004   Exercise Price
                                              ------------------    --------    -----------      -----------------   --------------
<S>                                           <C>                   <C>         <C>              <C>                 <C>
Options granted between $0.27 and $1.11            148,150          $ 1.00          1.1                148,150            $ 1.00
Options granted between $1.11 and $2.21            979,370          $ 1.88          6.8                447,395            $ 1.90
Options granted between $2.21 and $3.32          1,493,907          $ 2.77          6.9                472,094            $ 2.64
Options granted between $3.32 and $4.42          2,156,057          $ 3.73          7.8                540,860            $ 3.74
Options granted between $4.42 and $5.53            348,750          $ 4.62          8.9                 10,187            $ 4.56
Options granted between $5.53 and $6.64            575,514          $ 6.37          6.6                429,030            $ 6.37
Options granted between $6.64 and $7.74            491,375          $ 6.90          9.7                  8,937            $ 7.37
Options granted between $7.74 and $8.85          1,134,800          $ 8.61          6.1                854,223            $ 8.78
Options granted between $8.85 and $9.96             10,800          $ 9.69          5.3                  9,900            $ 9.73
Options granted between $9.96 and $11.06           107,800          $10.93          2.4                101,436            $10.94
                                                 ---------                                           ---------
                                                 7,446,523                                           3,022,212
                                                 =========                                           =========
</TABLE>

                                       42

<PAGE>

Prior to February 9, 2001, the Company granted certain options to employees
having exercise prices below what was considered the fair value of the
underlying stock. The Company amortized to expense $80,791 in 2004, $387,709 in
2003 and $994,078 in 2002 using an accelerated vesting method whereby each of
the years' vesting components is amortized over its own vesting period. During
2004, 2003 and 2002, in connection with employee terminations, the Company
extended the exercise period and accelerated vesting for certain option grants.
Accordingly, the options had a new measurement date and were expensed based upon
their new intrinsic value. Also, options granted to non-employee consultants are
measured based upon their fair value as calculated using the Black-Scholes
option pricing model. Option expense related to such terminations in 2004, 2003
and 2002 was $2,945,664, $973,958 and $102,749, respectively.

Included in operating expenses are the following stock compensation charges, net
of reversals related to terminated employees:

<TABLE>
<CAPTION>
                                               YEAR ENDED DECEMBER 31
                                   2004                2003                 2002
                              ---------------     ---------------     ---------------
<S>                           <C>                 <C>                 <C>
Cost of goods sold            $       155,275     $        86,793     $       163,590
Research and development            1,133,617             504,477              98,753
Selling and marketing                 144,519             215,935              31,781
General and administrative          1,593,044             554,462             802,703
                              ---------------     ---------------     ---------------
                              $     3,026,455     $     1,361,667     $     1,096,827
                              ===============     ===============     ===============
</TABLE>

The weighted-average fair value of options granted in 2004, 2003, and 2002 was
$3.49, $2.50 and $1.73, respectively, using the Black-Scholes option-pricing
model. The calculations were made assuming a dividend yield of 0%, a
weighted-average expected option life of five years and a weighted-average
risk-free interest rate of 4.1%, 4.0% and 4.0% in 2004, 2003 and 2002,
respectively. The volatility factor used in the Black-Scholes method for 2004,
2003 and 2002 was .84, .89 and .97, respectively.

5. INCOME TAXES

The provision for income taxes in 2004 represents the amount computed under the
alternative minimum tax (AMT) requirements.

The types of temporary differences between tax bases of assets and liabilities
and their financial reporting amounts that give rise to the deferred tax asset
(liability) and their approximate tax effects are as follows:

<TABLE>
<CAPTION>
                                                           DECEMBER 31
                                                     2004                  2003
                                             ------------------      ------------------
<S>                                          <C>                     <C>
Deferred tax assets:
   Patent expense                            $        1,563,000      $        1,223,000
   Stock compensation expense                           609,000                 806,000
   Deferred revenue                                     154,000                  27,000
   Inventory obsolescence                               260,000                 300,000
   Equipment and leasehold improvements                       -                 478,000
   Accrued liabilities                                1,945,000               1,452,000
   Other                                                168,000                  85,000
   AMT credit carryforward                               57,000                       -
   Net operating loss carryforwards                  45,321,000              45,899,000
                                             ------------------      ------------------
Total deferred tax assets                            50,077,000              50,270,000
Valuation allowance                                 (48,369,000)            (48,010,000)
                                             ------------------      ------------------
Net deferred tax assets                               1,708,000               2,260,000
                                             ------------------      ------------------

Deferred tax liabilities:
   Equipment and leasehold improvements                 (49,000)                      -
   Intangibles                                       (1,659,000)             (2,260,000)
                                             ------------------      ------------------
Deferred tax liabilities                             (1,708,000)             (2,260,000)
                                             ------------------      ------------------

Net deferred tax assets / (liabilities)      $                -      $                -
                                             ==================      ==================
</TABLE>

At December 31, 2004, the Company had net operating loss carryforwards of
approximately $113 million for U.S. federal and state income tax purposes, which
expire beginning in 2008. In the event of a change in ownership greater than 50%
in a three-year period, utilization of the net operating losses may be subject
to a substantial annual limitation due to the ownership change limitations
provided by the Internal Revenue Code of 1986 and similar state provisions.

                                       43

<PAGE>

At December 31, 2004, the Company had $57,000 of AMT credits which do not
expire. The valuation allowance at December 31, 2004 and 2003 was provided
because of the Company's history of net losses and uncertainty as to the
realization of the deferred tax assets. Through December 31, 2004, the Company's
foreign subsidiary has operated at a loss, and accordingly, no provision for
U.S. deferred taxes has been provided. Any earnings of the foreign subsidiary
would be considered to be permanently invested.

6. LEASE OBLIGATIONS

The Company leases its corporate facility under an operating lease effective
through September 2011. The Company has the option to extend the lease for three
additional five-year periods. The lease agreement required a $1,000,000 upfront
payment and requires the Company to provide the landlord an irrevocable standby
letter of credit of $1,300,000, which is collateralized by a certificate of
deposit included in short-term investments. Ongoing rent payments increase
during the lease term. Rent expense is being recorded by the Company on a
straight-line basis over the amended lease term. At December 31, 2004 and 2003,
long-term other assets includes approximately $938,000 and $1,078,000,
respectively, of prepaid rent. In addition, at December 31, 2004 and 2003, other
long-term liabilities includes approximately $1,099,000 and $728,000,
respectively, of deferred rent.

In 2004, the Company entered into multiple capital leases for computer
equipment, office equipment and furniture, totaling approximately $230,000.

Future minimum lease payments by year are as follows:

<TABLE>
<CAPTION>
                                               Capital       Operating
                                               Leases         Leases
<S>                                           <C>           <C>
2005                                          $ 76,076      $  1,806,000
2006                                            75,715         1,879,000
2007                                            52,057         1,954,000
2008                                            27,505         2,032,000
2009                                            27,505         2,113,000
Thereafter                                       9,126         3,913,000
                                              --------      ------------
Total minimum lease obligations                267,984      $ 13,697,000
                                              ========      ============
Less amounts representing interest              49,232
                                              --------
Present value of minimum lease payments        218,752
   Less current portion of long-term
lease obligations                               66,867
                                              --------
                                              $151,885
                                              ========
</TABLE>

Rent expense was approximately $2,114,000, $2,097,000 and $2,473,000 in 2004,
2003 and 2002, respectively.

7. RESTRUCTURING AND OTHER CHARGES

During the third quarter of 2002, the Company announced a restructuring plan
designed to simplify product development and manufacturing operations and reduce
operating expenses. The restructuring charges recorded were determined based
upon plans submitted by the Company's management and approved by the Board of
Directors using information available at the time. The third quarter 2002
restructuring charge included $2.2 million for the consolidation of facilities,
$500,000 for prepayment penalties mainly under capital lease arrangements, an
impairment charge of $10.8 million for abandoned leasehold improvements and
equipment to be sold and $900,000 of other costs related to the restructuring.
The Company also recorded a $1.1 million charge within cost of goods sold
related to inventory that was considered obsolete based upon the restructuring
plan.

During the fourth quarter of 2002, the Company completed an auction to sell
equipment held for sale resulting from the restructuring. The auction resulted
in significantly higher proceeds than the Company had anticipated in the third
quarter of 2002. Accordingly, a credit of $3.6 million was recorded as an offset
to the restructuring charge in the fourth quarter of 2002. The Company also
amended its corporate lease agreement during the fourth quarter of 2002, which
resulted in an increase to the facilities charge of $300,000. The facilities
charge contained estimates based upon the Company's potential to sublease a
portion of its corporate office beginning in 2004.

                                       44

<PAGE>

The Company continues to offer corporate office space for sublease, but it has
been unable to sublease the space. Accordingly, in the fourth quarter of 2003
and 2004, the Company changed the amount it expects to receive from the sublease
of the space. In 2004, the estimated lease and operating expenses were also
reduced, based on a portion of the office space being utilized.

The following table shows the components of the restructuring and other charges
and changes in the restructuring accrual through December 31, 2004. The
remaining restructuring balance of $1.1 million is for rent payments on a
non-cancelable lease, net of estimated sublease income, which will continue to
be paid over the lease term through 2011. The current portion of the accrual of
$162,043 is included in other accrued liabilities on the balance sheet and the
remainder is included in other long-term liabilities.

<TABLE>
<CAPTION>
                                                                      EQUIPMENT AND
                                                                        LEASEHOLD
                                                                      IMPROVEMENTS     PREPAYMENT
                                                      FACILITIES        DISPOSALS      PENALTIES      OTHER          TOTAL
                                                     ------------     -------------    ----------   ---------      -----------
<S>                                                  <C>              <C>              <C>          <C>            <C>
Charge in 2002                                       $  2,470,438      $ 7,175,995     $ 494,930    $ 945,870      $11,087,233
Payments made                                            (312,400)               -      (469,300)           -         (781,700)
Non-cash charges                                                -       (7,175,995)      (25,630)    (140,290)      (7,341,915)
                                                     ------------      -----------     ---------    ---------      -----------
  Accrued restructuring balance at December 31,
  2002                                                  2,158,038                -             -      805,580        2,963,618

Payments made                                            (674,809)               -             -     (874,765)      (1,549,574)
Revision to estimate                                      (69,185)               -             -       69,185                -
                                                     ------------      -----------     ---------    ---------      -----------
  Accrued restructuring balance at December 31,
  2003                                                  1,414,044                -             -            -        1,414,044

Payments made                                            (199,196)               -             -            -         (199,196)
Revision to estimate                                      (98,000)               -             -            -          (98,000)
                                                     ------------      -----------     ---------    ---------      -----------
  Accrued restructuring balance at December 31,
  2004                                               $  1,116,848      $         -     $       -    $       -      $ 1,116,848
                                                     ============      ===========     =========    =========      ===========
</TABLE>

8. LICENSE AGREEMENTS

The Company entered into an exclusive license agreement (research license) in
March 1994 to make, use and sell products utilizing the licensed patents in the
research market. Under the research license, the Company is required to pay a
royalty at a rate not to exceed a certain percentage of the selling price on
licensed component sales. There have been no sales of licensed components
through December 31, 2004. The research license will continue until the licensed
patents expire or until the agreement is terminated by either party, whichever
is earlier, as defined in the agreement. The Company also entered into an equity
agreement with the licensor in March 1994 whereby it issued 115,200 shares of
common stock in exchange for the research license and diagnostic market option,
which is an exclusive license agreement to make, use and sell products utilizing
the licensed patents in the diagnostic market. In October 1998, the Company
issued 103,200 shares to the licensor to exercise the diagnostic market option.
The shares issued in 1994 and 1998 were valued at amounts considered to
approximate the fair value of common stock at the time of each issuance.

Under this agreement, the Company granted the licensor a put option to sell a
specified number of shares back to the Company anytime after March 1, 1998. The
total number of shares that can be put to the Company cannot exceed the number
of shares necessary to achieve a purchase price of $200,000. At December 31,
2004, the price per share to be paid if the put option is exercised is $3.37.
Accordingly, the Company has classified $200,000 of additional paid-in capital
outside of shareholders' equity in the accompanying balance sheets.

In October 2001, the Company entered into a development, license and supply
agreement with RIKEN, Inc. (RIKEN). The Company licensed certain patent rights
relating to polymorphism in genes that encode drug metabolizing enzymes from
RIKEN for a nonrefundable fee which is being amortized over its estimated useful
life (7.5 years). In 2003, the Company and RIKEN entered into

                                       45

<PAGE>

an additional license for similar content. The Company also pays royalties based
upon net sales of licensed products in exclusive and nonexclusive territories.

In addition, the Company licensed rights to patents and/or patent applications
covering genetic variations associated with certain diseases for which the
Company has designed clinical diagnostic products.

9. COLLABORATIVE AGREEMENTS

In December 2000, the Company entered into a development and commercialization
agreement with BML, Inc. (BML). Under this agreement, the Company developed
assays in accordance with a mutually agreed development program for use in
clinical applications by BML. In 2000, BML paid the Company a nonrefundable fee
of $3 million, which was recognized as revenue on a straight-line basis over the
expected term of development services being performed by the Company. The
Company recorded revenue from BML of $917,000 and $1,000,000 in 2003 and 2002,
respectively. Additionally, in 2004, 2003 and 2002, BML paid the Company
$1,915,000, $1,500,000 and $1,683,000, respectively, for product and specified
services performed in these respective years, which was recognized as revenue as
the product was shipped and services were performed.

On October 16, 2002, the Company entered into a license and supply agreement
with Aclara Biosciences, Inc. (Aclara) under which Aclara has the non-exclusive
right to incorporate the Company's Invader(TM) technology and Cleavase(R) enzyme
with Aclara's eTag(TM) technology to offer the eTag Assay System for multiplexed
gene expression applications for the research market. In exchange, Aclara made
certain upfront payments and will make royalty payments to the Company on sales
of eTag-Invader gene expression assays. The Company has also provided Aclara
with certain manufacturing materials for use in manufacturing Invader products.
In connection with this agreement, the Company recorded revenue of $1,500,000
related to the license granted and $2,780,000 for product shipped to Aclara
during 2002. The Company received royalty revenue of $150,000 and $100,000 in
2004 and 2003, respectively. In December 2004, Aclara was acquired by
Virologics, Inc.

10. 401(k) PLAN

The Company has a 401(k) savings plan (the Plan) which covers substantially all
employees. The Plan provides for Company contributions of 50% of employee
contributions up to 6% of their compensation. Company contributions to the plan
were approximately $329,000, $311,000 and $331,000 in 2004, 2003 and 2002,
respectively.

11. SEGMENT DISCLOSURE

The Company operates in one industry segment. Product revenues to international
end-users accounted for 70%, 78% and 70% of product revenues in 2004, 2003 and
2002, respectively. At December 31, 2004 and 2003, approximately $2,681,000 and
$1,011,000, respectively, of receivables are denominated in Yen. Product
revenues by geographic area in 2004, 2003 and 2002, were as follows:

<TABLE>
<CAPTION>
                          2004                  2003                   2002
                    -----------------     ----------------     -----------------
<S>                 <C>                   <C>                  <C>
United States       $      13,759,367     $      7,668,573     $       8,700,680
Japan                      31,361,485           26,983,342            19,865,716
Other                         895,275              496,382               314,546
                    -----------------     ----------------     -----------------
                    $      46,016,127     $     35,148,297     $      28,880,942
                    =================     ================     =================
</TABLE>

12. QUARTERLY FINANCIAL DATA (UNAUDITED)

The following sets forth selected quarterly financial and stock price
information for the years ended December 31, 2004 and 2003 (in thousands, except
per share data). The operating results are not necessarily indicative of results
for any future period.

<TABLE>
<CAPTION>
                                                                  QUARTER ENDED
                                             ---------------------------------------------------------
                                              MARCH 31        JUNE 30      SEPTEMBER 30    DECEMBER 31
                                             -----------    -----------    ------------    -----------
<S>                                          <C>            <C>            <C>             <C>
2004:
   Net revenues                              $    15,276    $    12,632    $     10,479    $     8,106
   Gross margin (1)                               11,105          8,939           8,144          5,813
   Net income (loss)                               2,848           (106)             24         (4,708)
   Basic and diluted net income (loss)
     per share                               $      0.07    $     (0.00)   $       0.00    $     (0.12)
2003:
   Net revenues                              $     8,492    $     8,817    $      9,354    $     9,657
</TABLE>

                                       46

<PAGE>

<TABLE>
<S>                                          <C>            <C>            <C>               <C>
   Gross margin                                    5,403          5,442           6,094          6,541
   Net loss                                       (2,924)        (2,161)         (1,435)        (1,596)
   Basic and diluted net loss
     per share                               $     (0.07)   $     (0.05)   $      (0.04)     $   (0.04)
</TABLE>

(1)   Previously reported 2004 quarterly gross margin amounts have been adjusted
      for reclassifications of manufacturing costs between cost of goods sold
      and research and development expense. For the first, second and third
      quarters of 2004, gross margins were previously reported as $11,204,
      $9,142 and $7,838, respectively.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE

      None.

ITEM 9A. CONTROLS AND PROCEDURES

EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES

      As required by Rule 13a-15(b) under the Securities Exchange Act of 1934,
the Company's management, including the Company's Chief Executive Officer and
Chief Financial Officer, conducted an evaluation as of the end of the period
covered by this report, of the effectiveness of the Company's disclosure
controls and procedures as defined in Rules 13a-15(e) under the Securities
Exchange Act of 1934. Based on that evaluation, the Company's Chief Executive
Officer and Chief Financial Officer concluded that the Company's disclosure
controls and procedures were effective as of the end of the period covered by
this report. There have been no significant changes during the period covered by
this report in the Company's internal control over financial reporting or in
other factors that could significantly affect internal control over financial
reporting.

EVALUATION OF INTERNAL CONTROL OVER FINANCIAL REPORTING

      The management of Third Wave Technologies is responsible for establishing
and maintaining adequate internal control over financial reporting. Third
Wave's internal control system was designed to provide reasonable assurance to
the Company's management and board of directors regarding the preparation and
fair presentation of published financial statements.

      All internal control systems, no matter how well designed, have inherent
limitations. Even those systems determined to be effective can provide only
reasonable assurance with respect to financial statement preparation and
presentation.

      Third Wave's management assessed the effectiveness of the Company's
internal control over financial reporting as of December 31, 2004, using the
criteria set forth by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO) in Internal Control - Integrated Framework. Based on
management's assessment, management believes that, as of December 31, 2004, the
Company's internal control over financial reporting is effective.

      Third Wave's independent auditors have issued an audit report on
management assessment of the Company's internal control over financial
reporting, which is included herein.


                                       47

<PAGE>

           Report of Independent Registered Public Accounting Firm on
                   Internal Control over Financial Reporting

      To the Board of Directors
      Third Wave Technologies, Inc.

      We have audited management's assessment, included in the accompanying
Management's Report on Internal Control over Financial Reporting, that Third
Wave Technologies, Inc. maintained effective internal control over financial
reporting as of December 31, 2004, based on criteria established in Internal
Control--Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (the COSO criteria). Third Wave
Technologies, Inc.'s management is responsible for maintaining effective
internal control over financial reporting and for its assessment of the
effectiveness of internal control over financial reporting. Our responsibility
is to express an opinion on management's assessment and an opinion on the
effectiveness of the company's internal control over financial reporting based
on our audit.

      We conducted our audit in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether
effective internal control over financial reporting was maintained in all
material respects. Our audit included obtaining an understanding of internal
control over financial reporting, evaluating management's assessment, testing
and evaluating the design and operating effectiveness of internal control, and
performing such other procedures as we considered necessary in the
circumstances. We believe that our audit provides a reasonable basis for our
opinion.

      A company's internal control over financial reporting is a process
designed to provide reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for external purposes in
accordance with generally accepted accounting principles. A company's internal
control over financial reporting includes those policies and procedures that (1)
pertain to the maintenance of records that, in reasonable detail, accurately and
fairly reflect the transactions and dispositions of the assets of the company;
(2) provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company's
assets that could have a material effect on the financial statements.

      Because of its inherent limitations, internal control over financial
reporting may not prevent or detect misstatements. Also, projections of any
evaluation of effectiveness to future periods are subject to the risk that
controls may become inadequate because of changes in conditions, or that the
degree of compliance with the policies or procedures may deteriorate.

      In our opinion, management's assessment that Third Wave Technologies, Inc.
maintained effective internal control over financial reporting as of December
31, 2004, is fairly stated, in all material respects, based on the COSO
criteria. Also, in our opinion, Third Wave Technologies, Inc. maintained, in all
material respects, effective internal control over financial reporting as of
December 31, 2004, based on the COSO criteria.

      We also have audited, in accordance with the standards of the Public
Company Accounting Oversight Board (United States), the consolidated balance
sheets of Third Wave Technologies, Inc. as of December 31, 2004 and 2003, and
the related consolidated statements of operations, shareholders' equity and cash
flows for each of the three years in the period ended December 31, 2004 and our
report dated March 4, 2005 expressed an unqualified opinion thereon.

                                Ernst & Young LLP

      Milwaukee, Wisconsin
      March 4, 2005

                                       48
<PAGE>

      ITEM 9B. OTHER INFORMATION

      None.

                                    PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

      The Company incorporates by reference the information required by this
Item from the Company's definitive proxy statement for its annual meeting of
shareholders scheduled to be held on June 14, 2005 (the "Proxy Statement"),
which will be filed with the Securities and Exchange Commission pursuant to
Regulation 14A not later than 120 days after the end of the Company's fiscal
year.

ITEM 11. EXECUTIVE COMPENSATION

      The Company incorporates by reference the information required by this
Item from the Proxy Statement.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS

      The Company incorporates by reference the information required by this
Item from the Proxy Statement.

      Information required with respect to the securities authorized for
issuance under the Company's equity compensation plans, including plans that
have previously been approved by the Company's stockholders and plans that have
not previously been approved by the Company's stockholders, will be set forth in
the Proxy Statement, and such information is incorporated by reference from the
Proxy Statement.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

      The Company incorporates by reference the information required by this
Item from the Proxy Statement.

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES

      The Company incorporates by reference the information required by this
Item from the Proxy Statement.

                                     PART IV

ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

(a) Documents Filed as a Part of this Report.

      1.    Financial Statements. The financial statements required to be filed
            as part of this Report are listed on page 32.

      2.    Financial Statement Schedules. The following financial statement
            schedule required to be filed as part of this Report is included on
            page 53.

            Schedule II--Valuation and Qualifying Accounts. Schedules not
            included have been omitted because they are not applicable.

      3.    Exhibits. The exhibits required to be filed as a part of this Report
            are listed in the Exhibit Index.

                                       49
<PAGE>
                                   SIGNATURES

      Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, on March 16, 2005.

                                              THIRD WAVE TECHNOLOGIES, INC.

                                              By: /s/ John J. Puisis
                                                 -----------------------------
                                                     John J. Puisis
                                                     Chief Executive Officer

                                POWER OF ATTORNEY

      We, the undersigned directors and executive officers of Third Wave
Technologies, Inc., hereby severally constitute and appoint of Kevin T. Conroy
our true and lawful attorney and agent, with full power to him to sign for us,
and in our names in the capacities indicated below, any and all amendments to
the Annual Report on Form 10-K of Third Wave Technologies, Inc. filed with the
Securities and Exchange Commission, hereby ratifying and confirming our
signatures as they may be signed by our said attorney to any and all amendments
to said Annual Report on Form 10-K.

      Pursuant to the requirements of the Securities and Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities indicated on dates indicated.

           SIGNATURE                        TITLE                    DATE

    /s/ Lance Fors                 Chairman of the Board          March 13, 2005
    -----------------------
           Lance Fors

                                   Chief Executive Officer
                                   President, and Director
    /s/ John Puisis                (Principal Executive Officer)  March 15, 2005
    -----------------------
          John Puisis

    /s/ James J. Herrmann          Vice President of
    -----------------------        Finance
       James J. Herrmann           (Principal Financial
                                   Officer)                       March 15, 2005

    /s/ Gordon F. Brunner          Director                       March 14, 2005
    -----------------------
       Gordon F. Brunner

                                   Director
    -----------------------
       G. Steven Burrill

    -----------------------        Director
           Sam Eletr

    /s/ John Neis                  Director                       March 14, 2005
    -----------------------
           John Neis

    /s/ Lloyd M. Smith             Director                       March 12, 2005
    -----------------------
         Lloyd M. Smith

    /s/ Lionel Sterling            Director                       March 12, 2005
    -----------------------
        Lionel Sterling

    /s/ David A. Thompson          Director                       March 14, 2005
    -----------------------
       David A. Thompson

                                       50
<PAGE>

                                  EXHIBIT INDEX

      Certain of the following exhibits, as indicated parenthetically, were
previously filed as exhibits to registration statements filed by the Company
under the Securities Act of 1933, as amended (the "Securities Act"), or to
reports or registration statements filed by the Company under the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and are hereby
incorporated by reference to such statements or reports. The Company's Exchange
Act file number is 000-31745.

      Exhibits marked with an asterisk (*) indicate portions of the exhibit have
received confidential treatment. Exhibits marked with a double asterisk (**)
indicate a management contract or compensatory plan or arrangement.

<TABLE>
<CAPTION>
EXHIBIT
  NO.                   DESCRIPTION                           INCORPORATED BY REFERENCE TO
--------   --------------------------------------         -------------------------------------
<S>        <C>                                            <C>
     3.1   Amended and Restated Certificate of            Exhibit 3.1(b) to the Registrant's
           Incorporation of the Registrant,               Registration Statement on Form S-1,
           dated as of August 16, 2000                    Registration No. 333-42694, filed on
                                                          July 31, 2000, as amended

     3.2   Amended and Restated Bylaws of the             Exhibit 3.2(b) to the Registrant's
           Registrant, dated as of February 9,            Registration Statement on Form
           2001                                           8-A, File No. 000-31745, filed on
                                                          November 30, 2001

     4.1   Investors' Rights Agreement, dated             Exhibit 4.2 to the Registrant's
           as of July 24, 2000                            Registration Statement on Form S-1,
                                                          Registration No. 333-42694, filed
                                                          on July 31, 2000, as amended

     4.2   Rights Agreement between the                   Exhibit 4.9 to the Registrant's
           Registrant and EquiServe Trust Company         Registration Statement on Form
           N.A., dated as of October 24, 2001             8-A, File No. 000-31745, filed on
                                                          November 30, 2001

     4.3   Amendment No. 1 to the Rights                  Exhibit 4.2 to the Registrant's
           Agreement between the Registrant and           Registration Statement on Form 8-A/A,
           EquiServe Trust Company N.A.,                  File No. 000-31745, filed on
           dated February 18, 2003                        February 19, 2003

  10.1**   Incentive Stock Option Plan                    Exhibit 10.1 to the Registrant's
                                                          Registration Statement on Form S-1,
                                                          Registration No. 333-42694, filed
                                                          on July 31, 2000, as amended

  10.2**   1997 Incentive Stock Option Plan               Exhibit 10.2 to the Registrant's
                                                          Registration Statement on Form S-1,
                                                          Registration No. 333-42694, filed
                                                          on July 31, 2000, as amended

  10.3**   1997 Nonqualified Stock Option Plan            Exhibit 10.3 to the Registrant's
                                                          Registration Statement on Form S-1,
                                                          Registration No. 333-42694, filed
                                                          on July 31, 2000, as amended

  10.4**   1998 Incentive Stock Option Plan               Exhibit 10.4 to the Registrant's
                                                          Registration Statement on Form S-1,
                                                          Registration No. 333-42694, filed
                                                          on July 31, 2000, as amended

  10.5**   1999 Incentive Stock Option Plan               Exhibit 10.5 to the Registrant's
                                                          Registration Statement on Form S-1,
                                                          Registration No. 333-42694, filed
                                                          on July 31, 2000, as amended

  10.6**   1999 Nonqualified Stock Option Plan            Exhibit 10.6 to the Registrant's
                                                          Registration Statement on Form S-1,
                                                          Registration No. 333-42694, filed
                                                          on July 31, 2000, as amended

  10.7**   2000 Stock Plan                                Exhibit 10.7 to the Registrant's
                                                          Registration Statement on Form S-1,
                                                          Registration No. 333-42694, filed
</TABLE>

                                       51
<PAGE>

<TABLE>
<S>        <C>                                                <C>
                                                              on July 31, 2000, as amended

  10.8**   2000 Employee Stock Purchase Plan                  Exhibit 10.8 to the Registrant's
                                                              Registration Statement on Form S-1,
                                                              Registration No. 333-42694, filed
                                                              on July 31, 2000, as amended

  10.9**   Form of Director and Executive Officer             Exhibit 10.9 to the Registrant's
           Indemnification Agreement                          Registration Statement on Form S-1,
                                                              Registration No. 333-42694, filed
                                                              on July 31, 2000, as amended
</TABLE>

<TABLE>
<CAPTION>
EXHIBIT
  NO.                       DESCRIPTION                            INCORPORATED BY REFERENCE TO
-------   ---------------------------------------            --------------------------------------
<S>       <C>                                                <C>
 10.10    Lease Agreement, dated as of April                 Exhibit 10.18 to the Registrant's
          1, 1997, between the Registrant and                Registration Statement on Form S-1,
          University Research Park Facilities                Registration No. 333-42694, filed
          Corp. and amendment, dated as of                   on July 31, 2000, as amended
          September 1, 2001

 10.11    Amendment to Lease between Registrant              Exhibit 10.11 to the Registrant's
          and University Research Park Facilities            Annual Report on Form 10-K for the
          Corp. dated as of September 1, 2002                fiscal year ended December 31, 2002

 10.12    Development and Commercialization                  Exhibit 10.26 to the Registrant's
          Agreement, dated as of December 29,                Registration Statement on Form S-1,
          2000, between the Registrant and BML,              Registration No. 333-42694, filed
                                                             on Inc. July 31, 2000, as amended

 10.13    License Agreement dated as of October              Exhibit 10.14 to the Registrant's
          15, 2002 between Registrant and                    Annual Report on Form 10-K for the
          Aclara Biosciences, Inc.                           fiscal year ended December 31, 2002

 10.14    Employment Agreement between Lance                 Exhibit 10.16 to Registrant's
          Fors and Third Wave Technologies, Inc.             Annual Report on From 10-K for the
          dated October 16, 2003                             fiscal year ended on December 31, 2003

 10.15    Employment Agreement between John                  Exhibit 10.17 to Registrant's Annual
          Puisis and Third Wave Technologies, Inc.           Report on Form 10-K for the fiscal
          dated September 19, 2001 and Amendment             year ended December 31, 2003
          dated July 17, 2003

 10.16    Amendment No. 2 to Employment Agreement            Exhibit 10.2 to Registrant's Quarterly Report
          between John Pulsis and Third Wave                 on Form 10-Q for the quarter ended June 30,
          Technologies, Inc. effective June 14,2004          2004

 10.17    Code of Business Conduct                           Third Wave Technology's website,
                                                             www.twt.com

 10.18    Third Wave Technologies, Inc.
          Amended LTIP 1

 10.19    Third Wave Technologies, Inc.
          LTIP 2

 10.20    Separation Agreement between Registrant and
          John Comerford

 10.21    Separation Agreement between Registrant and
          David Nuti and Amendment dated October 21, 2004

 10.22    Employment Agreement between Kevin T. Conroy
          and Third Wave Technologies, Inc.
          dated March 14, 2005

 10.23    Employment Agreement between James J. Herrmann
          and Third Wave Technologies, Inc.
          dated March 14, 2005

 21       List of Subsidiaries

 23       Consent of Independent Registered Public
          Accounting Firm

 24       Powers of Attorney (contained in the
          signature page hereto)

 31.1     CEO's Certification Pursuant to Section
          302 of the Sarbanes Oxley Act of 2002

 31.2     Principal Financial Officer Certification
          pursuant to Section 302 of the Sarbanes
          Oxley Act of 2002.

 32.1     CEO's Certification pursuant to 18 U.S.C.
          Section 1350, of Chapter 63 of Title 18
          of the United States Code


 32.2     Principal Financial Officer's Certification
          pursuant to 18 U.S.C Section 1350, of Chapter
          63 of Title 18 of the United States Code
</TABLE>

                                       52
<PAGE>

                 SCHEDULE II: VALUATION AND QUALIFYING ACCOUNTS
                  YEARS ENDED DECEMBER 31, 2004, 2003, AND 2002

<TABLE>
<CAPTION>
                                                BALANCE AT     ADDITIONS
                                                 BEGINNING      CHARGED         (1)       BALANCE AT
               DESCRIPTION                        OF YEAR     TO EXPENSE     DEDUCTIONS   END OF YEAR
--------------------------------------------    ----------    ----------     ----------   -----------
                                                               (DOLLARS IN THOUSANDS)
<S>                                             <C>           <C>            <C>          <C>
Allowance for doubtful accounts receivable:
  2002 .....................................     $     175     $     455     $     165     $     465
  2003 .....................................     $     465     $     402     $     727     $     140
  2004 .....................................     $     140     $     177     $      17     $     300
                                                 =========     =========     =========     =========
Allowance for excess and obsolete inventory:
  2002 .....................................     $   2,680     $   2,015     $   1,645     $   3,050
  2003 .....................................     $   3,050     $   1,308     $   3,608     $     750
  2004 .....................................     $     750     $     805     $     905     $     650
                                                 =========     =========     =========     =========
</TABLE>

----------

(1) Represents amounts written off or disposed, net of recoveries.

                                       53