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As filed with the Securities and Exchange Commission on April 15, 2011

Registration No. 333-            

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

Form S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933

LUCID, INC.
(Exact name of registrant as specified in its charter)

New York
(State or other jurisdiction of
incorporation or organization)
  3841
(Primary standard industrial classification code number)
  16-1406957
(I.R.S. Employer
Identification Number)

2320 Brighton Henrietta Town Line Road
Rochester, New York, 14623
(585) 239-9800
(Address, including zip code, and telephone number, including area code, of registrant's principal executive offices)



Jay M. Eastman, Ph.D.
Chief Executive Officer
Lucid, Inc.
2320 Brighton Henrietta Town Line Road
Rochester, New York, 14623
(585) 239-9800
(Name, address, including zip code, and telephone number, including area code, of agent for service)



Copies to:
Thomas E. Willett
Harris Beach PLLC
99 Garnsey Road
Pittsford, New York 14534
(585) 419-8646 (phone)
(585) 419-8818 (facsimile)
  Steven Skolnick
Lowenstein Sandler PC
65 Livingston Avenue
Roseland, New Jersey 07068
(973) 597-2500 (phone)
(973) 597-2477 (facsimile)

Approximate date of commencement of proposed sale to the public: As soon as practicable after the effective date of the registration statement.

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

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

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

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

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

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

CALCULATION OF REGISTRATION FEE

       
 
Title of Each Class of
Securities to be Registered

  Proposed Maximum Aggregate
Offering Price(1)

  Amount of
Registration Fee

 

Common stock, par value $0.01 per share

  $28,750,000   $3,337.88

 

(1)
Estimated solely for purposes of determining the registration fee pursuant to Rule 457(o) under the Securities Act of 1933; includes shares which may be offered and sold upon exercise of the underwriters' over-allotment option, which covers 15% of the $25 million aggregate offering price of shares sold in this offering.

         The registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the registrant shall file an amendment which specifically states that this registration statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the registration statement shall become effective on such date as the Securities and Exchange Commission, acting pursuant to said Section 8(a), may determine.


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The information in this prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and it is not soliciting an offer to buy these securities in any state where the offer and sale is not permitted.

SUBJECT TO COMPLETION, DATED APRIL 15, 2011

PROSPECTUS

GRAPHIC

    •    Shares

Lucid, Inc.

Common Stock

        This is the initial public offering of    •    shares of common stock of Lucid, Inc.

        We expect the public offering price to be between $    •    and $    •    per share. There presently is no public market for our securities and we cannot ensure you that a market will develop. We have applied to list our common stock on the Nasdaq Global Select Market under the symbol "LUCD." We may effect a     •    for    •    reverse stock split prior to the consummation of this offering.

        Investing in our common stock is highly speculative and involves a high degree of risk. See "Risk Factors" beginning on page 9.



 
  Per Share   Total  

Public offering price

  $   $  

Underwriting discounts and commissions(1)

 
$

 
$

 

Proceeds, before expenses, to Lucid, Inc. 

 
$

 
$

 

(1)
Does not include a corporate finance fee in the amount of 2%, or $    •    per share, of the gross proceeds of the offering payable to the representative of the underwriters. See "Underwriting" for a description of the compensation to be received by the underwriters.

        The underwriters have the option to purchase up to an additional 15% of the shares sold in this offering from us at the public offering price less the underwriting discounts and commissions, within 45 days from the date of this prospectus to cover over-allotments, if any. The underwriters expect to deliver the shares on or about     •    , 2011.

        Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or passed upon the adequacy or accuracy of this prospectus. Any representation to the contrary is a criminal offense.

The date of this prospectus is    •    , 2011


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        You should rely only on the information contained in this prospectus. We have not authorized anyone to provide you with information different from that contained in this prospectus. We are offering to sell shares of our common stock and seeking offers to buy shares of our common stock only in jurisdictions where offers and sales are permitted. The information contained in this prospectus is accurate only as of the date of this prospectus, regardless of the time of delivery of this prospectus or any sale of the common stock.

        For investors outside the US: Neither we nor any of the underwriters have done anything that would permit this offering or possession or distribution of this prospectus in any jurisdiction where action for that purpose is required, other than in the US. You are required to inform yourselves about, and to observe any restrictions relating to, this offering and the distribution of this prospectus.

        We obtained statistical data and certain other industry forecasts used throughout this prospectus from market research, publicly available information and industry publications. Industry publications generally state that they obtain their information from sources that they believe to be reliable. While we believe that the statistical and industry data and forecasts and market research used herein are reliable, we have not independently verified such data. We have not sought the consent of the sources to refer to their reports in this prospectus.

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Prospectus Summary

        This summary highlights information contained elsewhere in this prospectus. It does not contain all of the information you should consider before buying shares of our common stock. You should read this entire prospectus carefully, especially the "Risk Factors" section and our financial statements and the related notes appearing at the end of this prospectus, before deciding to invest in shares of our common stock. Unless otherwise stated or the context otherwise requires, (i) references in this prospectus to "Lucid," "we," "us," "our" and similar references refer to Lucid, Inc., and (ii) the information in this prospectus assumes no exercise of the underwriters' over-allotment option.

Our Business

        We are a medical device and information technology company focused on the design, manufacture and sale of non-invasive, point-of-care medical imaging devices to assist in the early diagnosis of melanoma and other skin cancers, as well as non-malignant skin disease. Our flagship products for the early diagnosis of skin cancer are the VivaScope® 1500 and VivaScope® 3000 confocal imagers, which are also known as reflectance confocal microscopes. VivaScope devices, which have received 510(k) clearance from the FDA, are designed for use in a clinical setting by medical professionals to produce images of skin lesions for subsequent review by pathologists and dermatopathologists (together referred to herein as "pathologists") and other specially trained diagnostic image readers. VivaNet is our proprietary telepathology server that provides seamless transfer of VivaScope images over the Internet using VPN technology from a dermatologist's or other originating physician's office to a pathologist's office for near real-time interpretation, diagnosis and reporting. In addition, the VivaNet® server stores the diagnostic confocal images and the pathologist's evaluation as a part of the patient's permanent medical record.

        VivaScopes® and VivaNet® are designed to mimic the workflow of the current clinical practice in assessing suspicious skin lesions for skin cancer. The primary difference between traditional clinical practice and practice using our system is that, rather than surgically excising tissue from a patient's skin lesion for subsequent examination under a microscope in the pathologist's office, a dermatologist using the VivaScope® simply images the lesion with microscopic resolution and sends those high resolution images of the lesion through VivaNet® to the pathologist for examination and reporting. This results in a procedure that is faster than the traditional biopsy and pathology approach, without the need for surgical excision of a lesion that is often benign. In addition, results of the pathology report using our VivaScope confocal image technology can be conveyed to the patient by the physician in near real-time, thus mitigating the days to weeks wait times routinely associated with traditional biopsy assessments. The liability for the medical diagnosis remains with the pathologist, the same diagnostic expert who is primarily liable for the diagnosis in today's standard of care.

        The primary components of our system include:

    The VivaScope® non-invasive confocal imaging device in the form of either an arm mounted imaging head (Model 1500) or a hand-held imaging device (Model 3000), which employs high precision optics, laser illumination and custom designed electronics to resolve thin layers of individual cells in the epidermis and upper dermis of the skin without the need for an invasive biopsy; and

    The VivaNet® telepathology server that provides seamless transfer of VivaScope® images from a dermatologist's or other originating physician's office and to a pathologist for interpretation, diagnosis and reporting.

Our current products are neither research prototypes nor early production units; rather, many of our products are in routine daily use for patient management in certain medical institutions and medical practices in several countries.


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        We have sold over 300 VivaScope confocal imagers to academic medical centers and other markets around the world. Sales of VivaScopes into these traditional clinical research markets have resulted in more than 250 peer reviewed journal publications written by some of the world's experts in melanoma and other skin cancer research. These publications have established the clinical efficacy and diagnostic accuracy of our VivaScope confocal imagers and also established the brands "Lucid®" and "VivaScope®" in the dermatology community. In addition to FDA clearance, our VivaScope® 1500 and VivaScope® 3000 are also CE marked as medical devices for sale and clinical use in the European Union, and the VivaScope® 1500 is cleared by the Australian Therapeutic Goods Administration and the Chinese State Food and Drug Administration. We have been awarded 52 patents, 41 of which are United States patents and the remaining 11 are foreign patents. In addition, we have 27 additional U.S. and foreign patents pending. Our portfolio of issued patents includes both method and apparatus patents.

        We are currently directly distributing our products in the United States, Australia and the rest of the Western Hemisphere and, in other parts of the world, we rely primarily on third party distributors. We plan to lease our VivaScope® confocal imagers to dermatologists and license our VivaNet® services to pathologists on a recurring basis. We believe the strategy of providing VivaNet services on a recurring basis will provide us with an ongoing revenue stream directly related to: (i) the average per procedure fee billed to pathologists for images of each lesion provided through VivaNet for pathologic evaluation and reporting; (ii) the total number of VivaScopes® in dermatology and other practices providing images of lesions; and (iii) the average annual number of lesions imaged by our VivaScopes in these practices. This recurring revenue business model will allow us to provide access to our VivaScope confocal imagers and VivaNet reading technology without requiring significant up front capital investments by the participating physicians. We believe this model will help facilitate adoption of our technology by dermatologists and will drive the recurring revenue stream (i.e., per procedure fees) received from pathologists evaluating the images.

Industry

        Limitations of Current Melanoma and Non-Melanoma Cancer Diagnosis.    Melanomas and non-melanoma skin cancers are diagnosed by pathologists based on gross and microscopic examination of biopsy tissue specimens generally provided to them by dermatologists, plastic surgeons or primary care physicians, or PCPs. In the United States, these physicians rely primarily on visual clinical evaluation of skin lesions in order to determine which lesions to biopsy and send to the pathologist for evaluation. Consequently, these clinical examinations are limited to the surface appearance of the suspicious skin lesion and are heavily dependent on the physician's experience and skill. According to a paper by Welch, et al. based on SEER data from the National Cancer Institute, U.S. physicians typically biopsy more than 40 suspicious lesions to find one melanoma. Dermatologists who specialize in the management of skin lesions may also use dermoscopy, a method of viewing a lesion's gross superficial subsurface structure under magnification.

        Our internal market research suggests that while melanoma is the dominant concern of dermatologists, these physicians are also interested in better technology for identifying and clinically diagnosing both basal cell carcinoma and squamous cell carcinoma. Our data also suggests these physicians are significantly more likely to adopt a technology that can assist in the diagnosis of all three of these skin cancers, as opposed to a technology that can only assist in the diagnosis of melanoma. We have also learned from our market research that physicians and patients have a strong preference for a technology that places the final decision regarding the diagnosis of skin cancer in the hands of a pathologist, in contrast to a technology that makes a diagnosis using computer automated diagnosis based on software algorithms.

        According to the American Cancer Society, and data in a paper by Rogers, et al., skin cancer, including melanoma and non-melanoma skin cancers, or NMSCs, is the most common of all cancers in

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the United States and accounts for approximately 70% of all new cancer cases each year in the U.S. According to Rogers, there were an estimated 3.6 million NMSCs and melanomas in the U.S. population in 2006 versus approximately 1.5 million cases of other types of cancer, according to Cancer Facts and Figures 2010. The three most common skin cancers, in rank order are: (i) basal cell carcinoma, accounting for approximately 78% of skin cancers; (ii) squamous cell, totaling approximately 19% of skin cancers; and (iii) melanoma, which accounts for an estimated 3% of skin cancer cases, but is responsible for the majority of all skin cancer deaths. The American Cancer Society projected that approximately 11,740 deaths from all types of skin cancer occurred in 2010.

        Melanoma is currently receiving significant attention from the medical community and the public. The American Academy of Dermatology estimated that in 2010, 68,130 new cases of invasive melanoma would occur and 8,700 deaths would result. It is the most common cancer in young adults ages 25-29, and is the primary cause of cancer death in women between the ages of 25 to 30, according to the Skin Cancer Foundation. In addition, according to Medscape, approximately 46,770 additional new cases of melanoma in situ also occurred in 2010, resulting in a total of roughly 114,900 new cases of melanoma in that year.

        A survey of dermatologists by Dr. Seema P. Kini of Emory University, as reported in Skin and Allergy News (2011), revealed that 58% of these dermatologists did not report new cases of malignant melanoma to their state cancer registry. Consequently, the number of melanoma cases reported in Cancer Facts & Figures 2010 may substantially under report the incidence of melanoma in the United States.

        According to the Skin Cancer Foundation's "Skin Cancer Facts," melanoma is the most deadly skin cancer and is responsible for approximately 75% of skin cancer fatalities, and while there is no known effective cure for metastatic melanoma, early detection and excision of melanoma can lead to nearly a 99% cure rate. Early diagnosis allows cure by simple excision at a cost typically in the range of $2,500 for a melanoma in situ. Advanced Stage IV melanoma is costly to treat resulting in medical expenses that are often in the range of $160,000 per patient, as reported in the Dermatology Online Journal (2009).

        NMSCs, such as basal cell and squamous cell carcinoma, are also accessed clinically by the physician using visual examination. As is the case for melanoma, lesions suspicious for NMSC are biopsied and the tissue is sent to the pathologist for definitive diagnosis. Since most NMSCs are considerably less lethal than melanoma, they are subject to a lower over-biopsy rate. We believe that the NMSC over-biopsy rate is in the range of approximately 2:1.

        The Prevalence of Skin Cancer Diagnosis in the U.S. Medical System.    We estimate that approximately 4.6 million specimens are examined by U.S. pathologists for indications of melanoma (based on a 40:1 biopsy ratio and an estimated 114,900 new cases of melanoma per year) and that another 7 million are examined for NMSC (based on our estimate of a 2:1 biopsy ratio and an estimated 3.5 million new cases of NMSC per year), for a total of approximately 11.6 million skin biopsies of suspicious lesions.

        Our objective is for our VivaScope® systems, combined with our VivaNet® telepathology system, to become the standard of medical care for the early detection and diagnosis of melanoma and non-melanoma skin cancers. We believe that our systems may ultimately eliminate the need for most routine surgical skin biopsies. In order to achieve this objective, we are pursuing the following strategy:

    Establish our VivaScope® reflectance confocal imaging technology as the leader for assisting in melanoma and non-melanoma skin cancer detection and diagnosis.

    Verify third party payer reimbursement to support our VivaNet recurring revenue model.

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    Obtain third party payer reimbursement for dermatologists and other physicians using our VivaScope confocal imagers.

    Commercialize our technologies using both direct and distribution sales channels.

    Broaden application of our technology into additional fields.

Risks Associated with our Business

        Our business is subject to a number of risks discussed under the heading "Risk Factors" and elsewhere in this prospectus, including, but not limited to, the following:

    We have a limited operating history, expect future losses, and may be unable to achieve or maintain profitability. Our business and prospects must be considered in light of the significant risks, expenses, and difficulties frequently encountered by medical device companies in their early stage of operations.

    We may be unable to obtain market acceptance of our products. If our VivaScope confocal imagers and/or our VivaNet telepathology system do not achieve an adequate level of acceptance by physicians, healthcare payors, and patients, we may not generate meaningful revenue and we may not become profitable.

    Third-party payors may not provide sufficient coverage or reimbursement to healthcare providers for the use of our products. If our customers are unable to obtain adequate reimbursement for our products, market acceptance of our VivaScope confocal imagers and/or our VivaNet telepathology system would be adversely affected.

    We have incurred net operating losses since our inception. Our net loss was approximately $4.3 million and $4.1 million in 2010 and 2009, respectively. We expect to incur significant sales, marketing, and manufacturing expenses during the early marketing phase of our VivaScope confocal microscope devices and in the launch of VivaNet. As a result, we expect to continue to incur operating losses for the foreseeable future. In addition, the report of our independent registered public accounting firm with respect to our financial statements appearing at the end of this prospectus contains an explanatory paragraph stating that our financial results and our need to raise additional financing raise substantial doubt about our ability to continue as a going concern.

    We may be unable to protect our intellectual property rights, and claims of infringement or misappropriation of the intellectual property rights of others could prohibit us from commercializing our products.

        You should carefully consider these factors, as well as all of the other information set forth in this prospectus, before making an investment decision.

Company Information

        We were organized as a New York corporation on November 27, 1991 under the name Lucid Technologies, Inc. We subsequently amended our Certificate of Incorporation to change our name to Lucid, Inc. Our principal executive offices are located at 2320 Brighton Henrietta Town Line Road, Rochester, New York 14623. Our telephone number is (585) 239-9800. Our web site is www.lucid-tech.com. The information on or accessible through our website does not constitute a part of this prospectus and is not incorporated herein by reference.

        This prospectus contains references to our U.S. registered trademarks: VivaScope, VivaNet, VivaBlock, VivaStack, VivaCam, VivaNet, VivaCell, VivaScopy and our corporate logo. All other trademarks, tradenames and service marks appearing in this prospectus are the property of their respective owners.

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The Offering

Common stock offered by us   • shares

Common stock outstanding after the offering

 

• shares

Use of proceeds

 

We estimate that we will receive net proceeds of approximately $ • million from the sale of [ • ] million shares of our common stock at an assumed initial public offering price of $[ • ] per share, the mid-point of the range set forth on the cover page of this prospectus, after deducting underwriting discounts and commissions and estimated expenses of approximately $ • . We expect to use the net cash proceeds of the Offering to (i) repay a substantial portion of our existing indebtedness, including but not limited to the payment in full of any amounts outstanding under our line of credit facility, (ii) build our global research, sales, marketing, manufacturing and administration structure to commercialize our VivaScope and VivaNet technology platforms, and (iii) for such other working capital and general corporate purposes as we may identify in the future. See "Use of Proceeds."

Risk factors

 

You should read the "Risk Factors" section of this prospectus for a discussion of factors to consider carefully before deciding to invest in shares of our common stock.

Proposed Nasdaq Global Select Market Trading Symbol

 

LUCD

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        The number of shares of our common stock to be outstanding after this offering is based on    •    shares outstanding as of March 31, 2011, and unless otherwise indicated, excludes:

    •    shares of common stock issuable as of the date of this prospectus upon the exercise of outstanding stock options at a weighted average exercise price of $    •    per share;

    up to    •    shares of common stock reserved for future grants under our 2010 Long-Term Equity Incentive Plan;

    •    shares of common stock issuable upon exercise of warrants at an exercise price of    •    per share;    •    shares of common stock issuable upon exercise of warrants at an exercise price of     •    per share;    •    shares of common stock issuable upon exercise of warrants at an exercise price of     •    per share; and,    •    shares of common stock issuable upon exercise of warrants at an exercise price of     •    per share;

    •    shares of common stock issuable upon exercise of warrants to be issued to the underwriters upon completion of this offering at an exercise price equal to 120% of the public offering price per share; and,

    •    shares of common stock which may be issued upon the conversion of certain fee entitlements payable to Northeast LCD Capital, exercisable at the option of Northeast LCD Capital.

        Except as otherwise indicated herein, all information in this prospectus, including the number of shares outstanding after this offering, assumes or gives effect to:

    A    •    —for—    •    reverse stock split of our common stock that we may complete prior to the closing of this offering;

    The conversion of our outstanding convertible debt notes, which notes were issued pursuant to a convertible debt offering during December 2010/January 2011 (the "2010/2011 Convertible Debt Offering"), into    •    shares of our common stock;

    The conversion of our outstanding convertible debt notes, which notes were issued pursuant to a convertible debt offering during 2009 (the "2009 Convertible Debt Offering," which together with our 2010/2011 Convertible Debt Offering constitutes all of our outstanding convertible debt), into     •    shares of our common stock; and,

    The conversion of all of our shares of Series A and Series B preferred stock into     •    shares of our common stock at the closing of this offering.

        Unless we specifically state otherwise, all information in this prospectus assumes no exercise of the underwriters' over-allotment option.

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Summary Financial Data

        The following table sets forth our summary consolidated financial data, which is derived from our consolidated financial statements. The summary consolidated financial statement data as of December 31, 2010 and 2009 and for the years ended December 31, 2010 and 2009, are derived from our audited consolidated financial statements included elsewhere in this prospectus. You should read this summary financial data in conjunction with, and it is qualified in its entirety by, reference to our historical financial information and other information provided in this prospectus, including "Management's Discussion and Analysis of Financial Condition and Results of Operations" and our consolidated financial statements and related notes appearing elsewhere in this prospectus. The historical results set forth below are not necessarily indicative of the results to be expected in future periods.

 
  Year Ended December 31,  
 
  2010   2009  

Statement of Operations Data:

             

Revenue

  $ 2,626,792   $ 2,302,539  

Operating expenses:

             
 

Cost of Revenue

    1,143,035     1,064,214  
 

General and administrative

    3,799,268     3,232,441  
 

Sales and marketing

    798,925     879,482  
 

Engineering, research and development

    685,710     756,199  
           

Total operating expenses

    6,426,938     5,932,336  
           

Other operating income

    244,479     85,049  

Loss from operations

   
(3,555,667

)
 
(3,544,748

)

Other (expense) income, net

   
(747,250

)
 
(506,603

)
           

Net loss

  $ (4,302,917 ) $ (4,051,351 )
           

Basic and diluted net loss per common share

  $ (1.61 ) $ (1.72 )
           

Weighted-average number of common shares outstanding

    2,671,248     2,356,867  
           

Basic and diluted net loss per common share—pro forma (unaudited)

  $        
             

Basic and diluted shares used in computing pro forma net loss per share (unaudited)

           
             

        The pro forma balance sheet data set forth below assumes or gives effect to:

    The conversion of the notes issued in connection with our 2010/2011 Convertible Debt Offering into     •    shares of our common stock;

    The conversion of the notes issued in connection with our 2009 Convertible Debt Offering into     •    shares of our common stock; and,

    The conversion of all of our shares of Series A and Series B preferred stock into     •    shares of our common stock at the closing of this offering.

        The pro forma, as adjusted, balance sheet data also gives effect to our issuance and sale of    •    shares of common stock in this offering at the initial public offering price of $    •    per share, after deducting underwriting discounts and commissions and estimated offering expenses payable by us.

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  As of December 31, 2010  
 
  Actual   Pro Forma   Pro Forma
As Adjusted
 
 
   
  (unaudited)
  (unaudited)
 

Cash

  $ 839,075   $   $  
               

Long Term Debt:

                   
 

2009 Convertible Debt Offering

  $ 900,000   $   $  
 

2010/2011 Convertible Debt Offering

    3,037,152          
 

Other debt(1)

    1,397,180          
 

Warrant liabilities

    1,674,170          
 

Less debt discount and current portion

    (1,559,629 )        
                   

  $ 5,448,873              

Stockholders' Deficit:

                   
 

Preferred stock

    144,833          
 

Common stock

    45,083          
 

Additional paid-in capital

    19,725,348          
 

Subscription receivable

    (739,218 )        
 

Accumulated deficit

    (27,597,667 )        
               
 

Total stockholders' (deficit) equity

  $ (8,421,621 ) $   $  

Total capitalization

 
$

(2,972,748

)

$

 
$

 
               

(1)
Includes related party debt of $183,146.

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Risk Factors

        Investing in our common stock involves a high degree of risk. You should carefully consider the following risk factors, as well as the other information in this prospectus, before deciding whether to invest in shares of our common stock. If any of the following risks actually occur, our business, financial condition and results of operations would suffer. In that case, the trading price of our common stock would likely decline and you might lose all or part of your investment in our common stock. The risks described below are not the only ones we face. Additional risks that we currently do not know about or that we currently believe to be immaterial may also impair our business, financial conditions and results of operations.

Risks related to Our Financial Position and Capital Requirements

We have a history of losses, and we anticipate that we will incur continued losses for the foreseeable future.

        We reported net losses of approximately $4.3 million and $4.1 million in 2010 and 2009, respectively. As of December 31, 2010, we had an accumulated deficit of approximately $27.6 million. We have devoted substantially all of our resources to research and development and sales relating to our VivaScope confocal imagers and the VivaNet telepathology system. Our success will depend upon, among other things, our ability to successfully market and sell our products and to generate revenues. Unanticipated problems, expenses and delays are frequently encountered in developing and commercializing new technology. These include, but are not limited to, competition, the need to gain clinical acceptance of our technology, the need for sales and marketing expertise, regulatory concerns, and setbacks in the continued development of new technology. We expect to incur significant sales, marketing, and manufacturing expenses during the early marketing phase of our VivaScope confocal microscope devices and in the launch of VivaNet. As a result, we expect to continue to incur operating losses for the foreseeable future. These losses, among other things, have had and will continue to have an adverse effect on our stockholders' equity. If we are not able to fund our cash needs, we may not be able to continue as a going concern, and it is likely that all of our investors would lose their investment.

The report of our independent registered public accounting firm expresses substantial doubt about our ability to continue as a going concern.

        Our auditors, Deloitte & Touche LLP, have indicated in their report on our financial statements for the fiscal years ended December 31, 2010 and 2009 that conditions exist that raise substantial doubt about our ability to continue as a going concern due to our recurring losses from operations, working capital deficiency, deficit in equity, and the need to raise additional capital to fund operations. A "going concern" opinion could impair our ability to finance our operations through the sale of debt or equity securities. Our ability to continue as a going concern will depend on our ability to obtain additional financing when necessary, which is not certain. If we are unable to achieve these goals, our business would be jeopardized and we may not be able to continue. If we ceased operations, it is likely that all of our investors would lose their investment.

After giving effect to the proceeds of this offering, assuming we raise the maximum amount set forth on the cover of this prospectus, our capital resources will only fund our operations for approximately 36 months after closing of this offering and we will need substantial additional capital for the continued development of our products and for our long-term operations.

        We will use the proceeds from this offering to fund our continued operations. We believe that the net proceeds of this offering, assuming we raise the maximum amount set forth on the cover of this prospectus, plus our existing cash and cash equivalents, should be sufficient to meet our operating and capital requirements for approximately 36 months after the closing of this offering. Because of the numerous risks and uncertainties associated with research, development and commercialization of

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medical devices, we are unable to estimate the exact amounts of our working capital requirements. Our future funding requirements will depend on many factors, including, but not limited to:

    the cost of commercialization activities of our existing VivaScope products and VivaNet system, and of our future product candidates, including marketing, sales and distribution costs;

    the number and characteristics of any future product candidates we pursue or acquire;

    the scope, progress, results and costs of researching and developing our future product candidates, and conducting preclinical clinical trials;

    the timing of, and the costs involved in, obtaining regulatory approvals for our future product candidates;

    the cost of manufacturing our existing VivaScope products and maintaining our VivaNet system, as well as such costs associated with any future product candidates we successfully commercialize;

    our ability to establish and maintain strategic partnerships, licensing or other arrangements and the financial terms of such agreements;

    the costs involved in preparing, filing, prosecuting, maintaining, defending and enforcing patent claims, including litigation costs and the outcome of such litigation; and

    the timing, receipt and amount of sales of, or royalties on, our future products, if any.

        In addition to the net proceeds from this offering, we will require significant amounts of additional capital in the future, and such capital may not be available when we need it on terms that we find favorable, if at all. We may seek to raise these funds through public or private equity offerings, debt financings, credit facilities, or partnering or other corporate collaborations and licensing arrangements. If adequate funds are not available or are not available on acceptable terms, our ability to fund our operations, take advantage of opportunities, develop products and technologies, and otherwise respond to competitive pressures could be significantly delayed or limited, and we may need to downsize or halt our operations. Prevailing market conditions may not allow for such a fundraising or new investors may not be prepared to purchase our securities at prices that are greater than the purchase price of shares sold in this offering. In the event that future fundraising is at prices lower than the purchase price of shares sold in this offering, investors participating in this offering could suffer significant ownership dilution and/or a reduction in the market value of their holdings of our common stock.

We currently have a negative net worth, and, if we are unable to pay our accounts payable and other obligations, our business could be adversely affected.

        Our financial statements report us having a negative net worth of $8.4 million. In addition, we have accumulated substantial debt, accounts payable, and accrued expenses to our trade vendors and to certain of our research partners/collaborators. Our inability to pay these accounts payable and accrued expenses could have a material adverse effect on our business, financial condition and results of operations. Our inability to negotiate and meet payment terms on some of these obligations, combined with a lack of success in fully subscribing this offering, may significantly increase the degree of risk for investors in this offering.

We are a highly leveraged company. Substantial indebtedness imposes significant operating and financial restrictions on us, which may adversely affect our financial condition and prevent us from capitalizing on business opportunities and taking some actions.

        We have substantial indebtedness. As of December 31, 2010, we had $6.1 million of outstanding debt, of which $2.0 million was outstanding under our credit facility, and $3.9 million was outstanding under our convertible notes and will convert automatically into shares of our common stock in connection with this offering. This level of indebtedness could have important consequences to

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investors in our securities. Among other things, it could make it difficult for us to satisfy all of our obligations to our creditors and could limit our ability to obtain additional debt financing to fund our working capital requirements. Included in our indebtedness is a $5.0 million line of credit facility, of which $2.0 million had been borrowed as of December 31, 2010. The facility is in the form of a demand loan, so that the bank may demand full or partial repayment at any time at its sole option and we may not be able to obtain alternative financing to facilitate such repayment. In addition, our credit facility contains financial and other restrictive covenants that may limit our ability to incur additional indebtedness, and it imposes significant operating and financial restrictions on us. These restrictions limit our ability to, among other things:

    incur additional indebtedness;

    incur liens;

    make investments and sell assets;

    pay dividends and make other distributions;

    purchase our stock;

    engage in business activities unrelated to our current business;

    enter into transactions with affiliates; or

    consolidate, merge or sell all or substantially all of our assets.

        In addition, we are required to satisfy and maintain specified financial ratios and other financial condition tests. Our ability to meet those financial ratios and tests can be affected by events beyond our control, and we cannot assure you that we will meet those ratios and tests. A breach of any of these covenants could result in a default. Upon the occurrence of an event of default our lenders could elect to declare all amounts outstanding to be immediately due and payable and terminate all commitments to extend further credit.

        As a result of these covenants and restrictions, we will be limited in how we conduct our business and we may be unable to raise additional capital to compete effectively or to take advantage of new business opportunities. The terms of any future indebtedness we may incur could include more restrictive covenants. A breach of any of these covenants could result in a default in respect of the related indebtedness. If a default occurs, the relevant lenders could elect to declare the indebtedness, together with accrued interest and other fees, to be due and payable immediately and proceed against any collateral securing that indebtedness. In the event that some or all of our debt is accelerated and becomes immediately due and payable, we may not have the funds to repay, or the ability to refinance, such debt.

        Subject to the terms of our outstanding debt, we may be able to incur substantial additional indebtedness in the future. Although the agreements governing our outstanding indebtedness contain restrictions on the incurrence of additional indebtedness, these restrictions are subject to a number of significant qualifications and exceptions, and under certain circumstances, the amount of indebtedness that could be incurred in compliance with these restrictions could be substantial.

        If we cannot make scheduled payments on our indebtedness, we will be in default under one or more of our debt agreements and, as a result, holders of our debt could declare all outstanding principal and interest due and payable, and we could be forced into bankruptcy or liquidation. Our ability to make scheduled payments or to refinance our indebtedness depends on our financial and operating performance, which is subject to prevailing economic and competitive conditions and to certain financial, business and other factors beyond our control. We may not be able to maintain a level of cash flow from operations sufficient to permit us to pay the principal and interest on our indebtedness. If our cash flows and capital resources are insufficient to fund our debt service obligations, we may be forced to reduce or delay capital expenditures, sell assets or operations, seek

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additional capital or restructure or refinance our indebtedness. We may not be able to take any of these actions, and these actions may not be successful or permit us to meet our scheduled debt service obligations. Furthermore, these actions may not be permitted under the terms of our existing or future debt agreements. In the absence of such operating results and resources, or refinancings and amendments, we could face substantial liquidity problems and may be required to dispose of material assets or operations to meet our debt service and other obligations.

Our future growth is dependent upon the development of new products, which requires significant research and development, clinical trials and regulatory approvals, all of which are very expensive and time-consuming and may not result in commercially viable products.

        In order to develop new products and improve current product offerings, we focus our research and development programs largely on the development of next-generation and novel technology offerings. If we are unable to develop and launch new products, our ability to maintain or expand our market position may be materially adversely impacted. We may not be able to access new technologies on terms favorable to us, and we may not be able to achieve commercial feasibility, obtain regulatory approval or gain market acceptance of any such new technologies. A delay in the development, approval or commercialization of these technologies may adversely impact the contribution of new products to our future growth.

We may suffer damages if there are delays in our completion of this offering.

        Pursuant to the terms and conditions of the securities issued in our 2010/2011 Convertible Debt Offering, the holders of those securities are entitled to certain rights and damages in the event that we do not complete an initial public offering, or similar financing event per the terms of the agreement, by July 12, 2011. More specifically, the interest rate of the notes would increase to 9% and the conversion price would be reduced by 5% each month until an offering is completed. In addition, holders of these securities are entitled to a cash liquidated damages equal to 1.5% of each purchaser's subscription amount per month until we complete and initial public offering or similar financing. This amount is capped at 10% of the purchaser's subscription amount.

Risks Related to Our Intellectual Property Rights

We rely on copyrights, trademarks, trade secrets, and patents to protect our proprietary rights.

        We have registered our Lucid®, VivaNet® and VivaScope® trademarks on the Principal Register of the United States Patent and Trademark Office for uses on and in connection with our medical product and equipment line. Our trademarks and copyrights, whether registered or not, may not provide significant commercial protection or an advantage over our competitors.

        In addition, third parties may claim that our trademarks, copyrights, or patents, or our products or technology, infringe their trademarks, copyrights, patents or other proprietary rights. Any infringement or misappropriation claim could cause us to incur significant costs, could place significant strain on our financial resources, divert management's attention from our business and harm our reputation. If the relevant intellectual property is upheld as valid and enforceable and we were found to infringe, we could be prohibited from selling our products unless we could obtain licenses to use the technology covered by the intellectual property or are able to design around the intellectual property. We may be unable to obtain a license on terms acceptable to us, if at all, and we may not be able to redesign our products to avoid infringement.

We could be unsuccessful in obtaining adequate patent protection for one or more of our products.

        We have 52 issued patents and approximately 27 pending patent applications worldwide. Our pending patent applications may not be allowed. In addition, any patent now issued, or obtained in the future, may not provide protection or be of commercial benefit to us, and the validity of our patents

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could be challenged. Moreover, our means of protecting our proprietary rights may not be adequate, and our competitors may independently develop comparable or superior technologies.

        The medical device market in which we operate is largely technology driven. Physician customers have historically moved quickly to new products and new technologies. As a result, intellectual property rights, particularly patents and trade secrets, play a significant role in product development and differentiation. Our ability to commercialize VivaNet and VivaScope will depend, in part, on our ability, both in the U.S. and in other countries, to obtain patents, enforce those patents, preserve trade secrets and operate without infringing the proprietary rights of third parties.

        Patents and other proprietary rights are and will continue to be essential to our business, and our ability to compete effectively with other companies will be dependent upon the proprietary nature of our technologies. We rely upon trade secrets, know-how, continuing technological innovations, strategic alliances and licensing opportunities to develop, maintain and strengthen our competitive position. We pursue a policy of generally obtaining patent protection in both the U.S. and abroad for patentable subject matter in our proprietary devices and attempt to review third-party patents and patent applications to the extent publicly available in order to develop an effective patent strategy, avoid infringement of third-party patents, identify licensing opportunities and monitor the patent claims of others. No assurance can be made that any pending or future patent applications will result in the issuance of patents, that any current or future patents issued to, or licensed by, us will not be challenged or circumvented by our competitors, or that our patents will not be found invalid. In addition, we may have to take legal action in the future to protect our patents, trade secrets or know-how or to assert them against claimed infringement by others. Any legal action of that type could be costly and time consuming and no assurances can be made that any lawsuit will be successful.

        In addition, any future patents may not prevent other persons or companies from developing similar or medically equivalent products and other persons or companies may be issued patents that may prevent the sale of our products or that will require us to license or pay significant fees or royalties. Furthermore, issued patents may not be valid or enforceable, or be able to provide our Company with meaningful protection. The invalidation of key patents or proprietary rights that we own, or an unsuccessful outcome in lawsuits to protect our intellectual property, could have a material adverse effect on our business, financial condition or results of operations.

        We are not aware of any third parties infringing our patents. Unauthorized parties may try to copy aspects of our products and technologies or obtain and use information we consider proprietary. Policing the unauthorized use of our proprietary rights is difficult. We cannot guarantee that no harm or threat will be made to our or our collaborators' intellectual property. In addition, changes in, or different interpretations of, patent laws in the U.S. and other countries may also adversely affect the scope of our patent protection and our competitive situation.

        There is certain subject matter that is patentable in the U.S. but not generally patentable outside of the U.S. Differences in what constitutes patentable subject matter in various countries may limit the protection we can obtain outside of the U.S. These and other issues may prevent us from obtaining patent protection outside of the U.S., which would have a material adverse effect on our business, financial condition and results of operations.

Issued patents for one or more of our products could be found invalid or unenforceable if challenged in court.

        If we or one of our collaborators were to initiate legal proceedings against a third party to enforce a patent covering one of our products, the defendant could counterclaim that our patent is invalid and/or unenforceable. In patent litigation in the United States, defendant counterclaims alleging invalidity and/or unenforceability are commonplace. Grounds for a validity challenge could be an alleged failure to meet any of several statutory requirements, for example, lack of novelty, obviousness or non-enablement. Grounds for an unenforceability assertion could be an allegation that someone connected with prosecution of the patent withheld relevant information from the U.S. Patent and

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Trademark Office, or made a misleading statement, during prosecution. Although we believe that we have conducted our patent prosecution in accordance with the duty of candor and in good faith, the outcome following legal assertions of invalidity and unenforceability during patent litigation is unpredictable. With respect to the validity question, for example, we cannot be certain that there is no invalidating prior art, of which we and the patent examiner were unaware during prosecution. If a defendant were to prevail on a legal assertion of invalidity and/or unenforceability, we would lose at least part, and perhaps all, of the patent protection on one of our products or certain aspects of VivaNet and VivaScope. Such a loss of patent protection could have a material adverse impact on our business.

Claims that our technology, our products or the sale or use of our products infringe the patent rights of third parties could result in costly litigation or could require substantial time and money to resolve even if litigation is avoided.

        The medical device industry in which we operate is susceptible to significant intellectual property litigation and, in recent years, it has been common for companies in the medical device field to aggressively challenge the patent rights of other companies in order to gain a competitive advantage. Patent litigation is costly and time-consuming and there can be no assurance that we will have, or will be able to devote, sufficient resources to pursue such litigation.

        We may become involved as either a plaintiff or a defendant in patent infringement and other intellectual property-related actions. We may become a party to patent infringement claims and litigation or interference proceedings declared by the U.S. Patent and Trademark Office to determine the priority of inventions. The defense and prosecution of these matters are both costly and time consuming. Additionally, we may need to commence proceedings against others to enforce our patents, to protect our trade secrets or know-how or to determine the enforceability, scope and validity of the proprietary rights of others. These proceedings would result in substantial expense to us and significant diversion of effort by our technical and management personnel.

Unfavorable outcomes in intellectual property litigation could limit our research and development activities and/or our ability to commercialize our products.

        Potentially unfavorable outcomes in intellectual property proceedings could limit our intellectual property rights and activities and could result in significant royalty or other payments or injunctions that may prevent the sale of products and may significantly divert the attention of our technical and management personnel. Such adverse outcomes could have a material adverse effect on our ability to sell certain products and on our operating margins, financial condition, results of operation or liquidity.

        If third parties successfully assert intellectual property rights against us, we might be barred from using certain aspects of our technology or barred from developing and commercializing certain products. Prohibitions against using certain technologies, or prohibitions against commercializing certain products, could be imposed by a court or by a settlement agreement between us and a plaintiff. In addition, if we are unsuccessful in defending against allegations of patent infringement or misappropriation of trade secrets, we may be forced to pay substantial damage awards to the plaintiff. There is inevitable uncertainty in any litigation, including intellectual property litigation. There can be no assurance that we would prevail in any intellectual property litigation, even if the case against us is weak or flawed. If litigation leads to an outcome unfavorable to us, we may be required to obtain a license from the owner of the intellectual property in order to continue our research and development programs or to market our products. The necessary license may not be available to us on commercially acceptable terms, or at all. This could limit our research and development activities, our ability to commercialize certain products, or both. If we fail to obtain a required license or are unable to design around a patent, our business, financial condition or results of operations could be materially adversely affected.

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        Most of our competitors are larger than we are and have substantially greater resources. They are, therefore, likely to be able to sustain the costs of complex patent litigation longer than we could. In addition, the uncertainties associated with litigation could have a material adverse effect on our ability to raise the funds necessary for clinical trials, continue our internal research programs, obtain licenses to use needed technology, or enter into strategic partnerships that would help us bring our product candidates to market.

Intellectual property litigation may lead to unfavorable publicity that harms our reputation and causes the market price of our common stock to drop.

        During the course of any patent litigation, there could be public announcements of the results of hearings, rulings on motions, and other interim proceedings in the litigation. If securities analysts or investors regard these announcements as negative, the perceived value of our products, programs, or intellectual property could be diminished. Accordingly, the market price of our common stock may decline.

Confidentiality agreements with employees and third parties may not prevent unauthorized disclosure of trade secrets and other proprietary information.

        In addition to patents, we rely on trade secrets, technical know-how, and proprietary information concerning our business strategy in order to protect our competitive position. In the course of our research and development activities and our business activities, we often rely on confidentiality agreements to protect our proprietary information. Such confidentiality agreements are used, for example, when we talk to vendors of laboratory or clinical development services or potential strategic partners. In addition, each of our employees is required to sign a confidentiality agreement upon joining our Company. We take steps to protect our proprietary information, and our confidentiality agreements are carefully drafted to protect our proprietary interests. Nevertheless, there can be no guarantee that an employee or an outside party will not make an unauthorized disclosure of our proprietary confidential information. This might happen intentionally or inadvertently. It is possible that a competitor will make use of such information, and that our competitive position will be compromised, in spite of any legal action we might take against persons making such unauthorized disclosures.

        Trade secrets are difficult to protect. Although we use reasonable efforts to protect our trade secrets, our employees, consultants, contractors, or outside scientific collaborators might intentionally or inadvertently disclose our trade secret information to competitors. Enforcing a claim that a third party illegally obtained and is using any of our trade secrets is expensive and time consuming, and the outcome is unpredictable. In addition, courts outside the U.S. sometimes are less willing than U.S. courts to protect trade secrets. Moreover, our competitors may independently develop equivalent knowledge, methods and know-how.

        Our research and development strategic partners may have rights to publish data and other information to which we have rights. In addition, we sometimes engage individuals or entities to conduct research relevant to our business. The ability of these individuals or entities to publish or otherwise publicly disclose data and other information generated during the course of their research is subject to certain contractual limitations. These contractual provisions may be insufficient or inadequate to protect our confidential information. If we do not apply for patent protection prior to such publication, or if we cannot otherwise maintain the confidentiality of our proprietary technology and other confidential information, then our ability to obtain patent protection or to protect our trade secret information may be jeopardized.

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Intellectual property rights do not necessarily address all potential threats to our competitive position.

        The degree of future protection afforded by our intellectual property rights is uncertain because intellectual property rights have limitations, and may not adequately protect our business, or permit us to maintain our competitive position. We may face, among others, the following threats or challenges:

    Others may be able to develop technology or systems that are similar to our products and systems but that are not covered by the claims of the patents that we own or have exclusively licensed.

    Others may assert an ownership interest in any of our intellectual property rights or raise an inventorship issue with respect to our patent filings.

    We or our licensors or strategic partners might not have been the first to make the inventions covered by the issued patent or pending patent application that we own or have exclusively licensed.

    We or our licensors or strategic partners might not have been the first to file patent applications covering certain of our inventions.

    Others may independently develop similar or alternative technologies or duplicate any of our technologies without infringing our intellectual property rights.

    Our pending patent applications may not lead to issued patents.

    Issued patents that we own or have exclusively licensed may not provide us with any competitive advantages, or may be held invalid or unenforceable, as a result of legal challenges by our competitors.

    Our competitors might conduct research and development activities in countries where we do not have patent rights and then use the information learned from such activities to develop competitive products for sale in our major commercial markets.

    We may not develop additional proprietary technologies that are patentable.

    The patents of others may have an adverse effect on our business.

Changes in U.S. patent law could diminish the value of patents in general, thereby impairing our ability to protect our products.

        Obtaining and enforcing medical device patents is costly, time-consuming and inherently uncertain. In addition, Congress may pass patent reform legislation. The U.S. Supreme Court has ruled on several patent cases in recent years, either narrowing the scope of patent protection available in certain circumstances or weakening the rights of patent owners in certain situations. In addition to increasing uncertainty with regard to our ability to obtain patents in the future, this combination of events has created uncertainty with respect to the value of patents, once obtained. Depending on decisions by the U.S. Congress, the federal courts, and the U.S. Patent and Trademark Office, the laws and regulations governing patents could change in unpredictable ways that would weaken our ability to obtain new patents or to enforce our existing patents and patents that we might obtain in the future. If we are unable to obtain new patents or enforce our existing patents, our business, financial condition, and results of operations would be harmed.

Risks Related to the Development and Commercialization of Our Products

We have limited marketing experience, sales force or distribution capabilities. If we are unable to recruit key personnel to perform these functions, we may not be able to successfully commercialize our products.

        Our ability to produce revenues ultimately depends on our ability to sell our products. We currently have limited experience in marketing or selling our products, and we have a limited marketing

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and sales staff and distribution capabilities. Developing a marketing and sales force is time-consuming and will involve the investment of significant amounts of financial and management resources, and could delay the launch of new products or expansion of existing product sales. In addition, we will compete with many companies that currently have extensive and well-funded marketing and sales operations. If we fail to establish successful marketing and sales capabilities or fail to enter into successful marketing arrangements with third parties, our ability to generate revenues will suffer.

        Furthermore, even if we enter into marketing and distributing arrangements with third parties, we may have limited or no control over the sales, marketing and distribution activities of these third parties, and these third parties may not be successful or effective in selling and marketing our VivaNet and VivaScope. If we fail to create successful and effective marketing and distribution channels, our ability to generate revenue and achieve our anticipated growth could be adversely affected. If these distributors experience financial or other difficulties, sales of our products could be reduced, and our business, financial condition and results of operations could be harmed.

Our commercial success depends upon attaining significant market acceptance of our products by physicians, patients and healthcare payors.

        The medical device industry is highly competitive and subject to rapid and profound technological change. Our success depends, in part, upon physicians continuing to perform a significant number of diagnostic procedures and our ability to achieve and maintain a competitive position in the development of technologies and products in the skin cancer diagnosis field. If physicians, patients, or other healthcare providers opt to use our competitors' products, or healthcare payors do not accept our products, our commercial opportunity will be reduced and our potential revenues will suffer. Alternative diagnostic tools currently are widely accepted in the medical community and have a long history of use. In addition, technological advances may result in improvements in these alternative diagnostic tools or new technologies that produce superior diagnostic results as compared to VivaNet and VivaScope.

        Our products and systems may not be accepted in the marketplace at a level that would allow us to operate profitably. Our products and systems may be unable to achieve commercial acceptance for a number of reasons, such as the availability of alternatives that are less expensive, more effective, or easier to use; the perception of a low cost-benefit ratio for the product amongst our market, including screening centers, hospitals and physicians; or an inadequate level of product support. Our technologies or products may not be employed in all potential applications being investigated, and any reduction in applications would limit the market acceptance of our technologies and products, and our potential revenues.

        Further, the internal structure for medical service provision varies considerably from territory to territory throughout the world and may be, in some cases, subject to public sector procurement processes, which could delay penetration of this market by our product candidates. If the market does not accept our product candidates, when and if we are able to commercialize them, then we may never become profitable.

        Market acceptance of any products for which we have or may in the future receive regulatory approval depends on a number of factors, many of which are beyond our control. Factors that could delay, inhibit or prevent market acceptance of our product candidates may include:

    the timing and receipt of marketing approvals;

    the efficacy and safety of the product, as demonstrated in clinical trials;

    acceptance by physicians, treatment centers and patients of the product as a safe and effective diagnostic tool;

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    the potential and perceived advantages of VivaNet and VivaScope over alternative diagnostic tools, including, for example, products offered by our competitors;

    the cost of our products in relation to alternative products and relative convenience and ease of use of our products;

    the availability of adequate reimbursement and pricing by third parties and government authorities;

    the emergence of equivalent or superior products; and

    the effectiveness of our sales and marketing efforts.

        If our products fail to achieve market acceptance, we would not be able to generate significant revenue to fund our operations.

The termination of our distribution relationships with any of our key distributors, or a decline in revenue from such distributors, could have a material adverse effect on our business, financial condition, and results of operations.

        Our business is characterized by a high degree of customer concentration. For the year ended December 31, 2010, approximately 74% of our product sales were generated through our top three distributors. Our distribution agreements with these key distributors may be terminated, or they may fail to perform their obligations under such agreements. If either of these events occur, our marketing and distribution efforts may be impaired and our revenues may be adversely impacted. We may experience greater or lesser customer concentration in the future. However, it is likely that our revenue and profitability will continue to be dependent on a very limited number of large customers and distributors, and we may experience an even higher degree of customer concentration in the future. The loss of, material reduction in sales volume to, or significant adverse change in our relationship with any of our key distributors could have a material adverse effect on our revenue in any given period and may result in significant annual and quarterly revenue variations. Although we may be able to sell directly to customers if our relationships with any or all of our key distributors terminate, the development of our sales and distribution capabilities could involve significant expense and delay.

We rely heavily on a limited number of customers and a loss of or reduction in the amount of business from certain customers could adversely affect our revenues.

        Our sales to date have been to a limited number of customers. For the year ended December 31, 2010, moreover, sales to two customers were in the amounts of approximately $1.3 million and $200,000, representing 49% and 8%, respectively, of our total revenues. This customer concentration creates risk for us, in that a loss of either customer or a significant reduction in sales from these customers could adversely affect our financial condition and results of operations.

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We operate in a highly competitive market, which may result in others discovering, developing or commercializing products before, or more successfully, than we do.

        Although we possess proprietary technology for our VivaScope confocal microscope and for VivaNet, we face intense competition, both nationally and internationally, from companies marketing alternative technologies. Certain of such companies have established name recognition, reputation, and market presence, and greater financial, technical, sales, marketing and other resources than us, enabling them to better withstand the impact of risks associated with a highly competitive industry. We compete directly with MELA Sciences, Inc. (NASDAQ: MELA) and, specifically, with its MelaFind® product, which features a hand-held imaging device that emits multiple wavelengths of light to capture images of suspicious pigmented skin lesions and extract data. Optiscan Imaging Ltd. (Australia) and Mauna Kea Technologies (France, doing business as Cellvizio in the United States) offer confocal imaging technology. However, their first applications are believed to be primarily targeted for imaging the human gastrointestinal tract. We believe that electro-optical products designed to enhance the visualization and analysis of potential melanomas have been approved or are under development by: Welch Allyn, Inc.; Heine Optotechnik; 3Gen, LLC; Derma Medical Systems, Inc.; Medical High Technologies S.p.A.; ZN Vision Technologies AG; Polartechnics, Ltd.; Biocompatibles International (previously Astron Clinica, Ltd.); LL Tech, Inc. (France); and Biomips Engineering. Balter Medical is developing optical transfer diagnosis technology for the purpose of detecting anomalies in human tissue.

        The broader market for precision optical imaging devices used for medical diagnosis is intensely competitive, subject to rapid change, and significantly affected by new product introductions and other market activities of industry participants. We may also be subject to competition from major optical imaging companies, such as: General Electric Co.; Siemens AG; Bayer AG; Carestream Health; Welch Allyn, Inc.; Olympus Corporation; Carl Zeiss AG Deutschland; and others, each of which manufactures and markets precision optical imaging products for the medical market, and could decide to develop or acquire a product to compete with VivaNet. These companies enjoy numerous competitive advantages, including: significantly greater name recognition; established relations with healthcare professionals, customers and third-party payors; established distribution networks; additional lines of products, and the ability to offer rebates, higher discounts or incentives to gain a competitive advantage; greater experience in conducting research and development, manufacturing, clinical trials, obtaining regulatory approval for products, and marketing approved products; and greater financial and human resources for product development, sales and marketing, and patent litigation. As a result, we may not be able to compete effectively against these companies or their products. The success of our competitors in developing, bringing to market, distributing and selling their products could negatively affect our result of operations and/or general acceptance of our products.

Technological breakthroughs in the diagnosis or treatment of melanoma could render VivaNet and VivaScope obsolete.

        The precision optical imaging field is subject to rapid technological change and product innovation. VivaNet and VivaScope are based on our proprietary technology, but a number of companies and medical researchers are pursuing new technologies. Companies in the medical device industry with significantly greater financial, technical, research, marketing, sales and distribution and other resources have expertise and interest in the exploitation of computer-aided diagnosis, medical imaging, and other technologies VivaNet and VivaScope utilize. Some of these companies are working on potentially competing products or therapies, including confocal microscopy, various forms of spectroscopy, other imaging modalities, and molecular and genetic screening tests. In addition, the National Institutes of Health, several U.S. and international academic and medical centers, and other supporters of cancer research are presumptively seeking ways to improve the diagnosis or treatment of melanoma by sponsoring corporate and academic research. One or more of these companies could succeed in

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developing or marketing technologies and products or services that demonstrate better safety or effectiveness, superior clinical results, greater ease of use or lower cost than VivaNet and VivaScope, or such competitors could succeed in obtaining regulatory approval for introducing or commercializing any such products or services prior to us. Approval by the FDA of a commercially viable alternative to VivaScope produced by a competitor could significantly reduce market acceptance of VivaNet and VivaScope. Any of the above competitive developments could have a material adverse effect on our business, financial condition, and results of operations. Products, services, or technologies introduced prior to or subsequent to the commercialization of VivaNet and VivaScope could render these products less marketable or obsolete.

New product development in the medical device industry is both costly and labor intensive with very low success rates for successful commercialization; if we cannot successfully develop or obtain future products, our ability to grow may be impaired.

        Our long-term success is dependent, in large part, on the design, development and commercialization of new products and services in the medical technology industry. The product development process is time-consuming, unpredictable and costly. There can be no assurance that we will be able to develop or acquire new products, successfully complete clinical trials, obtain the necessary regulatory clearances or approvals required from the FDA on a timely basis, or at all, manufacture our potential products in compliance with regulatory requirements or in commercial volumes, or that potential products will achieve market acceptance. In addition, changes in regulatory policy for product approval during the period of product development, and regulatory agency review of each submitted new application, may cause delays or rejections. It may be necessary for us to enter into licensing arrangements in order to market effectively any new products or new indications for existing products. There can be no assurance that we will be successful in entering into such licensing arrangements on terms favorable to us or at all. Failure to develop, obtain necessary regulatory clearances or approvals for, or successfully market potential new products could have a material adverse effect on our business, financial condition and results of operations.

If VivaNet and VivaScope are approved for reimbursement, we anticipate experiencing significant pressures on pricing.

        Our products are purchased principally by hospitals, physicians and other healthcare providers that typically bill various third-party payors, including governmental programs (e.g., Medicare and Medicaid), private insurance plans and managed care programs, for the healthcare diagnostic services provided to their patients. In some foreign markets, which we may seek to enter in the future, pricing and profitability of medical devices are subject to government control. In the U.S., we expect that there will continue to be federal and state proposals for similar controls. Many private payors look to the Centers for Medicare & Medicaid Services, or CMS, which administer the Medicare program, in setting their reimbursement policies and amounts. If CMS or other agencies limit coverage or decrease or limit reimbursement payments for doctors and hospitals, this may affect coverage and reimbursement determinations by many private payors.

        The ability of customers to obtain appropriate reimbursement for their products and services from private and governmental third-party payors is critical to the success of medical technology companies. The availability of reimbursement affects which products customers purchase and the prices they are willing to pay. Reimbursement varies from country to country and can significantly impact the acceptance of new products and services. After we develop a new product, we may find limited demand for the product unless reimbursement approval is obtained from private and governmental third-party payors. Further legislative or administrative reforms to reimbursement systems in a manner that significantly reduces reimbursement for procedures using our medical devices or denies coverage for those procedures, including price regulation, competitive pricing, coverage and payment policies,

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comparative effectiveness of diagnostic tools, technology assessments and managed-care arrangements, could have a material adverse effect on our business, financial condition or results of operations.

        Even if reimbursement programs cover a device for certain uses, that does not mean that the level of reimbursement will be sufficient for commercial success. We expect to experience pricing pressures in connection with the commercialization of VivaNet and VivaScope and our future products due to efforts by private and government-funded payors to reduce or limit the growth of healthcare costs, the increasing influence of health maintenance organizations, and additional legislative proposals to reduce or limit increase in public funding for healthcare services. Private payors, including managed care payors, increasingly are demanding discounted fee structures and the assumption by healthcare providers of all or a portion of the financial risk. Efforts to impose greater discounts and more stringent cost controls upon healthcare providers by private and public payors are expected to continue. Payors frequently review their coverage policies for existing and new diagnostic tools and can, sometimes without advance notice, deny or change their coverage policies. Current trends toward managed healthcare in the U.S. and proposed legislation intended to control the cost of publicly funded healthcare programs could significantly influence the purchase of healthcare services and products, and may force us to reduce prices for VivaNet and VivaScope or result in the exclusion of our products from reimbursement programs. Significant limits on the scope of services covered or on reimbursement rates and fees on those services that are covered could have a material adverse effect on our ability to commercialize VivaNet and VivaScope and therefore, on our liquidity and our business, financial condition, and results of operations.

We operate in a heavily regulated sector, and our ability to remain viable will depend on future legislative action and favorable government decisions at various points by various agencies.

        In the United States, the FDA regulates the introduction of medical devices, as well as manufacturing, labeling and record keeping procedures for such products. The process of obtaining marketing clearance or approval for new medical devices from the FDA is costly and time consuming, and there can be no assurance that such approval will be granted for new products on a timely basis, if at all, or that the FDA review will not involve delays that would adversely affect our ability to commercialize new products. Even if regulatory clearance or approval to market a diagnostic product is obtained from the FDA, this clearance or approval may contain limitations on the indicated uses of the product. Marketing clearance or approval can also be withdrawn by the FDA due to failure to comply with regulatory standards or the occurrence of unforeseen problems following initial clearance or approval.

        From time to time, legislation is introduced in the U.S. Congress that could significantly change the statutory provisions governing the approval, manufacture and marketing of a medical device. Additionally, the medical device industry is heavily regulated by the federal government, and by state and local governments. The federal laws and regulations affecting healthcare change frequently, thereby increasing the uncertainty and risk associated with any healthcare related venture, including our business and VivaNet and VivaScope. In addition, FDA regulations and guidance are often revised or reinterpreted by the agency in ways that may significantly affect our business and our products. It is impossible to predict whether legislative changes will be enacted or FDA regulations, guidance, or interpretations changed, and what the impact of such changes, if any, may be.

        The federal government regulates healthcare through various agencies, including but not limited to the following: (i) the FDA, which administers the Food, Drug, and Cosmetic Act, or the FD&C Act, as well as other relevant laws; (ii) CMS, which administers the Medicare and Medicaid programs; (iii) the Office of Inspector General, or OIG, which enforces various laws aimed at curtailing fraudulent or abusive practices, including by way of example, the Anti-Kickback Law, the Anti-Physician Referral Law, commonly referred to as the Stark Law, the Anti-Inducement Law, the Civil Money Penalty Law, and the laws that authorize the exclusion of healthcare providers and others from participating in

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federal healthcare programs for violation of these governmental laws and regulations; and (iv) the Office of Civil Rights, which administers the privacy aspects of the Health Insurance Portability and Accountability Act of 1996, or HIPAA. All of the aforementioned are agencies within the U.S. Department of Health & Human Services, or HHS. Healthcare is also provided or regulated, as the case may be, by the Department of Defense through its TriCare program, the Public Health Service within HHS under the Public Health Service Act, the Department of Justice through the Federal False Claims Act and various criminal statutes, and state governments under Medicaid and other state sponsored or funded programs and their internal laws regulating all healthcare activities.

        In addition to regulation by the FDA as a medical device manufacturer, we are subject to general healthcare industry regulations. The healthcare industry is subject to extensive federal, state and local laws and regulations relating to: billing for services; quality of medical equipment and services; confidentiality, maintenance and security issues associated with medical records and individually identifiable health information; false claims; and product labeling.

        These laws and regulations are extremely complex and, in some cases, still evolving. In many instances, the industry does not have the benefit of significant regulatory or judicial interpretation of these laws and regulations. If our operations are found to be in violation of any of the federal, state or local laws and regulations that govern our activities, we may be subject to the applicable penalty associated with the violation, including civil and criminal penalties, damages, fines or curtailment of our operations. Any action against us for violation of these laws or regulations, even if we successfully defend against it, could cause us to incur significant legal expenses and divert our management's time and attention from the operation of our business.

        In addition, recent, widely-publicized events concerning the safety of certain drug, food and medical device products have raised concerns among members of Congress, medical professionals, and the public regarding the FDA's handling of these events and its perceived lack of oversight over regulated products. The increased attention to safety and oversight issues could result in a more cautious approach by the FDA and other agencies with respect to clearances and approvals for products such as ours.

If we fail to comply with ongoing regulatory requirements, or if we experience unanticipated problems with VivaNet or VivaScope, our product could be subject to restrictions or withdrawal from the market.

        Any product for which we obtain marketing approval, along with the manufacturing processes, post-approval clinical data and promotional activities for such product, will be subject to continual review and periodic inspections by the FDA and other regulatory bodies. Regulatory approval of our products may be subject to limitations on the indicated uses for which the products may be marketed or contain requirements for costly postmarketing testing and surveillance to monitor the safety or effectiveness of the products. Later discovery of previously unknown problems with our products, including unanticipated adverse events or adverse events of unanticipated severity or frequency, manufacturer or manufacturing processes, or failure to comply with regulatory requirements, may result in restrictions on such products or manufacturing processes, withdrawal of the products from the market, voluntary or mandatory recall, fines, suspension of regulatory approvals, product seizures, injunctions or the imposition of civil or criminal penalties.

Our facilities will be subject to inspection by the FDA and international authorities, and we could face penalties if we are found to be non-compliant with the regulations of the FDA or international authorities.

        The FDA and various other authorities will inspect our facilities from time to time to determine whether we are in compliance with regulations relating to medical device manufacturing, including regulations concerning design, manufacturing, testing, quality control, product labeling, distribution, promotion, and record keeping practices. Our facility was most recently inspected by the FDA in

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August 2009. A determination that we are in material violation of such regulations could lead to the imposition of civil penalties, including fines, product recalls, product seizures or, in extreme cases, criminal sanctions or a shutdown of our manufacturing facility. Even if regulatory approvals to market a product are obtained from the FDA, such approvals may contain limitations on the indicated uses of the product. The FDA could also limit or prevent the manufacture or distribution of our products and has the power to require the recall of products. FDA regulations depend heavily on administrative interpretation, and future interpretations made by the FDA or other regulatory bodies with possible retroactive effect may adversely affect us.

Our promotional and marketing activities will be subject to regulation by the FDA and international authorities, and we could face severe penalties if we are found to be promoting VivaNet or VivaScope for an unapproved use.

        If the FDA or international authorities determine that our promotional materials or activities constitute promotion of VivaNet or VivaScope for an unapproved use or other claim in violation of applicable law relating to the promotion of our products, it could demand that we cease the use of or modify our promotional materials or subject us to regulatory enforcement actions, including the issuance of a warning letter, injunction, civil fine and criminal penalties. It is also possible that other federal, state or foreign enforcement authorities might take action if they consider promotional or other materials to constitute promotion of VivaNet or VivaScope for an unapproved use, which could result in significant fines or penalties under other statutory authorities, such as laws prohibiting false claims for reimbursement. Our competitors may also assert claims either directly or indirectly with the FDA concerning any alleged illegal or improper marketing promotional activity.

Healthcare policy changes, including legislation to reform the U.S. healthcare system, may have a material adverse effect on our business, financial condition, results of operations and cash flows.

        Political, economic and regulatory influences are subjecting the healthcare industry to potential fundamental changes that could substantially affect our results of operations. In response to perceived increases in health care costs in recent years, there have been and continue to be proposals and enactments by the Obama administration, members of U.S. Congress, state governments, regulators and third-party payors to control these costs and, more generally, to reform the U.S. healthcare system. These changes are causing the marketplace to put increased emphasis on the delivery of more cost-effective treatments. Certain of these proposals and enactments or regulations promulgated to enforce them may limit the prices we are able to charge for VivaNet and VivaScope or the amount of reimbursement that may be available if such products are approved for reimbursement. The adoption of some or all of these enactments and proposals could have a material adverse effect on us. We cannot predict the final form these might take or their effects on our business.

        The Patient Protection and Affordable Care Act and Health Care and Education Affordability Reconciliation Act of 2010 were enacted into law in the U.S. in March 2010. As a U.S. headquartered company with significant sales in the U.S., this healthcare reform legislation will materially impact us. Certain provisions of the legislation will not be effective for a number of years, there are many programs and requirements for which the details have not yet been fully established or consequences not fully understood, and it is unclear what the full impact of the legislation will be. The legislation imposes on medical device manufacturers such as us a 2.3 percent excise tax on U.S. sales of Class I, II and III medical devices beginning in 2013. Both downward pressure on reimbursement and the excise tax could have a material adverse effect on our business, financial condition and the results of operations. Other provisions of this legislation, including Medicare provisions aimed at improving quality and decreasing costs, comparative effectiveness research, an independent payment advisory board, and pilot programs to evaluate alternative payment methodologies, could meaningfully change the way healthcare is developed and delivered, and may adversely affect our business and results of

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operations. Further, we cannot predict what healthcare programs and regulations ultimately will be implemented at the federal or state level, or the effect of any future legislation or regulation in the U.S. or internationally. However, any changes that lower reimbursements for our products or reduce medical procedure volumes could adversely affect our business and results of operations.

We must comply with complex statutes prohibiting fraud and abuse, and both we and physicians utilizing VivaNet and VivaScope could be subject to significant penalties for noncompliance.

        There are extensive federal and state laws and regulations prohibiting fraud and abuse in the healthcare industry that can result in significant criminal and civil penalties. These federal laws include: the Anti-Kickback Law which prohibits certain business practices and relationships, including the payment or receipt of remuneration for the referral of patients or the purchase, order or recommendation of goods or services for which payment will be made by Medicare or other federal healthcare programs; the physician self-referral prohibition, commonly referred to as the Stark Law; the Anti-Inducement Law, which prohibits providers from offering anything to a Medicare or Medicaid beneficiary to induce that beneficiary to use items or services covered by either program; the Civil False Claims Act, which prohibits any person from knowingly presenting or causing to be presented false or fraudulent claims for payment by the federal government, including the Medicare and Medicaid programs; HIPAA, which creates federal criminal laws that prohibit executing a scheme to defraud any healthcare benefit program and which also imposes certain obligations on entities with respect to the privacy, security and transmission of individually identifiable health information; the federal False Statements Statute, which prohibits knowingly and willfully falsifying, concealing or covering up a material fact or making any materially false statement in connection with the delivery of or payment for healthcare benefits, items or services; and the Civil Monetary Penalties Law, which authorizes HHS to impose civil penalties administratively for fraudulent or abusive acts. We are also subject to state laws that are analogous to the above federal laws, such as state anti-kickback and false claims laws (some of which may apply to healthcare items or services reimbursed by any third-party payor, including commercial insurers), as well as certain state laws that require pharmaceutical and medical device companies to comply with industry voluntary compliance guidelines and the relevant compliance guidance promulgated by the federal government.

        Sanctions for violating these laws include criminal and civil penalties that range from punitive sanctions, damage assessments, money penalties, imprisonment, denial of Medicare and Medicaid payments, or exclusion from the Medicare and Medicaid programs, or both. As federal and state budget pressures continue, federal and state administrative agencies may also continue to escalate investigation and enforcement efforts to root out waste and to control fraud and abuse in governmental healthcare programs. Private enforcement of healthcare fraud has also increased, due in large part to amendments to the Civil False Claims Act in 1986 that were designed to encourage private persons to sue on behalf of the government. Our ongoing efforts to comply with these laws may be costly, and a violation of any of these federal and state fraud and abuse laws and regulations could have a material adverse effect on our liquidity and financial condition. The risk of our being found in violation of these laws is increased by the fact that many of them have not been definitively interpreted by the regulatory authorities or the courts, and their provisions are open to a variety of subjective interpretations. In addition, these laws and their interpretations are subject to change. Any action against us for violation of these laws, even if we successfully defend against it, could cause us to incur significant legal expenses, divert our management's attention from the operation of our business and damage our reputation. An investigation into the use of VivaNet and VivaScope by physicians may dissuade physicians from either purchasing or using VivaNet and VivaScope and could have a material adverse effect on our ability to commercialize our products.

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The application of the privacy provisions of HIPAA is unclear, and we will become subject to other laws and regulations regarding the privacy and security of medical information.

        HIPAA, among other things, protects the privacy and security of individually identifiable health information by limiting its use and disclosure. HIPAA directly regulates "covered entities" (insurers, clearinghouses, and most healthcare providers) and indirectly regulates "business associates" with respect to the privacy of patients' medical information. All entities that receive and process protected health information are required to adopt certain procedures to safeguard the security of that information. It is unclear whether we would be deemed to be a covered entity or a business associate under the HIPAA regulations. In either case, we will be required to physically safeguard the integrity and security of the patient information that we, or our physician customers receive, store, create or transmit. If we fail to safeguard patient information, then we or our physician customers may be subject to civil monetary penalties, and this could adversely affect our ability to market VivaNet and VivaScope. We also may be liable under state laws governing the privacy of health information. As and when we expand our commercialization efforts in the foreign markets that we have targeted, we will also become subject to a variety of international laws, regulations and policies designed to protect the privacy of health information.

Clinical trials involve lengthy and expensive processes with uncertain outcomes, and results of earlier studies and trials may not be predictive of future trial results.

        We cannot predict whether we will encounter problems with any of our completed, ongoing or planned clinical trials, which would cause us or regulatory authorities to delay or suspend clinical trials, or delay the analysis of data from completed or ongoing clinical trials. We estimate that clinical trials involving various applications of VivaNet and VivaScope will continue for several years; however, such trials may also take significantly longer to complete and may cost more money that we expect. Failure can occur at any stage of testing, and we may experience numerous unforeseen events during, or as a result of, the clinical trial process that could delay or prevent commercialization of the current, or a future, more advanced, version of our VivaScope confocal imager or VivaNet, including but not limited to:

    delays in obtaining regulatory approvals to commence a clinical trial;

    slower than anticipated patient recruitment and enrollment;

    negative or inconclusive results from clinical trials;

    unforeseen safety issues;

    an inability to monitor patients adequately during or after treatment; and

    problems with investigator or patient compliance with the trial protocols.

        A number of companies in the medical device industry, including those with greater resources and experience than us, have suffered significant setbacks in advanced clinical trials, even after seeing promising results in earlier clinical trials. Despite the successful results reported in early clinical trials regarding VivaScope, we do not know whether any clinical trials we or our clinical partners may conduct will produce favorable results. The failure of clinical trials to produce favorable results could have a material adverse effect on our business, financial condition and results of operations.

Alternative applications of our technology may not be successful, which will limit our ability to grow the Company and generate revenue.

        Although we believe the early exploratory and pilot studies for other clinical applications of our technology outside of dermatology and pathology are encouraging, there can be no assurance any of these research and development activities, engineering efforts, or clinical studies will be successful or

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that any FDA clearances will be achieved for any of these other clinical applications. If alternative applications of our technology are not successful, our ability to grow the Company and generate revenue will be adversely impacted.

We face the risk of product liability claims and may not be able to obtain or maintain adequate insurance to protect against these claims.

        Our business exposes us to the risk of product liability claims that is inherent in the testing, manufacturing and marketing of medical devices, including those that may arise from the misuse or malfunction of, or design flaws in, our products. We may be subject to product liability claims if VivaNet or VivaScope cause, or merely appears to have caused, an injury or if a patient alleges that VivaNet or VivaScope failed to provide appropriate diagnostic information on a lesion where melanoma, another skin cancer, or another form of disease, was subsequently found to be present. Claims may be made by patients, healthcare providers or others involved with VivaNet or VivaScope. Although we carry product liability insurance that covers our VivaScope products, our anticipated current and anticipated product liability insurance may not be available to us in amounts and on acceptable terms, if at all, and if available, the coverage may not be adequate to protect us against any future product liability claims. If we are unable to obtain insurance at an acceptable cost or on acceptable terms with adequate coverage, or otherwise protect against potential product liability claims, we will be exposed to significant liabilities, which may harm our business. A product liability claim, recall or other claim with respect to uninsured liabilities or for amounts in excess of insured liabilities could result in significant costs and significant harm to our business.

        We may be subject to claims against us even if the apparent injury is due to the actions of others. For example, we rely on the expertise of physicians, nurses and other associated medical personnel to operate VivaScope. If these medical personnel are not properly trained or are negligent, we may be subjected to liability. These liabilities could prevent or interfere with our product commercialization efforts. Defending a suit, regardless of merit, could be costly, could divert management attention and might result in adverse publicity, which could result in the withdrawal of, or inability to recruit, clinical trial volunteers, or result in reduced acceptance of VivaScope in the market.

        Insurance and surety companies have reassessed many aspects of their businesses and, as a result, may take actions that could negatively affect our business. These actions could include increasing insurance premiums, requiring higher self-insured retentions and deductibles, reducing limits, restricting coverage, imposing exclusions, and refusing to underwrite certain risks and classes of business. Any of these actions may adversely affect our ability to obtain appropriate insurance coverage at reasonable costs, which could have a material adverse effect on our business, financial condition and results of operations.

Our manufacturing operations are dependent upon third-party suppliers, making us vulnerable to supply problems and price fluctuations, which could harm our business.

        Our manufacturing efforts currently rely on various suppliers that supply components and subassemblies required for the final assembly and test of our devices. In some cases we have written agreements with these suppliers, under which the supplier is obligated to perform services or produce components for us. There can be no assurance that these third parties will meet their obligations under the agreements. Some of these suppliers are sole-source suppliers. Contract manufacturers of some of our components, for example completed circuit boards, may also rely on sole-source suppliers to manufacture some of the components used in our products. Our manufacturers and suppliers may encounter problems during manufacturing due to a variety of reasons, including failure to follow specific protocols and procedures, failure to comply with applicable regulations, equipment malfunction and environmental factors, any of which could delay or impede their ability to meet our demand. Our reliance on these outside manufacturers and suppliers also subjects us to other risks that could harm

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our business, including: suppliers may make errors in manufacturing components that could negatively affect the effectiveness or safety of our products, or cause delays in shipment of our products; we may not be able to obtain adequate supply in a timely manner or on commercially reasonable terms; we may have difficulty locating and qualifying alternative suppliers for our sole-source suppliers; our suppliers manufacture products for a range of customers, and fluctuations in demand for the products these suppliers manufacture for others may affect their ability to deliver components to us in a timely manner; and our suppliers may encounter financial hardships unrelated to our demand for components, which could inhibit their ability to fulfill our orders and meet our requirements.

        Any interruption or delay in the supply of components or materials, or our inability to obtain components or materials from alternate sources at acceptable prices in a timely manner, could impair our ability to meet the demand of our customers and cause them to cancel orders.

Risks Related to the Operation of Our Business

We may be adversely affected by breaches of online security.

        To the extent that our activities involve the storage and transmission of confidential information, security breaches could damage our reputation and expose us to a risk of loss, or to litigation and possible liability. A substantial portion of our revenue in future years relies upon the transmission and storage of medical data through a virtual private network, or VPN, across the Internet. Our business may be materially adversely affected if our security measures do not prevent security breaches. In addition, such information may be subject to HIPAA privacy and security regulations, the potential violation of which may trigger concerns by healthcare providers, which may adversely impact our business, financial condition and results of operations.

All of our operations are conducted at a single location. Any disruption at our facility could increase our expenses.

        All of our operations are conducted at a single location. We take precautions to safeguard our facility, including insurance, health and safety protocols, contracted off-site engineering services, and off-site storage of computer data. However, a natural disaster, such as a fire, flood or earthquake, could cause substantial delays in our operations, damage or destroy our manufacturing equipment or inventory, and cause us to incur additional expenses. The insurance we maintain against fires, floods, earthquakes and other natural disasters may not be adequate to cover our losses in any particular case.

Our success will depend on our ability to attract and retain our personnel.

        Our success is particularly dependent upon the continued service of our executive officers and other key employees. We have currently executed employment agreements with Ms. Davis-McHugh and each of Messrs. Eastman, Fox, Hone, and Shea, which are described in more detail under the caption "Employment Agreements." These agreements expire on January 1, 2016, and are renewable for additional one-year terms unless either we or the executive send written notice to the other party of its intention not to renew at least ninety (90) days prior to expiration of the then-current term. We entered into an employment agreement with Mr. Joyce on March 22, 2011. Mr. Joyce's employment agreement is set to expire on March 22, 2016, but is also renewable for additional one-year terms. Each of these executives has agreed, pursuant to his or her respective employment agreement, not to compete with us, nor solicit our customers or employees, for a period of one (1) year following the termination of such executive's employment. Dr. Eastman and all other key engineering and product development employees have each executed Patent Assignment and Invention Disclosure Agreements with us. The loss of the services of any of our executive officers or other key employees could have a material adverse effect on our business and results of operations. Our future success will depend in

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part upon our ability to attract and retain highly qualified personnel. We may not be successful in hiring, retaining or developing sufficient qualified individuals.

Our employees may engage in misconduct or improper activities, including noncompliance with regulatory standards and prohibitions on insider trading.

        We are exposed to the risk of employee fraud or other misconduct. Misconduct by employees could include intentional failures to comply with FDA regulations, provide accurate information to the FDA, comply with applicable manufacturing standards, comply with federal and state healthcare fraud and abuse laws and regulations, report financial information or data accurately or disclose unauthorized activities to us. In particular, sales, marketing and business arrangements in the healthcare industry are subject to extensive laws and regulations intended to prevent fraud, misconduct, kickbacks, self-dealing and other abusive practices. These laws and regulations may restrict or prohibit a wide range of pricing, discounting, marketing and promotion, sales commission, customer incentive programs and other business arrangements. Employee misconduct could also involve the improper use of information obtained in the course of clinical trials, or illegal misappropriation of drug product, which could result in regulatory sanctions and serious harm to our reputation. We have adopted a Code of Business Conduct and Ethics, but it is not always possible to identify and deter employee misconduct, and the precautions we take to detect and prevent this activity may not be effective in controlling unknown or unmanaged risks or losses or in protecting us from governmental investigations or other actions or lawsuits stemming from a failure to be in compliance with such laws or regulations. If any such actions are instituted against us, and we are not successful in defending ourselves or asserting our rights, those actions could have a significant impact on our business, including the imposition of significant fines or other sanctions.

We may be liable for contamination or other harm caused by materials that we handle, and changes in environmental regulations could cause us to incur additional expense.

        Our manufacturing, research and development and clinical processes do not generally involve the handling of potentially harmful biological materials or hazardous materials, but they may occasionally do so. We are subject to federal, state and local laws and regulations governing the use, handling, storage and disposal of hazardous and biological materials. If violations of environmental, health and safety laws occur, we could be held liable for damages, penalties and costs of remedial actions. These expenses or this liability could have a significant negative impact on our business, financial condition and results of operations. We may violate environmental, health and safety laws in the future as a result of human error, equipment failure or other causes. Environmental laws could become more stringent over time, imposing greater compliance costs and increasing risks and penalties associated with violations. We may be subject to potentially conflicting and changing regulatory agendas of political, business and environmental groups. Changes to or restrictions on permitting requirements or processes, hazardous or biological material storage or handling might require an unplanned capital investment or relocation. Failure to comply with new or existing laws or regulations could harm our business, financial condition and results of operations.

Failure to maintain an effective system of internal control over financial reporting may not allow us to be able to accurately report our financial condition, results of operations or prevent fraud.

        We regularly review and update our internal control over financial reporting, disclosure controls and procedures, and corporate governance policies and procedures. We maintain controls and procedures to mitigate against risks, such as processing system failures and errors. Any system of controls and procedures, however well designed and operated, is based in part on certain assumptions and can provide only reasonable assurances that the objectives of the system are met. Events could occur which are not prevented or detected by our internal controls. Any failure or circumvention of our

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controls and procedures or failure to comply with regulations related to controls and procedures could cause a failure to meet our reporting obligations under applicable federal securities laws, which could have a material adverse affect on our business, results of operations and financial condition.

Risks Relating to this Offering

Following this offering, we will become subject to the reporting requirements of U.S. federal securities laws, which can be time-consuming and expensive.

        We currently have no class of securities registered under the Securities Exchange Act of 1934, as amended, or the Exchange Act, and are not a reporting company. In connection with this offering, we are becoming a U.S. public reporting company and, accordingly, subject to the information and reporting requirements of the Exchange Act and other federal securities laws, and the compliance obligations of the Sarbanes-Oxley Act of 2002, as amended, or SOX. The costs of preparing and filing annual and quarterly reports, proxy statements and other information with the SEC and furnishing audited reports to stockholders will cause our expenses to be higher than they would be if we did not become a U.S. reporting company. We expect these rules and regulations to increase our legal and financial compliance costs, introduce new costs, such as investor relations, stock exchange listing fees and shareholder reporting, and to make some activities more time consuming and costly.

Becoming a public company will cause us to incur increased costs and demands on our management and divert management's attention from our core business.

        Although certain members of our Board of Directors and management team have experience in various capacities with publicly-traded companies, we have never operated as a U.S. publicly-traded company subject to the reporting requirements of the federal securities laws and have not been required to comply with SOX. We will face increased legal, accounting, administrative and other costs and expenses as a public company that we did not incur as a private company. It may be time consuming, difficult and costly for us to develop and implement the internal controls and reporting procedures required by SOX. Although we will likely be exempt from the auditor attestation requirements of Section 404(b) of SOX due to our status as a non-accelerated filer under the SEC rules, we will still be subject to the annual requirements related to management's assessment of internal control over financial reporting, which are costly. We are in the process of instituting changes to our internal procedures to satisfy the requirements of SOX, as well as rules subsequently implemented by the SEC, the Public Company Accounting Oversight Board and the Nasdaq Global Select Market. We are evaluating our internal controls systems in order to allow us to report on our internal controls, as required by Section 404 of SOX, and will be required to report on our internal controls beginning with our annual report for the fiscal year ending December 31, 2011. While we anticipate being able to fully implement the requirements relating to internal controls and all other aspects of Section 404 of SOX in a timely fashion, we cannot be certain as to the timing of completion of our evaluation, testing and remediation actions or the impact of the same on our operations.

        As a small company with limited capital and human resources, we will need to divert management's time and attention away from our business in order to ensure compliance with these regulatory requirements. Implementing these changes may require new information technologies systems, the auditing of our internal controls, and compliance training for our directors, officers and personnel. We may need to hire additional financial reporting, internal controls and other finance staff in order to develop and implement appropriate internal controls and reporting procedures. Such efforts would require a potentially significant expense. In addition, these laws, rules and regulations could make it more difficult or more costly for us to obtain certain types of insurance, including director and officer liability insurance, and we may be forced to accept reduced policy limits and coverage or incur substantially higher costs to obtain the same or similar coverage. The impact of these requirements could also make it more difficult for us to attract and retain qualified persons to serve on our Board of

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Directors, our board committees or as executive officers. Additionally, changes in the laws and regulations affecting public companies, including Section 404 and other provisions of SOX, the rules and regulations adopted by the SEC and the Nasdaq Global Select Market, will result in increased costs to us as we respond to such requirements.

An active trading market for our common stock may not develop.

        Prior to this offering, there has been no public market for our common stock. Although we are seeking approval for listing of our common stock on the Nasdaq Global Select Market, an active trading market for our shares may never develop or be sustained following this offering. Further, we cannot be certain that the market price of our common stock will not decline below the initial public offering price or below the amount required by the Nasdaq Global Select Market to maintain our listing. Should we fail to meet the minimum standards established by the Nasdaq Global Select Market, we could be de-listed. If our securities were to be delisted from the Nasdaq Global Select Market, our securities could continue to trade on the NASD's over-the-counter bulletin board following any delisting from the Nasdaq Global Select Market, or on the Pink Sheets, as the case may be. Any such delisting of our securities could have an adverse effect on the market price of, and the efficiency of the trading market for, our securities, not only in terms of the number of shares that can be bought and sold at a given price, but also through delays in the timing of transactions and less coverage of us by securities analysts, if any. Also, if in the future we were to determine that we need to seek additional equity capital, it could have an adverse effect on our ability to raise capital in the public or private equity markets. The initial public offering price for our common stock will be determined through negotiations with the underwriters. This initial public offering price may vary from the market price of our common stock after the offering and investors may therefore be unable to sell their common stock at or above the initial public offering price.

Our stock price will be volatile, meaning purchasers of our common stock could incur substantial losses.

        Our stock price is likely to be volatile. The stock market in general and the market for medical technology companies in particular have experienced extreme volatility that has often been unrelated to the operating performance of particular companies. As a result of this volatility, investors may not be able to sell their common stock at or above the initial public offering price. The following factors, in addition to other risk factors described in this section and general market and economic conditions, may have a significant impact on the market price of our common stock:

    the announcement of new products or product enhancements by us or our competitors;

    developments or disputes concerning patents or other intellectual property rights;

    changes in the structure of and third-party reimbursement in the U.S.;

    the departure of key personnel;

    results of our research and development efforts and our clinical trials;

    regulatory developments in the U.S. and foreign countries;

    developments concerning our clinical collaborators, suppliers or marketing partners;

    changes in financial estimates or recommendations by securities analysts;

    failure of any new products, if approved, to achieve commercial success;

    product liability claims and litigation against us;

    the strength and variations in our financial results or those of companies that are perceived to be similar to us;

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    general economic, industry and market conditions; and

    future sales of our common stock.

        A decline in the market price of our common stock could cause you to lose some or all of your investment and may adversely impact our ability to attract and retain employees and raise capital. In addition, stockholders may initiate securities class action lawsuits if the market price of our stock drops significantly. Whether or not meritorious, litigation brought against us could result in substantial costs and could divert the time and attention of our management. Our insurance to cover claims of this sort may not be adequate.

We have broad discretion in the use of the net proceeds from this offering and may not use them effectively.

        We cannot specify with certainty the particular uses of the net proceeds we will receive from this offering. Our management will have broad discretion in the application of the net proceeds, including for any of the purposes described in "Use of Proceeds." Accordingly, you will have to rely upon the judgment of our management with respect to the use of the proceeds, with only limited information concerning management's specific intentions. Our management may spend a portion or all of the net proceeds from this offering in ways that our stockholders may not desire or that may not yield a favorable return. The failure by our management to apply these funds effectively could harm our business and financial condition. Pending their use, we may invest the net proceeds from this offering in a manner that does not produce income or that loses value.

Concentration of ownership among our directors, executive officers, and principal stockholders may prevent new investors from influencing significant corporate decisions.

        Upon closing of this offering, based upon beneficial ownership as of March 31, 2011, our directors, executive officers, holders of more than 5% of our common stock, and their affiliates will, in the aggregate, beneficially own approximately    •    % of our outstanding common stock. As a result, these stockholders, subject to any fiduciary duties owed to our other stockholders under New York law, will be able to exercise a controlling influence over matters requiring stockholder approval, including the election of directors and approval of significant corporate transactions, and will have significant control over our management and policies. Some of these persons or entities may have interests that are different from yours. For example, these stockholders may support proposals and actions with which you may disagree or which are not in your interests. The concentration of ownership could delay or prevent a change in control of our Company or otherwise discourage a potential acquirer from attempting to obtain control of our Company, which in turn could reduce the price of our common stock. In addition, these stockholders, some of whom have representatives sitting on our Board of Directors, could use their voting influence to maintain our existing management and directors in office, delay or prevent changes of control of our Company, or support or reject other management and board proposals that are subject to stockholder approval, such as amendments to our employee stock plans and approvals of significant financing transactions.

If there are substantial sales of our common stock, our stock price could decline.

        If our existing stockholders sell a large number of shares of our common stock or the public market perceives that these sales may occur, the market price of our common stock could decline. Based on shares outstanding on March 31, 2011, upon the closing of this offering, assuming no outstanding options are exercised prior to the closing of this offering, we will have approximately    •    shares of common stock outstanding. All of the shares offered under this prospectus will be freely tradable without restriction or further registration under the federal securities laws, unless purchased by our affiliates. The remaining    •    shares outstanding upon the closing of this initial public offering

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will be available for sale pursuant to Rules 144 and 701, and the volume, manner of sale and other limitations under these rules, as follows:

    •    shares of common stock will be eligible for sale in the public market, beginning 180 days after the effective date of this prospectus, unless the lock-up period is otherwise extended pursuant to its terms; and

    the remaining    •    shares of common stock will become eligible for sale in the public market beginning    •    , 20[            ].

        Existing stockholders holding an aggregate of    •    shares of common stock (including shares of series A preferred and series B preferred stock, and holders of our convertible debt, which securities will be automatically converted into our common stock immediately prior to the completion of the offering) and warrant holders holding warrants to purchase    •    shares of our common stock, based on shares outstanding as of March 31, 2011 have rights with respect to the registration of these shares of common stock with the SEC. See "Description of Capital Stock—Registration Rights." If we register these shares of common stock, they can immediately sell those shares in the public market.

        Within    •     months following this offering, we intend to register up to    •    shares of common stock that are authorized for issuance under our equity incentive plans. As of March 31, 2011,    •    shares were subject to outstanding options, of which     •     shares were vested. Once we register these shares, they can be freely sold in the public market upon issuance, subject to the lock-up agreements referred to above and restrictions on our affiliates.

You will incur immediate and substantial dilution as a result of this offering.

        The initial public offering price of this offering is substantially higher than the book value per share of our common stock. As a result, purchasers in this offering will experience immediate and substantial dilution of $    •    per share in the tangible book value of our common stock from the initial public offering price, based on the number of shares outstanding as of March 31, 2011. This is due in large part to earlier investors in our Company having paid substantially less than the initial public offering price when they purchased their shares. Investors who purchase shares of common stock in this offering will contribute approximately     •    % of the total amount we have raised to fund our operations but will own only approximately    •    % of our common stock, based on the number of shares outstanding as of March 31, 2011. In addition, the exercise of currently outstanding options to purchase common stock and future equity issuances, including future public or private securities offerings and any additional shares issued in connection with acquisitions, will result in further dilution.

Our charter documents and New York law may inhibit a takeover that stockholders consider favorable and could also limit the market price of our stock.

        Provisions of our certificate of incorporation and bylaws and applicable provisions of New York law may make it more difficult for or prevent a third party from acquiring control of us without the approval of our Board of Directors. These provisions:

    limit who may call a special meeting of stockholders; and,

    do not permit cumulative voting in the election of our directors, which would otherwise permit less than a majority of stockholders to elect directors; and,

        In addition, Section 912 of the New York Business Corporation Law generally provides that a New York corporation may not engage in a business combination with an interested stockholder for a period of five years following the interested stockholder's becoming such. An interested stockholder is generally a stockholder owning at least 20% of a corporation's outstanding voting stock. These provisions may have the effect of entrenching our management team and may deprive you of the

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opportunity to sell your shares to potential acquirors at a premium over prevailing prices. This potential inability to obtain a control premium could reduce the price of our common stock.


Special Note Regarding Forward-Looking Statements

        This prospectus contains forward-looking statements that involve substantial risks and uncertainties. All statements, other than statements of historical facts, included in this prospectus regarding our strategy, future operations, future financial position, future revenues, projected costs, prospects, plans and objectives of management are forward-looking statements. The words "anticipates," "believes," "estimates," "expects," "intends," "may," "plans," "projects," "will," "would" and similar expressions are intended to identify forward-looking statements, although not all forward-looking statements contain these identifying words. Although we do not make forward-looking statements unless we believe we have a reasonable basis for doing so, we cannot guarantee their accuracy. We may not actually achieve the plans, intentions or expectations disclosed in our forward-looking statements and you should not place undue reliance on our forward-looking statements. Actual results or events could differ materially from the plans, intentions and expectations stated in the forward-looking statements we make. We have included important factors in the cautionary statements included in this prospectus, particularly in the "Risk Factors" section, that we believe could cause actual results or events to differ materially from the forward-looking statements that we make. Additional risks, uncertainties and factors, other than those discussed under "Risk Factors," could also cause our actual results to differ materially from those projected in any forward-looking statements we make. We operate in a very competitive and rapidly changing environment in which new risks emerge from time to time and it is not possible for us to predict all risk factors, nor can we address the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements. Our forward-looking statements do not reflect the potential impact of any future acquisitions, mergers, dispositions, joint ventures or investments we may make. We do not assume any obligation to update or revise any forward-looking statements, or to so update the reasons actual results could differ materially from those anticipated in these forward-looking statements, even if new information becomes available in the future.


Use of Proceeds

        We estimate that we will receive net proceeds of approximately $    •     million from the sale of [    •    ] million shares of our common stock at an assumed initial public offering price of $[    •    ] per share, the mid-point of the range set forth on the cover page of this prospectus, after deducting underwriting discounts and commissions and estimated expenses of approximately $    •    , which includes our underwriter's non-accountable expense allowance, legal, accounting, printing costs and expenses, and various fees associated with the registration and listing of our securities payable by us. If the underwriters exercise their over-allotment option in full, we will receive an additional $    •    after deducting $    •    for underwriting discounts and commissions.

        We expect to use the net cash proceeds of the Offering to (i) repay a substantial portion of our existing indebtedness, including but not limited to the payment in full of any amounts outstanding under our $5 million line of credit facility (a demand facility and therefore callable at any time by our lender), which amounts bear interest at the prime rate published in the Wall Street Journal plus 1% with a floor rate of 6%, (ii) build our global research, sales, marketing, manufacturing and administration structure to commercialize our VivaScope and VivaNet technology platforms, and (iii) for such other working capital and general corporate purposes as we may identify in the future. However, we will have significant discretion with respect to the application of such proceeds. In the event that our plans change, our assumptions change or prove to be inaccurate, or the proceeds of this offering prove to be insufficient, it may be necessary or advisable to reallocate proceeds or to use proceeds for other purposes, or we may be required to seek additional financing or we may be required to curtail our

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operations. As a result of the foregoing, our success will be affected by our discretion and judgment with respect to the application and allocation of the proceeds of this offering. We intend to invest such proceeds in short-term, interest-bearing investment grade securities.


Dividend Policy

        We have never declared or paid cash dividends on our common stock. We currently intend to retain our cash for the development of our business. We do not intend to pay cash dividends to our stockholders in the foreseeable future.

        We are now, and expect in the future, to be subject to covenants in debt arrangements that place restrictions on our ability to pay dividends. Other than those restrictions, and the limitation that applicable law provides that dividends may only be paid out of available surplus, the payment of dividends will be at the discretion of our Board of Directors and will depend on our results of operations, capital requirements, financial condition, prospects, contractual arrangements, any limitations on the payment of dividends present in our current or future debt agreements, and other factors that our Board of Directors may deem relevant.

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Capitalization

        You should read this capitalization table together with the sections of this prospectus entitled "Management's Discussions and Analysis of Financial Condition and Results of Operations" and with the financial statements and related notes to those statements included elsewhere in this prospectus.

        The following table sets forth our capitalization as of December 31, 2010:

          (i)  on an actual basis;

         (ii)  on a pro forma basis, which assumes or gives effect to:

    The conversion of the notes issued in connection with our 2010/2011 Convertible Debt Offering into     •     shares of our common stock;

    The conversion of the notes issued in connection with our 2009 Convertible Debt Offering into     •     shares of our common stock; and,

    The conversion of all of our shares of Series A and Series B preferred stock into     •     shares of our common stock at the closing of this offering; and,

        (iii)  on a pro forma, as adjusted basis to give effect to the pro forma transaction described above and the receipt of the estimated net proceeds from the sale of     •    shares offered hereby at an assumed public offering price of $    •    per share, after deducting underwriting discounts and commissions, and estimated offering expenses payable by us.

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        The pro forma information set out in this table is for illustrative purposes and our capitalization following the completion of the offering will be adjusted based on the actual initial public offering price and other terms of this offering determined at pricing. You should read this table together with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and our audited financial statements and related notes appearing elsewhere in this prospectus.

 
  As of December 31, 2010  
 
  Actual   Pro Forma   Pro Forma
As Adjusted
 
 
   
  (unaudited)
  (unaudited)
 

Cash

  $ 839,075   $   $  
               

Long Term Debt:

                   
 

2009 Convertible Debt Offering

  $ 900,000   $   $  
 

2010/2011 Convertible Debt Offering

    3,037,152          
 

Other debt(1)

    1,397,180          
 

Warrant liabilities

    1,674,170          
 

Less debt discount and current portion

    (1,559,629 )        
                   

  $ 5,448,873              

Stockholders' Deficit:

                   
 

Preferred stock

    144,833          
 

Common stock

    45,083          
 

Additional paid-in capital

    19,725,348          
 

Subscription receivable

    (739,218 )        
 

Accumulated deficit

    (27,597,667 )        
               
 

Total stockholders' (deficit) equity

  $ (8,421,621 ) $   $  

Total capitalization

 
$

(2,972,748

)

$

 
$

 
               

(1)
Includes related party debt of $183,146.

        The table above excludes, as of December 31, 2010:

    •    shares of common stock issuable as of the date of this prospectus upon the exercise of outstanding stock options at a weighted average exercise price of $    •    per share;

    up to    •    shares of common stock reserved for future grants under our 2010 Long-Term Equity Incentive Plan;

    •    shares of common stock issuable upon exercise of warrants at an exercise price of    •    per share;    •    shares of common stock issuable upon exercise of warrants at an exercise price of     •    per share;    •    shares of common stock issuable upon exercise of warrants at an exercise price of     •    per share; and,    •    shares of common stock issuable upon exercise of warrants at an exercise price of     •    per share;

    •    shares of common stock issuable upon exercise of warrants to be issued to the underwriters upon completion of this offering at an exercise price equal to 120% of the public offering price per share; and,

    •    shares of common stock which may be issued upon the conversion of certain fee entitlements payable to Northeast LCD Capital, exercisable at the option of Northeast LCD Capital.

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Dilution

        If you invest in our common stock, your interest will be diluted to the extent of the difference between the public offering price per share of our common stock and the net tangible book value per share of our common stock immediately after this offering. Net tangible book value per share represents the amount of our common stockholders' equity, less intangible assets, divided by the number of shares of our common stock outstanding. As of December 31, 2010, we had a net tangible book value of approximately $(8.7) million or $(1.93) per share of common stock.

        Pro forma net tangible book value as of December 31, 2010 was    •     million or    •    per common share, which includes or gives effect to:

    The conversion of the notes issued in connection with during our 2010/2011 Convertible Debt Offering into     •    shares of our common stock;

    The conversion of the notes issued in connection with our 2009 Convertible Debt Offering into     •    shares of our common stock; and,

    The conversion of all of our shares of Series A and Series B preferred stock into     •    shares of our common stock at the closing of this offering.

        Assuming the sale by us of    •     million shares of common stock offered in this offering at an assumed initial public offering price of $[    •    ] per share, the mid-point of the range set forth on the cover page of this prospectus, and after deducting the underwriting discounts and commissions and estimated offering expenses, our as adjusted pro forma net tangible book value as of December 31, 2010, would have been $    •    , or $    •    per share of common stock. This represents an immediate increase in pro forma net tangible book value of $    •    per share of common stock to our existing stockholders and an immediate dilution of $    •    per share to the new investors purchasing shares in this offering. The following table illustrates this per share dilution:

Assumed initial public offering price per share

  $  

Net tangible book value per share as of December 31, 2010

  $  

Pro forma net tangible book value per share as of December 31, 2010

  $  

Increase in pro forma net tangible book value per share attributable to new investors

  $  

Pro forma net tangible book value per share after the offering

  $  

Dilution per share to new investors

  $  

        The following table sets forth on a pro forma as adjusted basis, as of December 31, 2010, the number of shares of common stock purchased from us, the total consideration paid and the average price per share paid by existing holders of common stock and by the new investors in this initial public offering, before deducting the underwriting discounts and commissions and estimated offering expenses payable by us. The data for "Existing Investors" includes or gives effect to (i) the conversion of the notes issued in connection with our 2010/2011 Convertible Debt Offering into    •    shares of our common stock, (ii) the conversion of the notes issued in connection with our 2009 Convertible Debt Offering into     •    shares of our common stock, and (iii) the conversion of all of our shares of Series A and Series B preferred stock into     •    shares of our common stock at the closing of this offering. All of these figures also reflect a     •    -for-    •    reverse stock split of our common stock that we may complete prior to the closing of this offering.

 
  Shares Purchased   Total Consideration   Average
Consideration
 
 
  Number   Percent   Amount   Percent   Per Share  

Existing Investors

        % $     % $  

New Investors

                     

Total

        100.0 %       100.0 %      

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        Assuming (i) the conversion of the notes issued in connection with our 2010/2011 Convertible Debt Offering into    •    shares of our common stock, (ii) the conversion of the notes issued in connection with our 2009 Convertible Debt Offering into    •    shares of our common stock, (iii) the conversion of all of our shares of Series A and Series B preferred stock into    •    shares of our common stock at the closing of this offering, (iv) the issuance of    •    shares of common stock issuable as of the date of this prospectus upon the exercise of outstanding stock options at a weighted average exercise price of $    •    per share, (v) the issuance of    •    shares of common stock reserved for future grants under our 2010 Long-Term Equity Incentive Plan, (vi) the issuance of    •    shares of common stock issuable upon exercise of warrants at an aggregate exercise price of $    •    share, (vii)     •    shares of common stock issuable upon exercise of warrants to be issued to the underwriters upon completion of this offering at an exercise price equal to 120% of the public offering price per share, and (viii)     •     shares of common stock which may be issued upon the conversion of certain fee entitlements payable to Northeast LCD Capital, exercisable at the option of Northeast LCD Capital, the shares purchased by the new investors would constitute    •    % of all shares purchased from us, and the total consideration paid by new investors would constitute     •    % of the total consideration paid for all shares purchased from us. In addition, the average price per share paid by new investors would be $    •    , and the average price per share paid by existing stockholders would be $    •    .

        In the preceding tables, the shares of our common stock exclude, as of December 31, 2010:

    •    shares of common stock issuable as of the date of this prospectus upon the exercise of outstanding stock options at a weighted average exercise price of $    •    per share;

    up to    •    shares of common stock reserved for future grants under our 2010 Long-Term Equity Incentive Plan;

    •    shares of common stock issuable upon exercise of warrants at an exercise price of    •    per share;    •    shares of common stock issuable upon exercise of warrants at an exercise price of     •    per share;    •    shares of common stock issuable upon exercise of warrants at an exercise price of     •    per share; and,    •    shares of common stock issuable upon exercise of warrants at an exercise price of     •    per share;

    •    shares of common stock issuable upon exercise of warrants to be issued to the underwriters upon completion of this offering at an exercise price equal to 120% of the public offering price per share; and,

    •    shares of common stock which may be issued upon the conversion of certain fee entitlements payable to Northeast LCD Capital, exercisable at the option of Northeast LCD Capital.

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

        You should read the following discussion and analysis of our financial condition and results of operations together with our financial statements and the related notes appearing at the end of this prospectus. Some of the information contained in this discussion and analysis or set forth elsewhere in this prospectus, including information with respect to our plans and strategy for our business and related financing, includes forward-looking statements that involve risks and uncertainties—see "Special Note Regarding Forward-Looking Statements." You should review the "Risk Factors" section of this prospectus for a discussion of important factors that could cause actual results to differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis.

Overview

        We are a medical device and information technology company focused on the design, manufacture and sale of non-invasive, point-of-care medical imaging devices to assist in the early diagnosis of melanoma and other skin cancers, as well as non-malignant skin disease. Our flagship products for the early diagnosis of skin cancer are the VivaScope® 1500 and VivaScope® 3000 confocal imagers, which are also known as reflectance confocal microscopes. VivaScope devices, which have received 510(k) clearance from the FDA, are designed for use in a clinical setting by medical professionals to produce images of skin lesions for subsequent review by pathologists and dermatopathologists (together referred to herein as "pathologists") and other specially trained diagnostic image readers. VivaNet®is our proprietary telepathology server that provides seamless transfer of VivaScope images over the Internet using VPN technology from a dermatologist's or other originating physician's office to a pathologist's office for near real-time interpretation, diagnosis and reporting. In addition, the VivaNet server stores the diagnostic confocal images and the pathologist's evaluation as a part of the patient's permanent medical record.

        VivaScopes and VivaNet are designed to mimic the workflow of the current clinical practice in assessing suspicious skin lesions for skin cancer. The primary difference between traditional clinical practice and practice using our system is that rather than surgically excising tissue from a patient's skin lesion for subsequent examination under a microscope in the pathologist's office, a dermatologist using the VivaScope simply images the lesion with microscopic resolution and sends those high resolution images of the lesion through VivaNet to the pathologist for examination and reporting. This results in a procedure that is faster than the traditional biopsy and pathology approach, without the need for surgical excision of a lesion that is often benign. In addition, results of the pathology report using our VivaScope confocal image technology can be conveyed to the patient by the physician in near real-time, thus mitigating the days to weeks wait times routinely associated with traditional biopsy assessments. The liability for the medical diagnosis remains with the pathologist, the same diagnostic expert who is primarily liable for the diagnosis in today's standard of care.

        The primary components of our system include:

    The VivaScope non-invasive confocal imaging device in the form of either an arm mounted imaging head (Model 1500) or a hand-held imaging device (Model 3000), which employs high precision optics, laser illumination and custom designed electronics to resolve thin layers of individual cells in the epidermis and upper dermis of the skin without the need for an invasive biopsy; and

    The VivaNet telepathology server that provides seamless transfer of VivaScope images from a dermatologist's or other originating physician's office and to a pathologist for interpretation, diagnosis and reporting.

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        Our current products are neither research prototypes nor early production units; rather, many of our products are in routine daily use for patient management in certain medical institutions and medical practices in several countries.

        We have sold over 300 VivaScope confocal imagers to academic medical centers and other markets around the world. Sales of VivaScopes into these traditional clinical research markets have resulted in more than 250 peer reviewed journal publications written by some of the world's experts in melanoma and other skin cancer research. These publications have established the clinical efficacy and diagnostic accuracy of our VivaScope confocal imagers and also established the brands "Lucid" and "VivaScope" in the dermatology community. In addition to FDA clearance, our VivaScope 1500 and VivaScope 3000 are also CE marked as medical devices for sale and clinical use in the European Union, and the VivaScope 1500 is cleared by the Australian Therapeutic Goods Administration and the Chinese State Food and Drug Administration. We have been awarded 52 patents, 41 of which are United States patents and the remaining 11 are foreign patents. In addition, we have 27 additional U.S. and foreign patents pending. Our portfolio of issued patents includes both method and apparatus patents.

        We are currently directly distributing our products in the United States, Australia and the rest of the Western Hemisphere and, in other parts of the world, we rely primarily on third party distributors. We plan to lease our VivaScope confocal imagers to dermatologists and license our VivaNet services to pathologists on a recurring basis. We believe the strategy of providing VivaNet services on a recurring basis will provide us with an ongoing revenue stream directly related to: (i) the average per procedure fee billed to pathologists for images of each lesion provided through VivaNet for pathologic evaluation and reporting; (ii) the total number of VivaScopes in dermatology and other practices providing images of lesions; and (iii) the average annual number of lesions imaged by our VivaScopes in these practices. This recurring revenue business model will allow us to provide access to our VivaScope confocal imagers and VivaNet reading technology without requiring significant up front capital investments by the participating physicians. We believe this model will help facilitate adoption of our technology by dermatologists and will drive the recurring revenue stream (i.e., per procedure fees) received from pathologists evaluating the images.

        We anticipate that we will continue to generate losses for the next several years as we commercialize the VivaScope and VivaNet platform and expand our corporate infrastructure. We believe that our existing cash and cash equivalents, including the net proceeds of this offering, assuming we raise the maximum amount set forth on the cover of this prospectus, will allow us to fund our operating plan through the first half of 2013.

        We have devoted substantially all of our resources to the development of our VivaScope and VivaNet platforms, which expenses have included research and development, conducting clinical investigation for our product candidates, protecting our intellectual property and the general and administrative support of these operations. While we have generated revenue through product sales, we have funded our operations largely through multiple rounds of private debt and equity financings. We have never been profitable and we reported net losses of approximately $4.3 million and $4.1 million in 2010 and 2009, respectively. As of December 31, 2010, we had an accumulated deficit of approximately $27.6 million. We expect to incur operating losses for the foreseeable future as we invest substantial resources to promote the commercialization, and attempt to achieve widespread adoption, of our products. We may require additional financing to support these and other operating activities. In addition, the report of our independent registered public accounting firm, Deloitte & Touche LLP, with respect to our consolidated financial statements appearing at the end of this prospectus contains an explanatory paragraph stating that our recurring losses from operations and working capital deficiency raise substantial doubt about our ability to continue as a going concern. Furthermore, we expect to continue generating net losses during the next several years. Adequate additional funding may not be available to us on acceptable terms, or at all. We expect that research and development expenses will

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increase along with general and administrative costs, as we grow and operate as a public company. We will need to generate significant revenues to achieve profitability and we may never do so.

        Our revenues consist of product revenue, non-product revenue and grant revenue. Product revenues consist of revenues derived from the sale of our products and services, primarily VivaScopes, as well as an immaterial amount of revenue from maintenance and support services. We recognize product revenue when evidence of an agreement exists, title has passed (generally upon shipment) or services have been rendered. Non-product revenue, which to date has been in the form of a payment from a European distributor for certain rights, including a license to use certain technology in defined geographic areas, is recognized as earned. Grant revenue, which has most recently been derived from a small business innovation research grant, is generally recognized as expenses provided for under the grants are incurred.

Years Ended December 31, 2010 and 2009

        We reported a consolidated net loss of $4.3 million or $(1.61) per share for the year ended December 31, 2010 as compared to consolidated net loss of $4.1 million or $(1.72) per share for the year ended December 31, 2009. The increase in net loss resulted primarily from increased operating costs as we began the preparations to become a public company.

        The following presents a more detailed discussion of our consolidated operating results:

        Product sales.    For the years ended December 31, 2010 and 2009, we had sales of our VivaScope products of $2.3 million and $1.9 million, respectively. The increase was primarily attributable to our increased sales through our European distributor and our direct sales to Australia during 2010. We also began shipping our VS3000 handheld confocal unit in 2010.

        Non-Product Revenue.    For the years ended December 31, 2010 and 2009, we recognized non-product revenue resulting from fee payments from our European distributor of approximately $350,000 in each year. We received a one-time licensing fee of $1.75 million in 2006, which is being amortized over a five-year period in increments of $350,000 per year. This licensing fee gives our European distributor the right to use and sell our technology in certain geographic areas, pursuant to a distribution agreement which expires on December 31, 2011, with automatic one-year renewals thereafter.

        Grant revenue, net.    For the years ended December 31, 2010 and 2009, we recognized grant revenue of $0 and $95,000, respectively, under a National Cancer Institute, Small Business Innovation Research grant, which grant was awarded on a competitive basis. Grant revenue is recognized as it is earned, as determined by the terms of the grant, and is presented net of expenses directly related to the project being funded by the grant.

        Cost of revenue.    For the years ended December 31, 2010 and 2009, we incurred cost of revenue of $1.1 million in each year. As a percentage of product sales, cost of revenue was 50% and 57% for the years ended December 31, 2010 and 2009, respectively. The decrease in cost of sales as a percentage of product sales reflects our focus on decreasing material costs through strategic purchasing and vendor negotiation.

        General and administrative expenses.    General and administrative expenses consist primarily of salaries and benefits, professional fees (including legal and accounting incurred in connection with our efforts to become a public company), occupancy costs for our office, insurance costs and general corporate expenses. For the year ended December 31, 2010, general and administrative expenses totaled $3.8 million and had increased $567,000 from the prior year primarily as a result of increased operating costs as we began the process of preparing to become a public company.

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        Sales and marketing expenses.    Sales and marketing expenses consist primarily of salaries and benefits, costs of holding reader training courses, and general marketing expenses. For the year ended December 31, 2010, sales and marketing expenses totaled $799,000, a decrease of $81,000 primarily resulting from our holding fewer reader training courses in 2010 than in 2009.

        Engineering, research and development expenses.    Engineering, research and development expenses consist primarily of salaries and benefits and material costs used in the development of new products and product improvements. For the year ended December 31, 2010, engineering, research and development expenses totaled $686,000, a decrease of $70,000 from the prior year related to decreased stock based compensation charges resulting from the vesting of certain awards in 2009.

        Other operating income.    During the year ended December 31, 2010, we were awarded $244,000 under the federal government's Qualified Therapeutic Discovery Program. These funds were awarded based on amounts we spent on qualified research and development during 2009. During the year ended December 31, 2009, we transferred two diagnostic instruments in settlement of all past due obligations under a terminated research agreement. We recognized a gain on this settlement of $85,000.

        Interest expense.    Interest expense increased $260,000 from $335,000 in December 31, 2009 to $595,000 for the year ended December 31, 2010, as a result of increased borrowings during 2010.

        Loss on extinguishment of debt.    During the year ended December 31, 2010, we successfully negotiated with multiple debt holders, including certain of those who participated in our 2009 Convertible Debt Offering, holders of convertible debentures, holders of convertible notes and others, to convert their outstanding principal and accrued interest into share of our common stock. In connection with these conversions, we recognized a loss of $76,000.

        Fair value adjustment of warrants expense.    For the years ended December 31, 2010 and 2009, we recognized $73,000 and $183,000, respectively, of expense to record changes in the fair value of certain of our outstanding warrants not indexed to our own stock.

        Other expenses.    For the year ended December 31, 2010, we incurred other expenses of $3,000, primarily related to taxes not based on income. For the year ended December 31, 2009, we incurred other income of $11,000 primarily related to miscellaneous income partially offset by taxes not based on income.

Liquidity and Capital Resources.

Summary of Cash Flows

 
  For the Year Ended December 31,  
 
  2010   2009  

Operating activities

  $ (4,014,728 ) $ (1,439,915 )

Investing activities

    (15,377 )   (15,540 )

Financing activities

    4,839,849     1,481,502  

Net increase in cash and cash equivalents

    809,744     26,047  

        Net cash used in operating activities.    Cash used in operating activities was $4.0 million and $1.4 million for the years ended December 31, 2010 and 2009, respectively. The increase in cash used in operating activities largely related to the increase in net loss for the period, combined with additional payments made to decrease trade payables, accrued interest and other accrued expenses.

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        Net cash used in investing activities.    Cash used in investing activities was $15,000 and $16,000 for the years ended December 31, 2010 and 2009, respectively, and represents purchases of fixed assets during these periods.

        Net cash provided by financing activities.    Cash provided by financing activities was $4.8 million and $1.5 million for the years ended December 31, 2010 and 2009, respectively. The increase during 2010 was a result of the proceeds from the sale of our convertible notes and warrants issued during this period, as well as warrants exercised during this period.

        Credit Facilities.    In July 2010, we entered into a revolving line of credit facility, pursuant to which we may borrow up to $5.0 million, subject to cetain limitations. Amounts borrowed bear interest at the prime rate published in the Wall Street Journal plus 1% with a floor rate of 6% (6% effective rate at December 31, 2010), and are payable on demand by the bank. The loan is secured by all of our assets and life insurance policies on certain members of our Board of Directors and is personally guaranteed by certain members of our Board of Directors, and is further guaranteed on a limited basis by one of our principal stockholders. At December 31, 2010, there was $2.0 million outstanding under this line of credit, which amount represents the only borrowings to date under this credit facility.

        2009 Convertible Debt Offering.    As of December 31, 2010, we had $900,000 outstanding under remaining convertible notes which were originally issued between August 2008 and June 2010 at interest rates ranging between 10% and 12%. In March 2011, the holder of $200,000 of this debt exchanged the amounts due for notes and warrants under the 2010/2011 Convertible Debt Offering notes discussed below. The two remaining convertible notes mature December 31, 2011.

        2010/2011 Convertible Debt Offering.    We issued senior convertible promissory notes to new investors during November 2010 totaling $2,075,000 in principal amount and in January 2011 totaling $1,075,000 in principal amount. In addition, existing debt holders exchanged principal and accrued interest of $962,000 and $513,000 in November 2010 and the first quarter of 2011, respectively, under the terms of their old debt for new notes under this offering. The notes bear interest at 8% and mature on the earlier of November 15, 2012, or such earlier date as may be required by acceleration, conversion or otherwise as defined in the agreement. The notes are automatically convertible into common stock upon the consummation of an underwritten initial public offering of at least $10 million at a conversion price equal to 70% of the price per share in an initial public offering, as defined in the agreement. We also issued to all 2010/2011 Convertible Debt Offering participants warrants to purchase that number of shares of common stock at a price of $    •    per share in an amount equal to 70% of the principal of the note divided by the price per share paid in our initial public offering, the price per share paid in a non-qualified financing, or, in the event none of these transactions occur by November 15, 2012, $4.11. These warrants expire on November 15, 2015.

        Promissory Notes.    As of December 31, 2010, we had $1.2 million outstanding under promissory notes, four of which accrued interest at 10% and two of which do not accrue interest. Two of the notes, with an aggregate principal balance of $    •    , remain outstanding, are currently in default, and contain a conversion right that permits the holders to convert, at their option, at any time in which the notes remain outstanding, principal and interest into common shares at a conversion price of $2.00. The other two notes were exchanged in March 2011 for notes and warrants under the 2010/2011 Convertible Debt Offering above.

        Operating Capital Requirements.    We anticipate that we will continue to generate losses for the next several years as we commercialize the VivaScope and VivaNet platforms and expand our corporate infrastructure. We believe that our existing cash and cash equivalents, including the net proceeds of this offering, assuming we raise the maximum amount set forth on the cover of this prospectus, will allow us to fund our operating plan through the first half of 2013.

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        In addition to the net proceeds from this offering, we will require significant amounts of additional capital in the future, and such capital may not be available when we need it on terms that we find favorable, if at all. We may seek to raise these funds through public or private equity offerings, debt financings, credit facilities, or partnering or other corporate collaborations and licensing arrangements. If adequate funds are not available or are not available on acceptable terms, our ability to fund our operations, take advantage of opportunities, develop products and technologies, and otherwise respond to competitive pressures could be significantly delayed or limited, and we may need to downsize or halt our operations. Prevailing market conditions may not allow for such a fundraising or new investors may not be prepared to purchase our securities at prices that are greater than the purchase price of shares sold in this offering.

        Because of the numerous risks and uncertainties associated with research, development and commercialization of medical devices, we are unable to estimate the exact amounts of our working capital requirements. Our future funding requirements will depend on many factors, including, but not limited to:

    the cost of commercialization activities of our existing VivaScope products and VivaNet system, and of our future product candidates, including marketing, sales and distribution costs;

    the number and characteristics of any future product candidates we pursue or acquire;

    the scope, progress, results and costs of researching and developing our future product candidates, and conducting preclinical clinical trials;

    the timing of, and the costs involved in, obtaining regulatory approvals for our future product candidates;

    the cost of manufacturing our existing VivaScope products and maintaining our VivaNet system, as well as such costs associated with any future product candidates we successfully commercialize;

    our ability to establish and maintain strategic partnerships, licensing or other arrangements and the financial terms of such agreements;

    the costs involved in preparing, filing, prosecuting, maintaining, defending and enforcing patent claims, including litigation costs and the outcome of such litigation; and

    the timing, receipt and amount of sales of, or royalties on, our future products, if any.

Off-Balance Sheet Arrangements

        We had no off-balance sheet arrangements as of December 31, 2010 and as of the date of this prospectus.

Recently Issued Accounting Pronouncements

        In the normal course of business, management evaluates all new accounting pronouncements issued by the Financial Accounting Standards Board, SEC, Emerging Issues Task Force, American Institute of Certified Public Accountants and other authoritative accounting bodies to determine the potential impact they may have on our Consolidated Financial Statements. Based upon this review, we do not expect any of the recently issued accounting pronouncements to have a material impact on our consolidated financial statements.

Critical Accounting Policies and Estimates

        The discussion and analysis of our financial condition, liquidity and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting

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principles generally accepted in the United States of America. The preparation of these financial statements requires management to make estimates and assumptions that affect amounts reported therein. The following lists our current accounting policies involving significant management judgment and provides a brief description of these policies:

        Fair Value.    Certain elements of our financial statements require us to make estimates regarding the fair market value of our common stock. Our management determines this value from time to time utilizing a variety of factors, including the report of a third party valuation consultant, the general performance of the Nasdaq composite, and our financial results and condition. The Company uses Black Scholes for financial option modeling. We believe that the results we have calculated using the Black Scholes option pricing model approximate the results of the Binomial Options Pricing Model and has yielded a reasonable estimate of fair value for all assessed dates. However, it is likely that these results may have been different than our fair market value had we been listed on an exchange.

        Historically, we have used estimates of the fair value of our common stock at various dates for the purpose of:

    Determining the fair value of our common stock on the date of grant of a stock-based compensation award to our employees and non-employees as one of the inputs into determining the grant date fair value of the award.

    Determining the fair value of our common stock on the date of grant of a restricted stock award to determine the amount of compensation expense to be recorded over the requisite service period.

    Determining the fair value of our common stock to be issued at the date of conversion of convertible debt instruments into our common stock.

    Determining the intrinsic value of certain debt features, such as beneficial conversion features, on the date of issuance of convertible instruments.

    Determining the fair value of our common stock at each reporting period as an input into our model to value warrants classified as liabilities.

        Management has estimated the fair value of our common stock during 2010 as follows:

Date of Valuation
  Estimate of
Fair Value
  Purpose

May 27, 2010

  $ 3.29   Grants of stock-based awards

November 15, 2010

  $ 3.95   Issuance of common stock related to extinguishment of convertible debt

December 30, 2010

  $ 4.16   Grants of stock-based awards

        In order to determine the fair value of our common stock at each measurement date, we relied in part on a valuation report retrospectively prepared by an independent valuation consultant based on data we provided. The valuation report provided us with guidelines in determining the fair value, but the determination was made by our management. We obtained a retrospective valuation by a third-party valuation specialist because, as an emerging company, we have not had the resources at our disposal to gather all of the necessary inputs including information regarding comparable companies. We applied the income approach/ discounted cash flow analysis based on our projected cash flow using management's best estimate as of the valuation date. The determination of the fair value of our common stock requires complex and subjective judgments to be made regarding our projected financial and operating results, our unique business risks, complex features of our outstanding debt and equity

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instruments, the liquidity of our shares and our operating history and prospects at the time of valuation.

        In determining the fair value of our common stock we made estimates surrounding our weighted average cost of capital of 21.90% based on a number of inputs, including the risk-free rate, an equity risk premium based on forward looking equity risk premium studies multiplied by a Beta derived from Bloomberg of firms in a comparable line of business, a small stock premium from a Duff &Phelps study that reflects expectations of equity holders, a company-specific risk premium based on revenue projections relative to comparable firms, plus the Company's cost of debt. We used an option-pricing method to allocate enterprise value to preferred and common shares, taking into account the guidance prescribed by the AICPA Audit and Accounting Practice Aid, "Valuation of Privately-Held Company Equity Securities Issued as Compensation." The method treats common stock and preferred stock as call options on the enterprise's value, with exercise prices based on the liquidation preference of the preferred stock. We also used an option-pricing method which involves making estimates of the anticipated timing of a potential liquidity event, such as a sale of our Company or an initial public offering, and estimates of the volatility of our equity securities. The anticipated timing is based on the plans of our Board of Directors and management. Estimating the volatility of the share price of a privately held company is complex because there is no readily available market for the shares. We estimated the volatility of our shares at 70% based on the historical volatilities of comparable publicly traded companies engaged in similar lines of business. Had we used different estimates of volatility, the allocations between preferred and ordinary shares may have been different.

        We believe the fair value of our shares has increased due to broader acceptance at leading cancer centers of the Lucid technology platform. The Company closed an institutional financing organized by an investment bank which broke escrow in November 2010, and a related conversion of debt to equity, which were key events reinforcing our future prospects. An increase in VivaNet reading and imaging site installations during the last half of the year was also was an important milestone for the Company.

        Stock-Based Compensation.    We measure compensation cost for stock-based compensation at fair value and recognize compensation over the service period for awards expected to vest. The fair value of each restricted stock award is based on management's estimate of fair value and is recognized as compensation expense using straight-line amortization over the requisite service period. The fair value of each stock option grant is estimated on the date of grant using the Black-Scholes pricing model and is recognized as compensation expense using straight-line amortization over the requisite service period. The determination of fair value using the Black-Scholes model requires a number of complex and subjective variables. Key assumptions in the Black-Scholes pricing model include the fair value of common stock, the expected term, expected volatility of the common stock, the risk-free interest rate, and estimated forfeitures. We determined the fair value of our common stock using a variety of factors, including the report of a third party valuation consultant, the general performance of the Nasdaq composite, and our financial results and condition. The expected term is estimated by using the actual contractual term of the awards and the length of time for the recipient to exercise the awards. Management determined that, as a private company, it was not practicable to estimate the volatility of our stock price, based on our low frequency of price observations. Therefore, expected volatilities were based on a volatility factor computed based on the historical equity volatilities of the common stock of publicly traded comparable firms. The risk-free interest rate was based on the implied yield available at the time the options were granted on U.S. Treasury zero coupon issues with a remaining term equal to the expected term of the option. Estimated forfeitures are based on historical data, as well as management's current expectations.

        Warrant Liabilities.    We have issued warrants with complex provisions which require estimates of fair value to appropriately record our potential liabilities. We account for warrants that are indexed to our own stock as a component of equity and record these amounts at estimated fair value computed at the date of grant. Warrants issued that are not indexed to our own stock are treated as a liability and

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are initially recorded at estimated fair value computed at the date of grant. This liability is adjusted to fair value at each period presented. We also review each warrant with complex provisions for triggering events at each reporting period. For example, during 2010, we reclassified certain warrants from liabilities to stockholders' equity to reflect the recognition of certain provisions which indexed the warrant to our own stock when the warrant had not previously been indexed to our stock.

        The fair value of warrants is derived using the Black-Scholes pricing model. The Company believes that the Black-Scholes pricing model results in a value that is not materially different from the value determined using a binomial pricing model. Effective January 1, 2009, new accounting guidance related to determination of warrants indexed to our own stock resulted in certain of the outstanding warrants to be classified as liabilities. We recorded a cumulative effect of a change in accounting principle to the 2009 opening accumulated deficit as a result of the new accounting guidance. Where warrants are issued in connection with debt, the proceeds from the debt issuance are allocated between the debt and warrants based on their relative fair values.

        Convertible Debt.    We have certain debt instruments that contain conversion features. When the debt agreement allows for conversion at a stated price that is lower than the fair value of the underlying common stock at the date the agreement is consummated, the difference between the common stock price and the conversion price multiplied by the number of convertible shares is recorded as a discount on the debt. When the debt agreement allows for conversion at a value that is contingent upon the occurrence of future events, the difference between the common stock price and the conversion price multiplied by the number of convertible shares is recorded as a discount on the debt at the time the contingency no longer exists.

        We also examine each of the conversion features as a potential embedded derivative, though we have determined that none of our existing conversion features represent embedded derivatives. We continue this assessment at each reporting period. Certain of our convertible debt instruments have been issued with detachable warrants. In these instances, the value of the warrants is recorded as a debt discount, which is accreted to interest expense over the life of the debt.

        Income Taxes.    We recognize income taxes under the asset and liability method. As such, deferred taxes are based on temporary differences, if any, between the financial statement and tax bases of assets and liabilities that will result in future taxable or deductible amounts. The deferred taxes are determined using the enacted tax rates that are expected to apply when the temporary differences reverse. Income tax expense is based on taxes payable for the period plus the change during the period in deferred income taxes. Valuation allowances are established when it is more likely than not that the deferred tax assets will not be realized and the deferred tax assets are reduced to the amount expected to be realized.

        Tax positions are recognized only when it is more likely than not (likelihood of greater than 50%) that the position would be sustained upon examination based solely on the technical merits of the position. Tax positions that meet the more likely than not threshold are measured using a probability-weighted approach as the largest amount of tax benefit that is greater than 50% likely of being realized upon settlement. We recognize accrued interest and penalties, if any, related to income tax liabilities as a component of income tax expense.

        Revenue Recognition.    We recognize revenue when evidence of an arrangement exists, title has passed (generally upon shipment) or services have been rendered, the selling price is fixed or determinable and collectability is reasonable assured. When transactions include multiple deliverables, we apply the accounting guidance for multiple element arrangements to determine if those deliverables constitute separate units of accounting. Revenue on arrangements that include multiple elements is allocated to each element based on the relative fair value of each element. Each element's allocated revenue is recognized when the revenue recognition criteria for that element have been met, although

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multiple element arrangements have not been material through December 31, 2010. Fair value is generally determined by objective evidence, which is based on the price charged when each element is sold separately. All costs related to product shipment are recognized at time of shipment and included in cost of revenue. We do not provide for rights of return to customers on product sales.

Quantitative and Qualitative Disclosures about Market Risk

        Foreign Currency Exchange Risk—As of December 31, 2010 and through the date of this prospectus, we did not have significant exposure to foreign currency exchange rates as substantially all of our transactions are denominated in U.S. dollars.

        Interest Rate Risk—We have $2.0 million in outstanding borrowings under our line of credit which has a variable interest rate with a floor of 6%. Should interest rates rise above 6%, a 1% change in interest rates will change our annual interest expense by $20,000. The remainder of our long-term debt has fixed rates and is not subject to interest rate fluctuations.

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Our Business

Overview

        We are a medical device and information technology company focused on the design, manufacture and sale of non-invasive, point-of-care medical imaging devices to assist physicians in the early diagnosis of melanoma and other skin cancers, as well as non-malignant skin disease. Our flagship products for the early diagnosis of skin cancer are the VivaScope® 1500 and VivaScope® 3000 confocal imagers, which are also known as reflectance confocal microscopes. VivaScope devices, which have received 510(k) clearance from the FDA, are designed for use in a clinical setting by medical professionals to produce images of skin lesions for subsequent review by pathologists and dermatopathologists (together referred to herein as "pathologists") and other specially trained diagnostic image readers to assist such pathologists in forming a clinical judgment. VivaNet is our proprietary telepathology server that provides seamless transfer of VivaScope images over the Internet using VPN technology from a dermatologist's or other originating physician's office to a pathologist's office for near real-time interpretation, diagnosis and reporting. In addition, the VivaNet® server stores the diagnostic confocal images and the pathologist's evaluation as a part of the patient's permanent medical record.

        VivaScopes® and VivaNet® are designed to mimic the workflow of the current clinical practice in assessing suspicious skin lesions for skin cancer. The primary difference between traditional clinical practice and practice using our system is that rather than surgically excising tissue from a patient's skin lesion for subsequent examination under a microscope in the pathologist's office, a dermatologist using the VivaScope® simply images the lesion with microscopic resolution and sends those high resolution images of the lesion through VivaNet® to the pathologist for examination and reporting. This results in a procedure that is faster than the traditional biopsy and pathology approach, without the need for surgical excision of a lesion that is often benign. In addition, results of the pathology report using our VivaScope confocal image technology can be conveyed to the patient by the physician in near real-time, thus mitigating the days to weeks wait times routinely associated with traditional biopsy assessments. The responsibility for the medical diagnosis remains with the pathologist, the same diagnostic expert who is primarily liable for the diagnosis in today's standard of care as the VivaScope System does not provide automated analysis or diagnosis of the images it produces.

        The primary components of our system include:

    The VivaScope® non-invasive confocal imaging device in the form of either an arm mounted imaging head (Model 1500) or a hand-held imaging device (Model 3000), which employs high precision optics, laser illumination and custom designed electronics to resolve thin layers of individual cells in the epidermis and upper dermis of the skin without the need for an invasive biopsy; and

    The VivaNet® telepathology server that provides seamless transfer of VivaScope® images from a dermatologist's or other originating physician's office and to a pathologist for interpretation, diagnosis and reporting.

Our current products are neither research prototypes nor early production units; rather, many of our products are in routine daily use for patient management in certain medical institutions and medical practices in several countries.

        We have sold over 300 VivaScope confocal imagers to academic medical centers and other markets around the world. Sales of VivaScopes into these traditional clinical research markets have resulted in more than 250 peer reviewed journal publications written by some of the world's experts in melanoma and other skin cancer research. These publications have established the clinical efficacy and diagnostic accuracy of our VivaScope confocal imagers and also established the brands "Lucid®" and "VivaScope®" in the dermatology community. In addition to FDA clearance, our VivaScope® 1500 and

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VivaScope® 3000 are also CE marked as medical devices for sale and clinical use in the European Union, and the VivaScope® 1500 is cleared by the Australian Therapeutic Goods Administration and the Chinese State Food and Drug Administration. We have been awarded 52 patents, 41 of which are United States patents and the remaining 11 are foreign patents. In addition, we have 27 additional U.S. and foreign patents pending. Our portfolio of issued patents includes both method and apparatus patents.

        We are currently directly distributing our products in the United States, Australia and the rest of the Western Hemisphere and, in other parts of the world, we rely primarily on third party distributors. We plan to lease our VivaScope® confocal imagers to dermatologists and license our VivaNet® services to pathologists on a recurring basis. We believe the strategy of providing VivaNet services on a recurring basis will provide us with an ongoing revenue stream directly related to: (i) the average per procedure fee billed to pathologists for images of each lesion provided through VivaNet for pathologic evaluation and reporting; (ii) the total number of VivaScopes® in dermatology and other practices providing images of lesions; and (iii) the average annual number of lesions imaged by our VivaScopes in these practices. This recurring revenue business model will allow us to provide access to our VivaScope confocal imagers and VivaNet reading technology without requiring significant up front capital investments by the participating physicians. We believe this model will help facilitate adoption of our technology by dermatologists and will drive the recurring revenue stream (i.e., per procedure fees) received from pathologists evaluating the images.

Industry

        Limitations of Current Melanoma and Non-Melanoma Cancer Diagnosis.    Melanomas and NMSCs are diagnosed by pathologists based on gross and microscopic examination of biopsy tissue specimens generally provided to them by dermatologists, plastic surgeons or primary care physicians, or PCPs. In the United States, these physicians rely primarily on visual clinical evaluation of skin lesions in order to determine which lesions to biopsy and send to the pathologist for evaluation. Consequently, these clinical examinations are limited to the surface appearance of the suspicious skin lesion and are heavily dependent on the physician's experience and skill. According to a paper by Welch, et al. based on SEER data from the National Cancer Institute, U.S. physicians typically biopsy more than 40 suspicious lesions to find one melanoma. Dermatologists who specialize in the management of skin lesions may also use dermoscopy, a method of viewing a lesion's gross superficial subsurface structure under magnification.

        Our internal market research suggests that, while melanoma is the dominant concern of dermatologists, these physicians are also interested in better technology for identifying and clinically diagnosing both basal cell carcinoma and squamous cell carcinoma. Our data also suggests these physicians are significantly more likely to adopt a technology that can assist in the diagnosis of all three of these skin cancers, as opposed to a technology that can only assist in the diagnosis of melanoma. We have also learned from our market research that physicians and patients have a strong preference for a technology that places the final decision regarding the diagnosis of skin cancer in the hands of a pathologist, in contrast to a technology that makes a diagnosis using computer automated diagnosis based on software algorithms.

        According to the American Cancer Society, and data in a paper by Rogers, et al., skin cancer, including melanoma and non-melanoma skin cancers, or NMSCs, is the most common of all cancers in the United States and accounts for approximately 70% of all new cancer cases each year in the U.S. According to Rogers, there were an estimated 3.6 million NMSCs and melanomas in the U.S. population in 2006 versus approximately 1.5 million cases of other types of cancer, according to Cancer Facts and Figures 2010. The three most common skin cancers, in rank order are: (i) basal cell carcinoma, accounting for approximately 78% of skin cancers; (ii) squamous cell, totaling approximately 19% of skin cancers; and (iii) melanoma, which accounts for an estimated 3% of skin cancer cases, but

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is responsible for the majority of all skin cancer deaths. The American Cancer Society projected that approximately 11,740 deaths from all types of skin cancer occurred in 2010.

        Melanoma is currently receiving significant attention from the medical community and the public. The American Academy of Dermatology estimated that in 2010, 68,130 new cases of invasive melanoma would occur and 8,700 deaths would result. It is the most common cancer in young adults ages 25-29, and is the primary cause of cancer death in women between the ages of 25 to 30, according to the Melanoma Research Foundation. In addition, according to Medscape, approximately 46,770 additional new cases of melanoma in situ also occurred in 2010, resulting in a total of roughly 114,900 new cases of melanoma in that year.

        A survey of dermatologists by Dr. Seema P. Kini of Emory University, as reported in Skin and Allergy News (2011), revealed that 58% of these dermatologists did not report new cases of malignant melanoma to their state cancer registry. Consequently, the number of melanoma cases reported in Cancer Facts & Figures 2010 may substantially under report the incidence of melanoma in the United States.

        According to the Skin Cancer Foundation's "Skin Cancer Facts", melanoma is the most deadly skin cancer and is responsible for approximately 75% of skin cancer fatalities and while there is no known effective cure for metastatic melanoma, early detection and excision of melanoma can lead to nearly a 99% cure rate. Early diagnosis allows cure by simple excision at a cost typically in the range of $2,500 for a melanoma in situ. Advanced Stage IV melanoma is costly to treat resulting in medical expenses that are often in the range of $160,000 per patient, as reported in the Dermatology Online Journal (2009).

        NMSCs, such as basal cell and squamous cell carcinoma, are also accessed clinically by the physician using visual examination. As is the case for melanoma, lesions suspicious for NMSC are biopsied and the tissue is sent to the pathologist for definitive diagnosis. Since most NMSCs are considerably less lethal than melanoma, they are subject to a lower over-biopsy rate. We believe that the NMSC over-biopsy rate is in the range of approximately 2:1.

        The Prevalence of Skin Cancer Diagnosis in the U.S. Medical System.    We estimate that approximately 4.6 million specimens are examined by U.S. pathologists for indications of melanoma (based on a 40:1 biopsy ratio and an estimated 114,900 new cases of melanoma per year) and that another 7 million are examined for NMSC (based on our estimate of a 2:1 biopsy ratio and an estimated 3.5 million new cases of NMSC per year), for a total of approximately 11.6 million skin biopsies of suspicious lesions.

Strategy

        Our objective is for our VivaScope® systems, combined with our VivaNet® telepathology system, to become the standard of medical care for the early detection and diagnosis of melanoma and non-melanoma skin cancers. We believe that our systems may ultimately eliminate the need for most routine surgical skin biopsies. In order to achieve this objective, we are pursuing the following strategy:

    Establish our VivaScope® reflectance confocal imaging technology as the leader for assisting in melanoma and non-melanoma skin cancer detection and diagnosis.  Our core VivaScope confocal imaging technology, which is protected by 41 U.S. patents, has been used as an FDA Class I medical device in medical research for melanoma and skin cancer detection diagnosis as well as the identification of dermatologic diseases since 1997. As a result, there are over 250 publications in peer reviewed medical journals documenting use of our technology. VivaScopes® are routinely used for the diagnosis of melanoma and other skin cancers in leading melanoma and skin cancer clinics around the world. In 2007, experts who use our technology for melanoma diagnosis established the International Confocal Microscopy Working Group, or the ICMWG, to

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      promote use of VivaScope confocal imaging technology in melanoma and skin cancer clinics around the world. We have supported and will continue to support the needs of leading melanoma and skin cancer experts and will sponsor the ICMWG as one means of expanding the number of clinical applications in dermatology and other fields of diagnostic medicine.

    Verify third party payer reimbursement to support our VivaNet recurring revenue model.  We intend to offer our VivaNet® telepathology services to pathologists on a per procedure basis in order to create a recurring revenue stream. We believe that third party reimbursement for our telepathology services should be available to pathologists using our VivaNet® system, and to us for our technical VivaNet® services, under an existing Current Procedural Terminology, or CPT code. It appears that a CPT code exists for the technical and support services we provide to pathologists via our VivaNet® telepathology system. We have retained the services of experts in medical reimbursement and they have commenced discussions with the medical directors of third party private payers and corresponding federal regional reimbursement carriers in an effort to obtain positive coverage decisions and thus routine reimbursement for the dermatologists and pathologists using our VivaScope® System and our VivaNet® services. We also plan a similar effort in order to achieve national coverage from CMS for our telepathology services business model.

    Obtain third party payer reimbursement for dermatologists and other physicians using our VivaScope confocal imagers.  We intend to lease our VivaScopes to dermatologists and other physicians at a low monthly lease rate in order to encourage broad adoption of the technology. Currently, there is a CPT reimbursement code available to these dermatologists that covers a portion of use of the VivaScope® and which may be sufficient to cover the cost of an imaging procedure performed by a medical assistant or technician. Following this offering, we intend to apply to the AMA for a new CPT code to specifically cover the VivaScope confocal imaging portion of our VivaScope® imaging procedure and thus achieve enhanced reimbursement for the dermatologists using our VivaScopes.

    Commercialize our technologies using both direct and distribution sales channels.  We are currently directly distributing our products in the United States, Australia and the rest of the Western Hemisphere and, in other parts of the world, we rely primarily on third party distributors. We plan to continue this strategy as we move our products into routine clinical practice. Our initial sales and marketing to U.S. and Australian based private practice physicians will focus on dermatologists with specialties in the diagnosis and treatment of melanoma and non-melanoma skin cancers. Our market research indicates that we must demonstrate acceptance by these skin cancer specialists before it is possible to enter the broader markets that include general practice dermatologists, plastic surgeons, and primary care physicians. We intend to begin expanding our U.S. sales, marketing and product support team during 2011 and to hire one sales person and a technical support person in Australia following this offering. Internationally we have distribution agreements in place with active partners in Europe, the Mediterranean region, Japan, South Korea, Thailand and China. We intend to extend our reach further into the Asia Pacific region with additional distribution partners managed by a sales person we plan to hire, and who will be based, in Sydney, Australia. Expansion into Central and South America is initially being directed from our headquarters in Rochester, New York until sales volumes in these regions are sufficient to justify sales offices in the regions.

    Broaden application of our technology into additional fields.  If we are successful in achieving penetration of our technology into dermatology practices for melanoma and non-melanoma skin cancer diagnosis, our long term strategy is to broaden the application of our technology: (i) into the primary care market for skin cancer diagnosis; and (ii) into other medical specialties that require pathologic examination of tissue. These include neuropathy screening and oral and cervical cancer detection and diagnosis. We will also consider expansion though potential

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      acquisition of complementary products and technologies in the diagnostic devices and medical information services arenas as opportunities arise.

Our Products

        Our VivaScopes are non-invasive imaging systems for assisting in the early detection of melanoma and other skin cancer, as well as non-malignant skin diseases. VivaScopes are comprised of an imaging head that, in clinical use, performs cellular resolution imaging of the skin at the point of care. The resolution of images produced by our VivaScopes is similar to that viewed by a pathologist when observing images of biopsy tissue with the aid of a medical grade microscope. Consequently, the images produced by a VivaScope are of sufficiently high quality for a pathologist to perform a diagnosis from the images, thereby eliminating the need to perform a biopsy in order to obtain tissue specimens of the patient's lesion for diagnosis.

        VivaScopes employ low power laser diodes and high precision optics to image the skin below its surface with high resolution, producing images that depict the cellular and sub-cellular structure of the skin. VivaScopes are available with either an arm mounted imaging head (the VivaScope 1500), similar in size to a dental x-ray head, or a convenient handheld imaging head (the VivaScope 3000). Both imaging heads are supplied on a medical grade cart that, in addition to the imaging head, carries the image acquisition computer, the operator keyboard and the system LCD display. A typical VivaScope 1500 is shown in an illustration on page 55 of this prospectus and the VivaScope 3000 handheld imaging head is shown in the insert photo. Also shown is the VivaCam® dermatoscopic imager that is included with all clinical VivaScope Systems. This full color five megapixel imager provides an image of the suspicious lesion that is similar to the visual image seen by the attending physician on visual examination of the lesion, and can assist the pathologist in forming an accurate evaluation of a suspicious lesion.

        VivaScopes and VivaCams® are designed by our engineering team and assembled and tested by our manufacturing staff from piece parts purchased from local and, in limited cases, specialized suppliers. System software for the VivaScope Systems is designed and written in-house under the rigid requirements of our quality system.

        VivaNet provides a rapid link between the attending physician, either the dermatologist or the primary care physician, and the pathologist. VivaNet is a DICOM (Digital Imaging and Communications in Medicine) compatible medical image server that stores, retrieves and transfers VivaScope images between physicians and pathologists. Images of suspicious lesions from a VivaScope can be transferred to a pathologist in near real-time for evaluation and reporting. The report can be rapidly returned to the attending physician for discussion with the patient, thereby enabling timely patient management.

        The DICOM standard was set by radiologists nearly 25 years ago, and supplier interoperability requirements were mandated about 15 years ago. DICOM is accepted worldwide for the secure and reliable transfer and storage of medical images. We selected this standard to minimize our development efforts and to assure ease of interface and acceptance in hospitals, the United States Veterans Administration, and the U.S. Department of Defense.

        In operation, images of a patient's lesion acquired in an attending physician's office are transferred to and stored on our VivaNet servers located in Rochester, New York. These servers are located in a HIPAA compliant facility and all communications are encrypted and secure. A digital copy of the images is immediately transferred to an online pathologist for evaluation and reporting. As soon as the evaluation is complete and the pathologist has filed an electronic report, the report is saved with the original images on the VivaNet server as a medical record. The report is then returned to the attending physician for discussion with the patient.

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        Since we adopted the DICOM standard for VivaNet, we can readily use industry standard equipment and software for its implementation. As an example, our servers are Hewlett Packard MAS (Medical Archive Storage) level devices running HP's MAS software. Our VivaScope application is based on Medicore's SDK (software development kit) of DICOM software routines. System software for VivaNet has been designed and written in-house, based on DICOM principles and standards.

        We are also developing the VivaScope 2500, a confocal imager designed to image excised surgical tissue for the purpose of determining the margin between malignant and benign tissue during surgical procedures. The initial application for this device is in Mohs surgery, a dermatological procedure for the precise surgical excision of skin cancers. We believe this device will be ready for initial market launch in late 2012.

        All of our FDA cleared VivaScope confocal imaging products are designed, manufactured, sold and serviced under the requirements of our quality system. The quality system is designed to jointly meet the requirements of the FDA's current Good Manufacturing Practices, or "GMP", and Quality System Regulation, or "QSR", the European Medical Device Directive (93/42/EEC) , the International Organization for Standardization's ("ISO") general requirements for quality management systems (ISO 9001), and ISO's medical device requirements for regulatory purposes for quality management systems (ISO 13485).

        Our quality system has also been audited annually since 2003 by G-MED North America for compliance with applicable international regulatory and quality standards. G-MED North America is a subsidiary of LNE/G-MED, a quality, standards and training organization headquartered in Paris, France. Each year, we have successfully maintained our CE mark and ISO 9001 and ISO 13485 certifications. The CE mark allows us to sell our VivaScope confocal imagers into the European Union, or EU. We have also achieved regulatory clearance for some or all of our VivaScope products in Australian, China and several other countries. As a consequence, we believe that our domestic and international regulatory clearances are sufficient to support our business for the foreseeable future.

        In-vivo Confocal Imagers.    Our first in-vivo confocal imaging product was the VivaScope 1000. Thirty of these devices, were sold to early adopters in medical and commercial research applications. This legacy product is no longer in production. Our in-vivo confocal imagers, including the legacy VivaScope 1000, the VivaScope 1500 and the VivaScope 3000 confocal imagers, all were initially sold as FDA Class I exempt devices. In September 2008, we received FDA 510(k) clearance for the VivaScope System. As used in the 510(k) intended use statement, the term VivaScope System covers both our VivaScope 1500 imaging head and the VivaScope 3000 handheld imaging head, either together or as separate imaging systems. The term VivaScope System also includes our VivaCam® dermatoscopic imager, a full color five megapixel macroscopic imager.

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        We believe the 510(k) level of clearance that we have achieved for the VivaScope System, comprised of the VivaScope 1500, the VivaScope 3000 and the VivaCam, is sufficient to proceed with sale of our in-vivo confocal imagers for routine use in U.S. private dermatology practices for clinical assessment of various forms skin disease, including skin cancers. This, combined with our CE mark for the EU and our Therapeutic Goods Administration, or TGA clearance in Australia for the VivaScope 1500 provide similar clearance in three key world markets for skin cancer detection and diagnosis.

        We have designed our VivaScope System to support the capture of: (i) clinical images of the patient; (ii) dermoscopic images of the patient's lesions; and (iii) confocal images of the patient's lesions. Medicare, Medicaid and some private payors provide reimbursement for clinical imaging and/or dermascopic imaging under an existing CPT code. We believe the amount of reimbursement available under this existing CPT code is adequate to support the VivaScope procedure when performed by a medical assistant or technician in the office of a private practice dermatologist.

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        We recognize that a favorable reimbursement environment can have a significant impact on the adoption of our VivaScope confocal imagers and VivaNet telepathology services and our commercial success. We believe this is especially true for adoption by general dermatologists and pathologists. Although we expect that the level of reimbursement available under existing CPT codes will be sufficient to support initial adoption by physicians, even if our VivaScope confocal imaging procedure becomes eligible for reimbursement, it may be that the level of reimbursement initially available may not be adequate for physicians to adopt the technology in their practices at the rate we expect.

        Ex-Vivo Confocal Imagers.    We also have developed VivaScope confocal imagers for rapidly imaging tissue that has been surgically excised from the body. These devices, which are intended to require little or no tissue preparation to render images similar to those obtained using traditional histology techniques, may have the potential to streamline the practice of conventional laboratory pathology procedures for excised tissue analysis. Our ex-vivo confocal imagers are registered as FDA Class I exempt devices. They are in the same FDA Class and category as conventional medical microscopes used by pathologists to view microscope slides of human tissue. We believe that such status is sufficient for us to sell the VivaScope 2500 for medical research applications, which is the current market for the device.

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        VivaNet Telepathology Server.    Our VivaNet telepathology server is a DICOM compliant medical grade server that stores, retrieves and transfers images between attending physicians, typically dermatologists, and diagnostic readers, typically pathologists. It is registered with the FDA as a Class I medical image storage device, which categorizes it as a radiology diagnostic device.

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Intellectual Property

        General.    Our policy is to protect our intellectual property by obtaining U.S. and foreign patents to protect the technology, inventions, and improvements important to the development of our business, U.S. and international trademarks to protect our company name, logo and brands and trade secrets which we enforce through confidentiality agreements, with our employees, and members of our board of directors and Scientific Advisory Board and through non-disclosure agreements with certain others outside of U.S. Our employees and consultants in scientific, technical certain other creative capacities are required to execute patent assignment agreements.

        Patents.    To date we have been awarded 41 U.S. patents, four Australian patents, three Japanese patents, two European patents, one Chinese patent and one Canadian patent. All of these patents are owned by us. In addition, we have 27 additional U.S. and foreign patents pending. Our portfolio of issued patents includes both method and apparatus patents. Generally, we file foreign counterparts of our most fundamental U.S. patents and we have been successful in obtaining issuance of these fundamental foreign patents in Europe, Australia, Japan, China and Canada while other foreign patent applications remain pending. Our pending patents include pending foreign counterparts of our U.S. patents and patent applications as well as pending U.S. patents on new technology. We have granted limited licenses to our European intellectual property to our distribution partner in Europe.

        For organizational purposes we categorize our patent portfolio into 7 distinct groups. These are:

    handheld imaging;

    digital pathology;

    tissue navigation;

    tissue stabilization;

    image quality;

    see and treat; and,

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    surgical pathology

        We currently hold seven (7) issued U.S. patents in the handheld imaging category, two (2) issued patents in the digital pathology category, two (2) issued patents in the tissue navigation category, seven (7) issued patents in the tissue stabilization category, eight (8) issued patents in the image quality category, six (6) issued patents in the see and treat category and nine (9) issued patents in the surgical pathology category. These patent categories, and the corresponding patent numbers, are illustrated in the patent tree diagram below:

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        The earliest U.S. patent in our portfolio was issued on August 5, 1997 and the latest U.S. patent in our portfolio was issued on January 4, 2011. Our patents expire between 2014 and 2026.

        In building our patent portfolio we have performed significant patent searches of the prior patent art in our field and believe we are free to practice our technology in the United States and elsewhere throughout the world. Nevertheless, we cannot be certain that our patent searches have identified all of the relevant prior art, or that we will be free to practice our technology throughout the world, or that our patents will not be challenged or circumvented by competitors. Whether a patent application should be granted or whether an issued a patent is valid or is infringed by another party are all matters of law. Therefore we cannot be certain that, if challenged, our patents, patent applications or other intellectual property rights will be upheld. If one or more of our patents, patent applications or other intellectual property rights are invalidated, rejected or found unenforceable, that could reduce or eliminate any competitive advantage we may have.

        Trademarks and Domain Names.    We have obtained United States trademark registrations for the following marks: "VivaScope®", "Lucid®", VivaBlock®", "VivaStack®", "VivaCam®", "VivaNet®", "VivaCell®", VivaScopy®" as well as our corporate logo. We have applied for U.S. trademark protection for "VivaScan," which application has been approved and is pending for the next phase of examination before the United States Patent and Trademark Office.

        Foreign trademarks have been obtained corresponding to some of our U.S. trademarks and others are pending foreign trademark approval.

        We have registered the internet domain name of our Company's web site, www.lucid-tech.com. In addition, we have obtained the following registered domain names: vivascope.com; vivascopy.com; vivascopy.net; telepathnet.com; and confocalalert.com.

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        Trade Secrets.    We also rely on trade secrets and technical know-how in the manufacture and marketing of our VivaScopes and VivaNet services. We require our employees, directors, consultants, contractors, visitors to our Company and certain others (including members of our Scientific Advisory Board, which is still in formation) to execute non-disclosure agreements with respect to our proprietary information. Although these agreements provide us a degree of protection, we cannot be sure that the agreements will be upheld in a court of law or that a court of law will enforce an injunction against unauthorized disclosure by a party to our confidentiality agreements.

        We believe that our apparatus and method patents, together with patents pending and unpatented trade-secrets and technical know-how, provide us a significant competitive advantage in the marketplace; however, we cannot be certain that, if challenged, our patented methods and apparatus or trade-secrets would be upheld. If any of our patented methods, patented apparatus or trade-secrets rights are invalidated, rejected or found unenforceable, that could reduce or eliminate any competitive advantage we might otherwise have had.

Clinical Studies of the Efficacy of VivaScope Confocal Imaging

        The reflectance confocal imaging technology used in our VivaScope confocal imagers has been extensively studied by independent medical researchers. These investigators have authored over 250 peer reviewed publications in scientific and medical journals. The papers cover a variety of skin diseases and as well as diseases of other tissues ranging from case studies to large clinical trials.

        Due to the prevalence of melanoma as a disease and its potentially life-threatening nature, a large number of studies have been performed to access the accuracy of confocal imaging in its diagnosis. The published melanoma studies evaluating our VivaScope confocal imagers have been conducted by leading melanoma experts from around the world.

        The efficacy of any diagnostic test is commonly measured by its:

        1)    sensitivity (the ability to detect disease when present);

        2)    specificity (the ability to exclude disease when not present); and

        3)    test accuracy (the number of correct diagnoses—either benign or malignant—versus the total number of diagnoses).

        The following table below presents a comparison of the accuracy of expert clinical diagnosis, biopsy followed by examination of the excised tissue by a pathologist, which is today's standard of care, and finally, the accuracy of our reflectance confocal imaging technology as determined in six independent studies based on a total of 927 lesions, of which 284 were melanomas. All of these studies were performed without significant financial support from Lucid and thus, we believe, represent independent scientific studies.

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        The first row of the above table presents the accuracy of clinical examination of lesions as reported by Monheit and his co-authors (Monheit, et al., "The Performance of MelaFind" Arch Dermatol. 2011 Feb;147(2):188-94.). Sensitivity of dermatologists in determining whether a suspicious lesion is melanoma was reported to be 78%, meaning that, on average, dermatologists will miss 22% of all melanomas when using visual examination of the lesion. Specificity of the expert dermatologists in the study was reported to be 3.7%, meaning that these experts will, on average, biopsy 27 benign lesions to find one melanoma. Accordingly, the accuracy of visual clinical examination of suspicious lesions by dermatologists appears inadequate and we believe better tools are needed for the clinical diagnosis of suspicious lesions.

        The accuracy of today's standard of care, biopsy followed by pathologic examination of the tissue specimen, which is not well documented in the medical literature, is presented on the second row of the table. The data presented was derived from a paper "Discordance in the Histopathologic Diagnosis of Melanoma and Melanocytic Nevi Between Expert Pathologists," published by Evan Farmer and his colleagues in the journal Human Pathology (Volume 27, No. 6, pp 528-531, June 1996). This paper provides concordance data for eight expert dermatopathologists in melanoma diagnosis. We analyzed these data to estimate the sensitivity, specificity and test accuracy for melanoma diagnosis of the eight expert dermatopathologists. Those estimates are summarized in the second row of the table and correspond to sensitivity of 90.4%, specificity of 86.5% and test accuracy of 88.2% for the diagnosis of melanoma.

        The third row of the table presents the arithmetic average of the sensitivity, specificity and test accuracy of the reflectance confocal microscopy technology used in our VivaScopes for the diagnosis of melanoma, based on the results of six clinical studies published in peer reviewed medical journals. These studies represent a total of 927 melanocytic lesions, of which 284 were melanomas. The indicated sensitivity of 95.5%, specificity of 86.9% and test accuracy of 89.9%, are all similar to or better than the corresponding results achieved in the Farmer paper.

        Consequently, confocal imaging demonstrates accuracy similar to, and in some cases better than that of, conventional pathologic analysis of tissue. The positive clinical results demonstrated in these six melanoma studies, as well as numerous other melanoma and non-melanoma skin cancer (NMSC) studies, has resulted in our VivaScopes being adopted for routine patient diagnosis and management in some of the leading melanoma and NMSC clinics around the world.

        In 2007, experts in the field formed the International Confocal Microscopy Working Group. The stated purpose of this working group is to: (i) promote use of the technology worldwide; (ii) provide training in the use of the technology and interpretation of reflectance confocal microscopy images; and (iii) coordinate collaborative research activities among its members. We view this as a strong testament to the clinical utility of our VivaScope confocal imaging technology for the early detection of melanoma and NMSC.

        Based on the clinical data available to date, we believe that dermatologists and primary care physicians who image lesions using our VivaScope confocal imagers and collaborate with pathologists using our VivaNet telepathology system should be able to more accurately identify melanomas and NMSC than is possible with visual clinical observation of the suspicious lesion alone. This may lead to diagnosis of skin cancers when they are in their earliest, most curable stage. Early detection of these skin cancers can reduce cost of treatment and minimize the number of unnecessary biopsies, thus improving the care for and quality of life of these patients.

Our Sales Process

        We are currently directly distributing our products in the United States, Australia and the rest of the Western Hemisphere and, in other parts of the world, we rely primarily on third party distributors. We plan to continue this strategy as we attempt to move our products into routine clinical practice.

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Initial sales and marketing to U.S. based private practice physicians will focus on dermatologists with specialties in the diagnosis and treatment of melanoma and non-melanoma skin cancers. Our market research indicates that we must demonstrate acceptance by these skin cancer specialists before it is possible to enter the broader markets that include general practice dermatologists, plastic surgeons, and primary care physicians. We intend to expand our U.S. sales, marketing and product support team following the offering.

        For the year ended December 31, 2010, the Company had sales of approximately $1.3 million and $200,000 to two customers. These two customers accounted for 82% and 13%, respectively, of the Company's accounts receivable balance at December 31, 2010.

        We plan to lease our VivaScope confocal imagers to dermatologists and license our VivaNet services to pathologists on a recurring basis. We believe the strategy of providing VivaNet services on a recurring basis will provide us with an ongoing revenue stream directly related to: (i) the average per procedure fee billed to pathologists for images of each lesion provided through VivaNet for pathologic evaluation and reporting; (ii) the total number of VivaScopes in dermatology and other practices providing images of lesions; and (iii) the average annual number of lesions imaged by our VivaScopes in these practices. This recurring revenue business model will allow us to provide access to our VivaScope confocal imagers and VivaNet reading technology without requiring significant up front capital investments by the participating physicians. We believe this model will help facilitate adoption of our technology by dermatologists and will drive the recurring revenue stream (i.e., per procedure fees) received from pathologists evaluating the images.

        Internationally, we have established distribution relationships with active partners in Europe, the Mediterranean region, Japan, South Korea, Thailand and China. In these regions, we have agreements with exclusive distributors pursuant to which the distributor sells our products within its specified territory on a best efforts basis, and is responsible for actively promoting and selling our products within its assigned territory. Our agreement with the distributor covering territory including Europe and the Mediterranean region has an initial term expiring on December 31, 2011, but renews automatically on an annual basis unless terminated for cause by either party. We entered into a related agreement with this distributor pursuant to which we received a one-time licensing fee of $1.75 million in 2006, in exchange for which we granted to the distributor the right to use and sell our technology within its specified territory in accordance with the distribution agreement. The distribution agreement also permits the distributor under certain circumstances to provide telemedical services related to our products. Each of our agreements with distributors covering other specified markets has an initial term of three years but renews automatically on an annual basis unless terminated for cause or upon 90 days written notice by either party. Each of our distribution agreements contains certain non-competition agreements on behalf of the distributor.

        These distribution relationships have enabled us to sell over 300 VivaScopes worldwide, of which over 200 are current generation products. We rely on our distributors to generate sales revenue, and we have a high degree of customer concentration. Approximately 74% of our product sales were generated through our top three distributors during 2010. There is no guarantee that our distribution agreements with these key distributors will be renewed, and we may experience greater or lesser customer concentration in the future. Although we may be able to sell directly to customers if our relationships with any or all of our key distributors terminate, the development of our sales and distribution capabilities could involve significant expense and delay.

        Our clinical support staff provides direct training in the operation of our VivaScopes to physicians and their staff. The first step in the training occurs on installation of the VivaScope imager in the physician's office, which generally takes a few hours. This initial training session is typically followed by one or two additional days of training as required by the staff in the physician's practice. We routinely

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provide additional training over VivaNet from our headquarters in Rochester, New York which reduces our expenses and the amount of on-site training required in the physician's office.

        We also sponsor training courses for pathologists that provide image evaluation services over VivaNet. These courses are taught by expert physicians in the interpretation of images acquired by our VivaScope confocal imagers. To date, we have held six of these two-day intensive courses. Pathologists attending these courses who choose to continue training are given access to our extensive training database of confocal imaging cases, which currently contains over 750 melanoma and non-melanoma skin cancers. During this online training each participating pathologist typically reads 500 or more confocal imaging cases at their own pace over VivaNet to gain proficiency and confidence in their diagnostic ability using confocal images.

        We will offer continuing medical education, or CME, credit for our confocal reading courses. We anticipate the availability of CME credit-bearing courses for the interpretation of VivaScope confocal images at credible medical institutions will significantly increase the motivation of pathologists to learn interpretation of confocal images. Consequently, we plan to encourage other medical institutions to offer similar CME credit-bearing courses.

        We have relevant sales experience derived from our sales of over 300 VivaScope confocal imagers in academic medical centers and other markets around the world. Sales of VivaScopes into these traditional clinical research markets have resulted in more than 250 peer reviewed journal publications written by some of the world's experts in melanoma and other skin cancer research. These publications have established the clinical efficacy and diagnostic accuracy of Lucid's VivaScope confocal imagers and also built the brands "Lucid" and "VivaScope" in the dermatology community. We intend to leverage our reputation, and these established brands, as we move forward with VivaNet.

        The sale of products into large and small medical practices has provided us the opportunity to learn and improve the products based on actual field experience. As a practical consequence, our current products are neither research prototypes nor early production units; rather, many of our products are in routine daily use for patient management in medical institutions and medical practices around the world. The experience we have gained in working with these institutions and practices has also provided valuable insight into the operations, procedures and workflow of "real world" medical practices.

        We manage our sales process using a formal sales pipeline process implemented using Salesforce.com customer relationship management, or CRM, web based application. Our traditional VivaScope sales pipeline is based on an eight stage process, beginning with a cold lead and progressing through a closed (i.e. fully paid) order. As we move forward with the VivaNet launch we are adapting this proven pipeline process to meet the specific requirements of the more service-based VivaNet sales model.

        The VivaNet sales process is a two pronged approach with efforts currently underway to establish adoption at some of the leading academic medical and cancer centers in the United States concurrently with early adopter pathologists and dermatologists in private practices. Certain medical institutions have expressed interest in reading cases submitted by dermatologists using VivaScopes as a means of extending their reach into the private dermatology practices in the surrounding region. If academic medical and cancer centers that adopt our technology become recognized as centers of excellence in the interpretation and diagnosis of melanoma and skin cancers, we believe this will facilitate the adoption of our technology by private practice physicians in the region.

        In order to introduce our products to academic medical and cancer centers as well as private practice physicians, we exhibit at appropriate medical conventions exhibits, including the American Academy of Dermatology annual and summer meetings and various regional dermatology and pathology meetings. We have exhibited at the American Academy of Dermatology Annual Meeting for

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several years and at the American Society of Dermatopathology, or "ASDP" Meeting for the past two years. At each of the ASDP meetings, we sponsored receptions which were attended by certain of the key opinion leaders and early adopters in the field of dermatopathology.

        Our VivaNet revenue model is a typical "razor and razor blade" business wherein the VivaScopes are the "razors" and the recurring VivaNet license fees are the "razor blades." Over the next several fiscal quarters pathologists will become a key element of our VivaNet sales strategy, because they have established professional relationships with their dermatologist clients. Today pathologists routinely process and diagnose biopsies provided by their dermatology clients. Typically, the relationship between a pathologist and his or her dermatologist client is one based on the highest level of professional trust, since it is the pathologist who provides the actual diagnosis of the dermatologist's patient's skin condition.

        Based on our understanding of this relationship between pathologists and dermatologists, we believe that dermatologists are more likely to adopt VivaScope confocal imaging in their practice if their pathologist is trained and competent to read the confocal images and provide diagnostic interpretation and reporting based on those images. Therefore, our VivaNet sales process logically begins by training pathologists in VivaScope confocal image interpretation using the training process outlined above. Once a pathologist is trained, we request that they provide references for a few dermatologists for whom he or she would like to provide diagnostic reading services. Our sales staff then follows-up with these dermatology practices and regarding the lease of a VivaScope for use in their practice. Once the dermatologist is connected to VivaNet, VivaScope confocal imaging cases can begin routine transfer to the pathologist for diagnosis. The pathologist is free to recommend additional imaging sites, until he or she has a full time workload of VivaScope confocal cases.

        Our initial selling strategy is regional in nature and will target the highest income areas of the U.S., since at least some of the early imaging sites may initially operate on out-of-pocket cash reimbursement basis. We anticipate that a significant portion of the early roll-out will occur in the New York City tri-state area, an area that, according to Healthgrades, has over 1,275 dermatologists, and extend throughout the northeast corridor of the U.S. Following the completion of this offering, we anticipate placing additional direct sales representatives in other regions of the U.S. as required to meet demand in those regions. Currently we support other regions of the U.S. from our headquarters in Rochester, New York.

Other Potential Clinical Applications of Our Platform Technologies

        We believe that our VivaScope confocal imaging technology and our VivaNet telepathology system are platform technologies that potentially have applicability in clinical applications beyond the early detection and diagnosis of skin cancer. These may include the early detection of oral cancer as well as the rapid screening of breast cancer. Publications describing case studies and smaller single-site pilot studies related to VivaScope imaging of oral tissue and breast tissue have appeared in peer reviewed medical literature and indicate the potential application of our technology in these clinical applications. A manuscript describing exploratory studies of imaging of gynecological tissue using our VivaScopes is pending publication and may point the way toward clinical applications of our imaging technology for gynecological cancers.

        Peer reviewed papers evaluating use of the VivaScope 1500 for the early detection of neuropathy have also been published in peer-reviewed medical journals. Neuropathy is a common side effect of diseases such as diabetes and HIV infection, and may occur during the treatment of cancers with chemotherapy. A small single-site, pilot clinical study at the University of Rochester Medical Center indicated that our VivaScope confocal imaging technology may be used in the early detection of neuropathy prior to the onset of clinically detectable symptoms. Peripheral neuropathy in diabetics may lead to blisters and sores on numb areas of the foot, because pressure or injury go unnoticed on these

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areas. If foot injuries are not treated promptly, infection may potentially spread to the bone, and the foot may then have to be amputated. Some experts estimate that half of all such amputations are preventable if minor problems are caught and treated in time.

        Our VivaScope 2500 is designed to use our confocal imaging technology to image excised tissue samples without the laborious tissue preparation procedures required to prepare the microscope slides used in conventional pathologic examination of tissue. We are initially targeting the dermatological Mohs surgery procedure as the first application of this device in clinical practice. Publications describing early clinical studies of this application of confocal imaging have appeared in peer reviewed medical journals. We believe these early clinical studies may point the way toward potentially broad applications of VivaScope confocal imaging in place of the traditional tissue preparation procedures associated with conventional pathological diagnosis.

        VivaNet, in addition to being a telepathology system, is also a HIPAA-compliant medical records system that provides a method to organize digital clinical, dermoscopy and VivaScope images in a searchable medical database. In our initial markets of dermatology and pathology, which have traditionally relied on paper charts, discrete photographs, microscope slides and paper diagnostic reports as documentation, we believe that these practices would benefit from a switch to a digital record system, coupled with an ability to quickly retrieve a complete patient history over VivaNet. The benefits of electronic medical records are not unique to dermatology and pathology, however, and could translate to the other clinical applications described in this section.

        Should we decide to pursue any of these other clinical applications of our platform VivaScope imaging, it may be necessary to conduct further research and development activities, substantial engineering efforts to modify our products for these clinical applications, larger clinical studies and applications for additional FDA clearances.

Scientific Advisory Board

        We are in the process of forming a Scientific Advisory Board (SAB) to: assist us in the medical education programs; advise us in the design of future products; help us design Company-initiated clinical studies; and assist us in evaluation of external investigator proposed studies. We anticipate the committee will initially be comprised of five to six key opinion leaders from the fields of dermatopathology, dermatology, and statistical design of clinical studies. We may ask key opinion leaders from fields other than dermatopathology and dermatology to participate in the activities of the SAB on an ad hoc basis, if and when we expand the scope our activities into other clinical specialities.

        An internationally recognized expert in dermatopatholoy, who specializes in pigmented lesions, lymphoma, and cutaneous inflammatory diseases, has agreed to Chair the SAB. He heads two prestigious programs of the World Health Organization (WHO) and has co-authored numerous articles and several books concerning skin pathology.

        Currently we are working with the Chariman of the SAB to write its charter and establish its membership and believe these founding activities will be completed within the next few months. We intend to have consulting agreements with each SAB member which will include customary compensation and confidentiality clauses. We expect the SAB will meet two to four times a year, with at least one meeting per year on a face-to-face basis at a convenient time and location for the SAB members.

Competition

        We are aware that a significant number of systems for visualization and assessment of skin lesions are either in development or in use, and may pose significant competition with our VivaScope confocal imagers and VivaNet telepathology server technologies. These other skin imaging systems generally fall

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into one of four basic categories: (i) Adjuncts to current dermatologic examination; (ii) FDA cleared devices; (iii) Pre-FDA clearance devices; and (iv) Nascent technologies. We do not believe that these systems have the ability of our VivaScope confocal imagers to achieve the cellular resolution of the skin required to achieve definitive pathologic diagnosis of tissue.

        Adjuncts to Current Dermatologic Examination.    In the United States, the current standard of care for melanoma and other skin cancer detection and clinical diagnosis relies on the skill and vision of physicians to decide, based on unaided clinical examination, whether a particular skin lesion is suspicious enough to warrant an invasive biopsy. For melanoma, a majority of physicians in the U.S. use a variant of the "ABCDE" criteria to make this critical clinical decision. Data from a recent clinical study indicates that the sensitivity and specificity of a physician relying of visual examination of a lesion to determine whether it is malignant is in the range of 78.0% sensitivity and 3.7% specificity (Monheit, et al., "The Performance of MelaFind" Arch Dermatol. 2011 Feb;147(2):188-94.). This means that, on average, a dermatologist will miss 22 out of 100 melanomas and will biopsy approximately 27 benign lesions for each melanoma found.

        In order to improve their clinical diagnostic accuracy, dermatologists may use either clinical photography or dermoscopy to supplement unaided visual examination of lesions. Clinical photography provides a means to identify those lesions that have changed from one examination to the next, i.e., the "E" (Evolution) of the ABCDE criteria. Clinical photography may be performed in the dermatologist's office or using services are provided by companies such as Canfield Scientific Imaging and DigitalDerm, Inc. Dermoscopy is a non-invasive technique that provides a magnified image of the skin's surface using a device known as a dermatoscope. A basic dermatoscope may be little more than an illuminated magnifying glass, or may be a digital camera that provides magnified electronic images of the skin that can be viewed on a LCD display and stored for future reference. Basic dermatoscopes are sold by numerous companies, including, among others, 3Gen, LLC (U.S.), Welch Allyn, Inc. (U.S.), and Heine Optotechnik (Germany), to name a few. Digital dermatoscopes have been designed and sold by numerous companies, including, among others, Derma Medical Systems, Inc. (Australia), Biomips Engineering (Italy). VisioMed AG (Germany), FotoFinder Systems GmbH (Germany) and BIOCAM GmbH (Germany).

        FDA Cleared Devices.    We are aware of two FDA cleared devices that may potentially compete with our technology. One is the SIAscope developed by Astron Clinica of the UK, now operating as a business unit of Biocompatibles International. The SIAscope has 510(k) clearance from the FDA, but the FDA cleared "Indications for Use" for the SIAscope do not state that it is intended to be used by physicians for diagnosis or determination of any clinical condition.

        Michelson Diagnostics is headquartered in England and manufactures the VivoSight, an optical coherence tomography device that achieved FDA 510(k) clearance in late 2009. The VivoSight is currently not capable of resolving individual cells or visualizing intercellular details, both of which are necessary for the device to be useful for the diagnosis of melanoma and NMSCs. The FDA 510(k) Indications for Use cover the "two-dimensional, cross-sectional, real-time imaging of external tissues of the human body." The Indications for Use do not indicate use in diagnosis.

        Pre-FDA Clearance Devices.    SciBase AB is a Swedish medical technology company that is developing a device known as the SciBase Electrical Impedance Spectrometer, or "SEIS". The company contends that the SEIS screening device can determine whether a mole is malignant. The SEIS is documented in seven published smaller clinical studies and over 1000 patients are currently being enrolled in a large ongoing clinical study of the technology. The SEIS product does not have FDA clearance for sale in the United States.

        MELA Sciences is a U.S. public company (Nasdaq: MELA, previously Electro-Optical Sciences) headquartered in Irvington, New York and developing MelaFind®, which uses multispectral dermoscopy

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and computerized diagnostic algorithms for the detection of melanoma. MELA Sciences has conducted a large pivotal clinical study of its MelaFind® device and the FDA held a panel meeting on November 18, 2010 to review its assessment of the device and to hear the comments of a panel of independent physicians (primarily dermatologists) regarding the pivotal clinical study results and the device itself. The panel voted narrowly in favor of the device (8 for, 7 opposed) on the critical question of safety and efficacy, and indicated that dermatologists need better tools for the evaluation of lesions suspicious of melanoma. As of this date the FDA has yet to make its final determination of whether MelaFind® will gain market clearance from the agency.

        Nascent Technologies.    Verisante Technology, Inc. is a Canadian public company traded on the Toronto Venture Exchange (V.VRS, previously T-Ray Science, Inc.—V.THZ), and is headquartered in Vancouver, British Columbia. The company is developing Raman Spectroscopy for the early detection of melanoma and other skin cancers under license from the British Columbia Cancer Agency. The company is currently developing the initial prototype of its device "Aura" which they expect to introduce first in Canada, Europe, and Australia and eventually in the U.S. once it achieves the required regulatory approvals in those regions and countries.

        Other nascent imaging modalities and diagnostic techniques for the early detection of skin cancers either exist or are under development. These include various molecular, genetic and proteomic screening tests. For example, Dermtech is exploring tape stripping of the stratum corneum of the skin as a means to gather RNA for analysis of melanoma cells that have migrated to the surface of the skin. Molecular imaging techniques that use fluorescent or other tags on antibodies to identify cancerous cells are also under investigation. Balter medical is developing optical transfer diagnosis as a means of assessing tissue for malignancy. Information on Balter's web site indicates that this technology is in an early stage of development. LL Tech, Inc. is an early stage French company that develops cellular imaging scanners for research and clinical applications based on optical coherence tomography (OCT) technology.

        Other Potential Competitors.    The market for optical imaging devices used for medical diagnosis is intensely competitive and subject to rapid change. It is significantly affected by new product introductions, the market activities of existing industry participants and acquisitions of smaller medical device companies by larger players in the medical diagnostics marketplace. As we launch our VivaNet into the U.S. clinical dermatology market, we can expect competition from major medical imaging companies, such as General Electric Co., Siemens, Phillips Healthcare, Bayer Diagnostics, Olympus Corporation, Carl Zeiss AG and others, each of which manufactures and markets precision medical diagnostic products and could decide to develop or acquire a product or products to compete with our VivaScope confocal imagers. In addition, the telepathology market is intensely competitive and any of the numerous companies are in the teleradiology and telepathology markets and may decide to offer products and services that are competitive to our VivaNet telepathology system. Companies active in this space include, among others, General Electric Co., Siemens AG, Philips Healthcare, and Virtual Radiologic Corporation, and Apollo Telemedicine.

Manufacturing

        Our in-house manufacturing process is largely an assembly-and-test process that operates under the standardized procedures of our quality system. Piece parts such as mechanically machined components, populated circuit boards, precision optical components and electro-mechanical optical scanning devices are purchased from suppliers to either our custom specifications or the standard specifications of the supplier. We also purchase computers, LCD displays and medical grade equipment carts which are integrated into our completed VivaScope Systems. The application software for our VivaScopes is written by our in-house software staff and runs under the Windows XP operating system. We have manufactured all generations of our VivaScope products since their inception, corresponding to over 300 devices shipped.

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        Generally we single source our component purchases to suppliers with which we have had a long term relationship. In the event these suppliers are unable to deliver parts we generally have back-up suppliers established. A few of our VivaScope components are from sole source suppliers, which means we are purchasing a unique component from them that is not available from other suppliers. As we design future generations of VivaScopes, it our intention to eliminate these specialized sole sourced components designs whenever possible.

Research and Development

        Our current technical research and development efforts are primarily focused on: (i) the product enhancements of our VivaNet software, as requested by the physicians using the system; (ii) the ongoing simplification of our VivaScope products for use in clinical practice; and (iii) the ongoing continuous improvements of the products to enhance manufacturability and product quality. To date, physician requests for VivaNet software enhancements have included the addition of clinical photography to the imaging procedure and enhanced database search capability for locating records based on parameters such as lesion diagnosis, diagnostic criteria in the various images, and other parameters over and above those routinely used to recall an individual patient's medical history. We also improve the software by implementing changes requested by physicians to improve their efficiency in use of the system. Throughout 2011 and following the completion of this offering, our software and hardware development activities will be primarily focused in support of the roll-out of VivaNet into commercial private and academic medical center clinical practice.

        We recently completed development and began manufacturing and selling a smaller, more functional version of our handheld VivaScope 3000. The initial version of the Vivascope 3000, the world's first handheld reflectance confocal microscope, resulted in substantial feedback from customers and clinical investigators regarding its features and operation. Based on this feedback we designed and built the second generation VivaScope 3000 which is smaller, lighter and more functional than the original device, while retaining the same image quality in a more clinically acceptable configuration. Shipments of this product began in the fourth quarter of 2010. We believe that the basic configuration of this second generation will be a platform from which other medical applications beyond skin cancer may be addressed.

        Our technical R&D plan also includes routine hardware product improvements and further software development that are generally driven by customer feedback. These items include activities such as the development of more clinically and environmentally acceptable disposables, enhanced VivaScope application software with features honed for use by private practice dermatologists and VivaNet diagnostic workstation features that will enhance the efficiency of pathologists for analyzing images and reporting their interpretations.

        We have applied for and received six Small Business Innovation Research (SBIR) and Small Business Technology Transfer (STTR) research grants from the United States National Cancer Institute (NCI). The funds from these grants have been used to augment our own internal product development and clinical studies funds. A summary of these NCI-funded SBIR and STTR research activities is detailed below:

        1.     A completed Phase I/Phase II project 5R44CA58954-03 "Confocal Imaging Through Thick Dermal Tissue."

        2.     A completed Phase I project 1R43CA60342-01 "Computer Based Video Imaging of Pigmented Skin Lesions."

        3.     A completed Phase I project 1R43CA093106-01 "Hand-held confocal microscope for clinical/surgical use."

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        4.     A completed Phase II project 2R44CA93106-02 "Hand-held confocal line-scanner for intrasurgical use."

        5.     A funded SBIR Phase II competing continuation STTR project 1R42-CA110226-01 "In-vivo clinical coherence confocal microscope." *This project remains in process

        6.     A funded SBIR Phase II competing continuation project 2R44CA059054-04 "Accuracy of confocal imaging for pigmented lesion diagnosis." *This project remains in process

        Our engineering, research, and development expenses for the years ended December 31, 2010 and 2009 were $685,710 and $756,199, respectively.

Regulation

        FDA Regulation of Medical Devices.    Our VivaScope and VivaNet products are considered medical devices and thus are subject to regulation by the FDA. The Food, Drug, and Cosmetic Act, or "FD&C Act", and other federal and state statutes and regulations govern the research, design, development, preclinical and clinical testing, manufacturing, safety, approval or clearance, labeling, packaging, storage, record keeping, servicing, promotion, import and export, and distribution of medical devices. Generally, each medical device we currently distribute in the U.S., or plan to distribute in the future, requires either: (i) formal exemption; (ii) prior premarket notification; (iii) 510(k) clearance; or (iv) PMA (premarket approval) from the FDA. The FDA classifies medical devices into one of three classes. Devices that are deemed to pose low risk are placed in Class I or II and as such, require fewer controls. Some Class I and certain Class II devices are exempted by regulation from the premarket notification, or 510(k), clearance requirement or the requirement of compliance with certain provisions of the FDA's Quality System Regulation, or "QSR".

        The FDA cleared our 510(k) application for our VivaScope System (i.e., either our VivaScope 1500 or VivaScope 3000) as a Class II device on September 17, 2008. Our VivaNet telepathology server is registered with the FDA as a Class I device. We believe these FDA clearances for our VivaScope Systems and VivaNet are sufficient for us to pursue our business strategy for the foreseeable future. Future products may require additional FDA clearances and may also involve clinical trials to demonstrate whether they are safe and effective for their indicated medical applications.

        Our ex-vivo imager, the VivaScope 2500 is registered with the FDA as a Class I device and is in the same FDA Class and category as conventional medical microscopes used by pathologists to view microscope slides of human tissue. We believe this FDA classification is sufficient for our current development, marketing and sales programs for the VivaScope 2500.

        FDA Regulations of Clinical Trials.    Clinical trials may be required for a 510(k) clearance and are nearly always required to support a PMA application. We currently have no plans to conduct additional clinical trials of our current products for the purpose of additional FDA regulatory clearances or for changes in the indications for use of our existing products, however clinical trials may be required should we decide to pursue new clinical applications of our existing devices or decide to develop new devices for either existing or new clinical applications.

        In the event we are required to conduct clinical trials for the purpose of supporting a 510(k) clearance or a PMA applications those trials must comply with the FDA's regulations governing the performance of clinical research, and these regulations may pose considerable hurdles in the clearance process. For example, the clinical research must comply with the requirements for IRB (Institutional Review Board) approval and for informed consent of patients enrolled in clinical trials. Records and reports for the clinical trial are subject to inspection by the FDA. The results of clinical testing may be unfavorable, in which case market clearance will be denied. Even if the intended safety and effectiveness success criteria are achieved, the FDA may not consider the data to be adequate and the approval or clearance of a product may be denied. The commencement or completion of a clinical trial

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may be delayed or halted, or be inadequate to support approval of a 510(k) clearance or PMA application, for numerous reasons, including (but not limited to): 1) the clinical trial protocol is not approved by the FDA or an IRB or is delayed by these bodies; 2) patients do not enroll in sufficient numbers or do not follow-up; 3) patients experience adverse events; 4) physicians decline to participate in the trial or do not comply with trial protocols or experience delays in performing the protocol; 5) third-party organizations do not perform data collection and analysis in a timely or accurate manner; 6) regulatory inspections of our clinical trial sites or our manufacturing facilities may require corrective actions or may suspend, terminate or invalidate our clinical trials; and 7) the results of the clinical trial may be unfavorable or inconclusive with respect to safety or effectiveness.

        A clinical trial may not generate data that supports the 510(k) or PMA application, and approval may be delayed, if obtained at all. Delays in receipt of approvals for future products or the failure to receive such approvals, the withdrawal of previously received approvals, or failure to comply with existing or future regulatory requirements would have a material adverse effect on our business, results of operations and financial condition. Approvals, if granted, may include significant limitations on the intended use and indications for use for which a product may be marketed.

        Devices that are approved or cleared and placed in commercial distribution are subject to numerous regulatory requirements, including: 1) establishment registration and device listing; 2) QSR, a FDA requirement that manufacturers follow design, testing, control, documentation and other quality assurance procedures; 3) labeling regulations that impose labeling restrictions and prohibit the promotion of products for unapproved or "off-label" uses; 4) medical device reporting regulations that require reporting to the FDA if a device caused or contributed to a death or serious injury or malfunctioned so as to cause or contribute to a death or serious injury if the malfunction were to recur; and 5) corrections and removal reporting regulations that require manufacturers to report field corrections and product recalls or removals undertaken to reduce risk to health by the device or to correct a FD&C violation that presents a risk to health. Also, the FDA may require postmarket surveillance studies or establishment and maintenance of a system for tracking products through the distribution channel to the patient level.

        Failure to comply with applicable regulatory requirements, including those applicable to the conduct of clinical trials, can result in enforcement action by the FDA, which may lead to any of the following sanctions: 1) warning letters; 2) fines and civil penalties resulting in unanticipated expenditures; 3) approval delays or refusal to approve our applications, including supplements; 4) withdrawal of FDA approval; 5) product recall or seizure; 6) interruption of production; 7) operating restrictions; 8) injunctions; and 9) criminal prosecution.

        We, and some of the suppliers of components used in our products, are also required to manufacture in compliance with current Good Manufacturing Practices (cGMP) requirements set forth in the QSR. The QSR requires a quality system for the design, manufacture, packaging, labeling, storage, installation and servicing of marketed devices, and includes extensive requirements with respect to quality management and organization, device design, equipment, purchase and handling of components, production and process controls, packaging and labeling controls, device evaluation, distribution, installation, complaint handling, servicing, and record keeping.

        The FDA enforces the QSR through periodic unannounced surveillance inspections. Our manufacturing facility has been and will continue to be subject to domestic and international regulatory inspection and review. If the FDA determines in its sole discretion that we or any of our regulated suppliers are non-compliant with these requirements, it can shut down our manufacturing operations, require recall of our devices, refuse to approve new marketing applications, institute legal proceedings to detain or seize products, or assess civil and criminal penalties against our Company or our officers, or other employees. Any such action by the FDA would have a material adverse effect on our business. We cannot assure you that we will be able to comply with all applicable FDA regulations.

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        International Medical Device Regulation.    International sales of medical devices are subject to foreign government regulations that vary substantially from country to country. Some countries have little to no regulation whereas other countries have a premarket notice or premarket acceptance similar to the FDA. The time required to obtain approval in a foreign country may be either shorter or longer than that required for FDA approval, and the requirements for approval may differ. There is a trend towards harmonization of quality system standards among the European Union, U.S., Canada and various other industrialized countries.

        The EU has adopted numerous directives and standards regulating the design, manufacture, clinical trials, labeling and adverse event reporting for medical devices. Devices that comply with the requirements of a relevant directive will be entitled to bear the CE conformity marking, indicating that the device conforms to the essential requirements of the applicable directives and, accordingly, can be commercially distributed throughout Europe. Our VivaScope 1500 and VivaScope 3000 are entitled to bear the CE mark for distribution as medical devices in the EU.

        One aspect of CE compliance is that manufacturers are required to comply with the ISO 9000 series of standards for quality operations (an international standard for quality management requirements maintained by the International Organization for Standardization (ISO)). The method of assessing conformity to EU regulations varies depending on the class of the product. Generally conformance involves self-assessment by the manufacturer and third party assessment by a "Notified Body." This third party assessment may consist of an audit of the manufacturer's quality system and specific testing of the manufacturer's product. An assessment by a Notified Body of one country within the European Union is required in order for a manufacturer to commercially distribute the product throughout the European Union. In order to meet this requirement, our quality system, device designs and manufacturing facilities are assessed annually by GMED North America, a certified EU Notified Body.

        Several other countries, such as Switzerland, have voluntarily adopted laws and regulations that mirror those of the European Union with respect to medical devices. Outside of the European Union, regulatory approval needs to be sought on a country-by-country basis in order for us to market our products. In this regard, we have obtained regulatory approval to market our VivaScope 1500 in Canada through its Health Canada Administration, in Australia through its Therapeutic Goods Administration and China through its State Food and Drug Administration

        Other Government Regulation.    The advertising of our medical devices is, and will continue to be subject to both FDA and Federal Trade Commission regulations. In addition, the sale and marketing of our medical devices is subject to complex federal and state laws and regulations generally intended to deter, detect, and respond to fraud and abuse in the healthcare system. These laws and regulations often restrict or prohibit pricing, discounting, commissions and other commercial practices are typical outside of the healthcare market.

        In particular, anti-kickback and self-referral laws and regulations limit our promotional programs and financial arrangements related to the sale of our products and related services to physicians seeking reimbursement from Medicare, Medicaid, private insurers or patients.

        The Civil False Claims Act and the Civil Monetary Penalties Law are similar in nature in that they both address fraud in the healthcare system. The Civil False Claims Act prohibits any person from knowingly presenting or causing to be presented false or fraudulent claims for payment by the federal government, including the Medicare and Medicaid programs.

        Sanctions for violating the above federal laws include criminal and civil penalties ranging from punitive sanctions, damage assessments, money penalties, imprisonment, denial of Medicare and Medicaid payments, or exclusion from the Medicare and Medicaid programs, or both.

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        Many states have adopted laws or have pending legislative proposals similar to the federal fraud and abuse laws, some of which prohibit the payment or receipt of remuneration for the referral of patients and physician self-referrals regardless of whether the service was reimbursed by Medicare or Medicaid. Many states have also adopted laws or are considering legislation to increase patient protections, such as limiting the use and disclosure of patient-specific health information. These state laws typically impose criminal and civil penalties similar to the federal laws.

        In the ordinary course of business, medical device manufacturers and suppliers are subject to routine inquiries, investigations and audits by federal and state agencies overseeing these laws and regulations. Recent federal and state legislation has increased funding for investigations and enforcement actions, causing these actions to increase over the past several years, a trend that is expected to continue.

        Private enforcement of healthcare fraud is also increasing, due in part to amendments to the Civil False Claims Act in 1986. These amendments encourage private persons to sue on behalf of the government. The Health Insurance Portability and Accountability Act of 1996 (HIPAA), in addition to its privacy provisions, created a series of new healthcare-related crimes.

        Environmental Regulation.    Our research and development and clinical processes may involve the handling of potentially harmful biological materials as well as hazardous materials. We and our investigators and vendors are subject to federal, state and local laws and regulations governing the use, handling, storage and disposal of hazardous and biological materials and we incur expenses relating to compliance with these laws and regulations. If violations of environmental, health and safety laws occur, we could be held liable for damages, penalties and costs of remedial actions. These expenses or this liability could have a significant negative impact on our financial condition. We may violate environmental, health and safety laws in the future as a result of human error, equipment failure or other causes. Environmental laws could become more stringent over time, imposing greater compliance costs and increasing risks and penalties associated with violations.. Changes to or restrictions on permitting requirements or processes, hazardous or biological material storage or handling might require an unplanned capital investment or relocation.

        Reimbursement.    We have analyzed the coverage and applicability of existing American Medical Association reimbursement codes (i.e. "CPT codes" or Current Procedural Terminology codes) with our reimbursement counsel. From this analysis we believe that third party reimbursement for our telepathology services should be available under existing CPT codes for: 1) a substantial portion of the VivaScope imaging procedure performed in a dermatology office; 2) pathologists reading VivaScope images; and 3) the services we provide to pathologists via our VivaNet telepathology system. We have recently initiated a project with an experienced reimbursement consulting firm which will contact and work with the medical directors of third party private payors to achieve positive coverage decisions and thus routine reimbursement for dermatologist performing the three steps of the VivaNet diagnostic process immediately outlined above. A similar project has been initiated with a second reimbursement firm to assist us in achieving positive coverage decisions from the Center for Medicare and Medicaid Services.

Product Liability and Insurance

        Our business exposes us to the risks of product liability claims that are inherent in the testing, manufacturing and marketing of medical devices, including those which may arise from design flaws or the misuse or malfunction of our products. We may be subject to product liability claims if any one of our products causes or appears to have caused an injury. Claims may be made by patients, healthcare providers or others using our medical devices.

        We do not maintain domestic or international clinical trial liability insurance because we do not directly run clinical trials, nor are they performed at our facility. Although we have general and product

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liability insurance that we believe is appropriate, this insurance is and will be subject to deductibles and coverage limitations. Our anticipated product liability insurance may not be available to us in sufficient amounts and on acceptable terms, if at all, and, if available, the coverage may not be adequate to protect us against any future product liability claims. If we are unable to obtain insurance at an acceptable cost or on acceptable terms with adequate coverage or otherwise protect against potential product liability claims, we will be exposed to significant liabilities, which may harm our business.

Employees

        As of March 31, 2011, we had 27 full-time employees and one part-time technical consultant. Seven of our employees were engaged in product and software research, development and IP, three in clinical and regulatory affairs, four in production, five in marketing and sales and eight in administrative activities. We believe that our relationship with our employees is good.

Facility

        We lease approximately 12,450 square feet of office, laboratory, and assembly space in the same building as our principal executive offices. The lease expires in February 2012. We believe that this facility is adequate to meet our current and reasonably foreseeable requirements. We believe that we will be able to obtain additional space, if required, on commercially reasonable terms.

Litigation

        We are not currently subject to any material legal proceedings, nor, to our knowledge, is any material legal proceeding threatened against us. From time to time, we may be a party to certain legal proceedings, incidental to the normal course of our business. While the outcome of these legal proceedings cannot be predicted with certainty, we do not expect that these proceedings will have a material effect upon our financial condition or results of operations.

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Management

Directors and Executive Officers

        The following tables set forth the names, ages as of March 31, 2011 and a brief account of the business experience of each person who is a current executive officer or director of our Company. Each director of our Company will hold office until the next annual meeting of shareholders of our Company or until his or her successor has been elected and qualified.

        The directors of Lucid are as follows:

Name
  Age   Position

William J. Shea

    63   Executive Chairman of the Board(4)

Jay M. Eastman, Ph.D. 

    62   Director and Chief Executive Officer

Brian Carty*(1),(3)

    61   Director

Nancy E. Catarisano*(3)

    49   Director

Matthew Cox*(2)

    41   Director

L. Michael Hone

    61   Director and Executive Vice President—VivaNet®

David Lovenheim

    68   Director

Rocco Maggiotto*(1),(3)

    60   Director

Ruben King-Shaw, Jr.*(2)

    49   Director

Ramey W. Tomson*(1),(2)

    64   Director

        Lucid's executive officers (in addition to those directors who also are executive officers as noted above) and other key personnel are as follows:

Name
  Age   Position

Marcy K. Davis-McHugh

    48   Chief Operating Officer and Corporate Vice President

William J. Fox

    45   Vice President of Technical Operations and Chief Technical Officer

Martin J. Joyce

    57   Chief Financial Officer

Karen A. Long

    34   Controller

*
Independent Director, as determined by the Board of Directors in accordance with Nasdaq marketplace rules

(1)
Member of Executive Compensation Committee

(2)
Member of Governance and Nominating Committee

(3)
Member of Audit Committee

(4)
Until March 15, 2011, Mr. Shea also served as our Acting Chief Financial Officer.

Directors, Executive Officers and Other Key Personnel

        William J. Shea, Executive Chairman, Board of Directors.    Mr. Shea was elected to the Board in 2001, and in December 2010, he was appointed our Executive Chairman. He has more than 35 years of experience in the financial services industry. Mr. Shea co-founded DLB Capital in October of 2006, a private equity firm, which he left in October of 2007. From 2005 to 2006, he served as Chairman of Royal & Sun Alliance, USA, and oversaw its divestiture from RSA, an insurance company headquartered in the United Kingdom which trades on the London Stock Exchange. From 2001 to 2004, he was Chief Executive Officer of Conseco, Inc. a public financial services firm which he guided through the bankruptcy and restructuring process, and which was subsequently relisted on the New York Stock Exchange. From 1997 to 2001, he oversaw the turnaround of Centennial Technologies, Inc.,

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a public manufacturing company. Mr. Shea formerly served as vice chair and chief financial officer of BankBoston, a public financial services company, from 1993 to 1998, and he was the vice chairman of Coopers & Lybrand, a national public accounting firm which has since merged with another entity, from 1990 to 1992. Mr. Shea is currently on the boards of Nasdaq OMX BX, Inc., a securities exchange, AIG SunAmerica, a financial services company, Boston Private Financial Holdings, a public financial services holding company, and he is Chairman of the Board of DemoulasSuperMarkets. Mr. Shea also previously served on the boards of the Boston Children's Hospital and Northeastern University.

        Jay M. Eastman, Ph.D., Director and Chief Executive Officer.    Dr. Eastman has served as a director and our chief executive officer since its founding in 1991. Since 1993, Dr. Eastman has served on the board of Arotech Corp., a public company which manufactures defense and security products, and since 1994, he has been a member of the board of directors Dimension Technologies, Inc., a manufacturer of three-dimensional displays. Dr. Eastman has been a member of the board of Chapman Instruments, Inc., a manufacturer of precision surface metrology instruments, since 2009. From 1986 to 1997, Dr. Eastman was an executive vice president and senior vice president of strategic planning for PSC, Inc., a public barcode laser scanner manufacturer. Dr. Eastman served on PSC's board of directors from April 1996 through November 2002, during which time the company filed for bankruptcy protection. He holds, as inventor or co-inventor, 44 patents. Dr. Eastman has been a fellow of the Optical Society of America, or OSA, and the Society of Photo-Optical Instrumentation Engineers, or SPIE, as well as an honorary member of the Rochester Engineering Society.

        Brian Carty, Director.    Mr. Carty was elected to the Board in 2008, and has served as the Chief Marketing Officer of Caritas Christi Health Care since 2008. From 2006 to 2008, he headed his marketing consulting firm, MLM Ventures. Mr. Carty has been President of three advertising agencies, including Wheelhouse in Boston and Hill Holiday in New York, positions that spanned the period from 1995 to 2006. During this period, he oversaw all global merger and post-merger marketing and communications activities for the combination of Price Waterhouse and Coopers & Lybrand which formed the world's largest professional services firm. Prior to that Mr. Carty served as partner and Chief of Staff to the Chairman of Coopers & Lybrand, and also served as head of world-wide marketing for the firm.

        Nancy E. Catarisano, Director.    Ms. Catarisano was elected to the Board in March 2011. She currently is Partner and Chief Operating Officer of Insero and Company, a certified public accounting firm in Rochester, New York, and also heads the Outsource Accounting Services Group for Insero which provides accounting and advisory services to early stage, developing high tech, and established businesses. Prior to joining Insero and Company as a Partner in 1999, Ms. Catarisano founded Ciaccia & Catarisano LLP, a public accounting firm that focused on high technology and growing privately held businesses. Ms. Catarisano is a Certified Public Accountant. She is a member of the American Institute of Certified Public Accountants and the New York Society of Certified Public Accountants. Ms. Catarisano has served as Chair of the Board, Finance/Audit and Consumer Service Committees of CP Rochester and as Chair of the Finance/Audit Committee of the Rochester Area Community Foundation. She has also been on various committees for National Center for Missing and Exploited Children and a member of the Board of Directors for Marrow Drive Rochester.

        Matthew Cox, Director.    Mr. Cox was elected to the Board in October 2010. Since 2007, he has served as Vice President of Product Management at Virtual Radiologics and, since 2009, he has also served as Vice President of vRad Alliance at Virtual Radiologics, with the responsibility for company strategy and business development initiatives. From 1999 to 2000, he was an administrator for Duke University Health System and a practice management/accounting consultant, assisting physicians and practices with maximizing performance in operations, revenue growth and billing/compliance related issues.

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        L. Michael Hone, Director and Executive Vice President, VivaNet Operations.    Mr. Hone was elected to the Board in 2002. He joined Lucid as Executive Vice President in 2011 and is charged with corporate strategic planning to support the adoption of Lucid's technology into private dermatology and dermatopathology practices. From June 2008 through August 2010, Mr. Hone served as President, Chief Executive Officer and as a director of American Aerogel. From 2006 through 2008, he was a consultant for Tempus Partners, a business consulting firm of which he was the sole owner. From 2001 to 2005, Mr. Hone served as President and Chief Operating Officer of Conseco, Inc. during which time he helped guide this financial services firm through the bankruptcy and restructuring process, resulting in its relisting on the New York Stock Exchange. He also served as President and CEO of Centennial Technologies, a manufacturer of digital memory that has since been acquired by another entity, and President, Chief Executive Officer, and Chairman of PSC, Inc., an Auto ID manufacturer of digital memory; both were public companies traded on Nasdaq. Mr. Hone is a named inventor or co-inventor on seven patents. Mr. Hone also serves as director for Chairman's View, Inc., in Boston, Massachusetts, and as Chairman of the Board of Trustees at the Killington Mountain School, Killington, Vermont.

        David A. Lovenheim, Director.    Mr. Lovenheim was elected to the Board in 1993, and he has been the managing director of Keystones Global, LLC, a national consulting firm based in Virginia that works with entrepreneurial businesses, including the Company, since 2007. He also serves as the managing director of Esplanade Ventures and has served in executive capacities when called upon for Esplanade's portfolio companies. One of these assignments was as a turn-around executive of Waste Reduction by Waste Reduction, Inc., a manufacturer-marketer of bio-hazardous waste remediation equipment in Indianapolis, Indiana, from 2002-2006. Mr. Lovenheim served as an executive officer and director of that company when it filed its petition in bankruptcy. Mr. Lovenheim was a partner of the law firm Harris Beach PLLC from 1979-2002 where he concentrated on corporate legal issues of entrepreneurial technology firms. From 1967-1978 he served as chief of staff for U.S. Congressman Frank J. Horton. Since 1982, Mr. Lovenheim has served on the boards of directors of more than 40 technology companies in North America and Europe, including some in the imaging and medical device industries.

        Rocco Maggiotto, Director.    Mr. Maggiotto was elected to the Board in February 2011. In December 2010, he retired as Executive Vice President and Global Head of Customer and Distribution Management for Zurich Financial's General Insurance Business, a position he held since 2006. Prior to joining Zurich, Mr. Maggiotto was a Senior Executive Advisor at Booz Allen Hamilton, Chairman of Client Development for the Parent Company of Marsh & McLennan Companies, Inc., a Senior Partner for PricewaterhouseCoopers and Vice Chairman for the former Coopers & Lybrand, a Managing Partner of their New York region, and Chairman of their worldwide financial services industry practice. He is on the Boards of the Ronald McDonald House of New York, The Weston Playhouse Theatre Company, and the Spenser Foundation.

        Ruben King-Shaw, Jr., Director.    Mr. King-Shaw was elected to the Board in December 2010. Since 2004, he has served as the chief executive officer of Mansa Equity Partners, Inc., a private equity and investment advisory firm specializing in supporting the growth of healthcare companies. He currently serves on the Obama administration's Medicare's Program Advisory and Oversight Commission, and he has been a member of the Executive Committee of the Board of Steward Health, LLC since November 2010, and the Lead Director of athenahealth, Inc., a public health services company, since 2004. From 2001 to 2003, Mr. King-Shaw served as Chief Operating Officer and Deputy Administrator of the Centers for Medicare and Medicaid Service and prior to public service, had 20 years of operating and executive experience in various health care service organizations.

        Ramey W. Tomson, Director.    Ms. Tomson was elected to the Board in 1994. She is the wife of the late Dr. Steven H. Tomson, co-founder of Lucid. Ms. Tomson maintains an active interest in Lucid to support her husband's vision for the Company. She is an early childhood education specialist, having

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worked in that field for the past 35 years. She is also an Orton-Gillingham certified tutor for children with dyslexia.

        Marcy K. Davis-McHugh, Corporate Vice President and Chief Operating Officer.    Ms. Davis-McHugh is responsible for the business operations at Lucid and also serves as our Corporate Secretary and as a director of Lucid's U.K. subsidiary, Lucid International Limited. With Lucid since 1995, she has also held positions in marketing and sales.

        William J. Fox, Vice President of Technology Operations and Chief Technology Officer.    Mr. Fox is responsible for Lucid's engineering and manufacturing operations. He joined our Company in 1999, serving as engineering manager until his promotion to his current position in 2005. Prior to joining our company in 1999, Mr. Fox previously held product engineering positions at Mitsui-Pathtek, Burron Medical, and Fisher Price. He currently manages teams that specialize in technologies such as video-rate confocal scanning laser microscopy and design/development of optics and electronic instrumentation. He holds inventor or coinventor patents in confocal imaging head design and optical examination of tissue, plus instrumentation design and methodology.

        Martin J. Joyce, Chief Financial Officer.    Mr. Joyce joined Lucid as Chief Financial Officer in March 2011. Previously he was Chief Financial Officer of BioSphere Medical, Inc., a publicly traded manufacturer and marketer of products for women's health and oncology, from 2004 through its acquisition by Merit Medical Systems, Inc. in 2010. From 2000 to 2004, Mr. Joyce served as Managing Partner of Stratex Group LLC, a provider of biopharmaceutical executive services to early stage companies and venture investors. From 1996 to 2000 he held a variety of senior-level positions in finance, sales, marketing and manufacturing at the biotechnology company Serono, Inc., ultimately serving as North American Chief Financial Officer. At Millipore Corporation, a bioscience company, and Bose Corporation, an audio equipment manufacturer, Mr. Joyce focused on strategic planning, product rationalization and return on investment analysis.

        Karen A. Long, Controller.    Ms. Long joined Lucid as Controller in June 2010, and primarily is responsible for all accounting functions, including ensuring compliance with financial and future SEC reporting requirements. Prior to joining Lucid, Ms. Long served as the Accounting Manager for Harbinger Group, Inc. (formerly Zapata Corporation) a publicly traded financial holding company, a position she held since 2000. Prior to Harbinger Group, she served as a senior accountant at Arthur Andersen LLP. Ms. Long is a Certified Public Accountant. Ms. Long is a member of the Finance Committee of a local nonprofit organization, the American Institute of Certified Public Accountants and the New York State Society of Certified Public Accountants.

Board of Directors Composition

        Our Board of Directors must consist of no less than three directors, provided that if all the shares are owned by fewer than three shareholders, the number of directors may be less than three, but not less than the number of shareholders. The number of directors is determined from time to time by resolution of a majority of the entire Board of Directors then in office, and the Board is currently composed of ten directors. At each annual meeting of stockholders, directors are elected to hold office until the next annual meeting. Directors are elected by a plurality of votes cast by shareholders. Holders of our series B preferred stock are entitled to elect one (1) director to our Board of Directors, and Mr. Hone is currently serving as the representative of the series B preferred stockholders on our Board of Directors.

Board Committees

        Our Board of Directors has established three standing committees: the Audit Committee, the Governance and Nominating Committee, and the Executive Compensation Committee. The members

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of each committee have been nominated by the Chairman of the Board of Directors and approved by the full Board. The names of the members of each committee, together with a brief description of each committee's function, is set forth below.

        Audit Committee.    The members of our audit committee are Nancy Catarisano (Chair), Brian Carty, and Rocco Maggiotto. The audit committee's primary duties and responsibilities are to:

    Oversee our accounting and financial reporting processes and the audit of our financial statements and to monitor the integrity our financial statements;

    Monitor the independence and qualifications of our independent auditor;

    Monitor the performance of our independent auditor and internal auditing department; and,

    Provide an avenue of communication among our independent auditor, management, the internal auditing department, and the Board of Directors.

        The Board of Directors has determined that Nancy Catarisano, Brian Carty, and Rocco Maggiotto each qualify as an "audit committee financial expert" as defined in Item 407(d) of Regulation S-K. Brian Carty and Rocco Maggiotto are currently "independent directors" as defined in the marketplace rules of the Nasdaq Stock Market, as well as applicable rules promulgated by the SEC related to the independence of audit committee members. The Nasdaq and SEC Rules, taken together, permit Ms. Catarisano a phase-in period following the effectiveness of the registration statement relating to this offering to satisfy the applicable independence criteria, and it is currently expected that she will do so on or prior to such date. The Board of Directors has adopted an Audit Committee Charter, which is available in the "Corporate Governance" section of the "Investor Relations" page included in our website at www.lucid-tech.com.

        Executive Compensation Committee.    The members of our Executive Compensation Committee are Brian Carty (Chair), Ramey Tomson, and Rocco Maggiotto. The primary function of the Executive Compensation Committee is to assist our Board of Directors in fulfilling its responsibilities in connection with the compensation our directors, officers and employees. It performs this function by:

    establishing and overseeing compensation programs, including both long term and short term incentive compensation plans for our employees;

    recommending to the Board the compensation of directors who are not officers;

    administering our equity award plans, both those in existence at the time of adoption of the Charter and those created thereafter, including the granting of equity awards thereunder;

    furnishing an annual Executive Compensation Committee Report on executive compensation and approving any disclosures relate to compensation included in our proxy statement; and

    performing such general oversight and investigation functions related to Company compensation inherent to the responsibilities designated herein or set forth in future resolutions of the Board.

        The authority of the Executive Compensation Committee with respect to any future equity incentive plan may be limited by the provisions of such plans as adopted by the Board and/or approved by our stockholders. The Committee may form and delegate authority to subcommittees when appropriate. The Board of Directors has determined that each of the members of the Executive Executive Compensation Committee is an "independent director," as defined in the marketplace rules of the Nasdaq Stock Market. The Board of Directors has adopted an Executive Compensation Committee Charter.

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        Governance and Nominating Committee.    The members of our governance and nominating committee are Ramey Tomson (chair), Ruben King-Shaw, Jr., and Matthew Cox. The committee is appointed by the Board of Directors to oversee, review and make periodic recommendations concerning our corporate governance policies, and shall recommend candidates for election to our Board of Directors. To this end, the committee is responsible for:

    Identifying and reviewing candidates for the Board and approving director nominations to be presented for shareholder approval at the annual meeting and to fill any vacancies. The Committee will from time to time review the process for identifying and evaluating candidates for election to the Board. The Committee may engage consultants or third-party search firms to assist in identifying and evaluating potential nominees.

    Reviewing from time to time the appropriate skills and characteristics required of Board members;

    Periodically reviewing our corporate governance policies and recommending to the Board modifications to the policies as appropriate;

    Having full access to our executives as necessary to carry out its responsibilities;

    Performing any other activities consistent with this Charter, our Bylaws and governing law as the Committee or the Board deems necessary or appropriate;

    Reviewing the Committee Charter from time to time for adequacy and recommending any changes to the Board; and,

    Reporting to the Board on the major items addressed at each Committee meeting.

        The Board of Directors has determined that each of the members of the committee is an "independent director," as defined in the marketplace rules of the Nasdaq Stock Market. The Board of Directors has adopted a Governance and Nominating Committee Charter.

Compensation Committee Interlocks and Insider Participation

        We did not have an Executive Compensation Committee until December 14, 2010. Prior to the formation of that Committee, Dr. Eastman, our Chief Executive Officer, participated in the deliberations regarding executive compensation. None of our executive officers has served as a member of the compensation committee, or other committee serving an equivalent function, of any other entity, one of whose executive officers served as a member of our Executive Compensation Committee.

Compensation Discussion and Analysis

Overview and Objectives

        Our approach to executive compensation reflects our view that compensation of our executive officers should focus our executive team on the accomplishment of our short-term objectives, as well as implementation of our long-term strategies. In December 2010, we established an Executive Compensation Committee composed of independent directors, which has the responsibility to oversee our executive compensation programs and practices to ensure they are competitive and include incentives for the creation of value for our shareholders, by aligning their interests with those of our executive officers.

        Historically, and as is discussed in greater detail below, our executive compensation has consisted of three principal components:

        Base Salary.    Base salary for our executive officers is determined at the commencement of employment and is re-evaluated periodically. In determining whether to adjust an executive's base

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salary, our Board of Directors takes into account factors such as Company performance, individual performance, general economic factors and the resources available to us.

        Stock Option Grants.    Our executive officers receive stock option grants as long-term incentives to ensure a portion of compensation is linked to our long-term success.

        Benefits.    Our executive officers are eligible for health insurance and other benefits made generally available to other employees.

        As is indicated below, we expect that annual incentive compensation in the form of cash bonuses will be another component of executive compensation in future years.

        As is also indicated in greater detail below, the Executive Compensation Committee, working with outside consultants, has developed a compensation program for our executive officers that has been designed to achieve the following objectives as we move forward:

    Attract and retain talented executives;

    Motivate and reward executives based on annual performance;

    Reward the achievement of particular objectives and individual contributions;

    Incentivize management to enhance long-term shareholder value; and

    Provide compensation that is competitive within our industry.

Role of the Board of Directors

        We have an Executive Compensation Committee of the Board which is responsible for determinating the compensation of our executive officers. That Committee is now composed of directors who qualify as independent directors within the meaning of Nasdaq's marketplace rules. Our Chief Executive Officer makes recommendations regarding executive compensation, but, since the formation of our Executive Compensation Committee in December 2010, has not participated in discussions regarding his own compensation. None of our executive officers participate in discussions of the Executive Compensation Committee or the Board regarding executive compensation.

        During 2010, the Executive Compensation Committee retained the services of First Niagara Benefits Consulting to assist it in making determinations regarding executive compensation, including: base salaries to be paid to our executive officers; annual incentive compensation to be paid to our executive officers; equity awards to be made to our executive officers in 2010; compensation to be paid to our outside directors; and the terms and conditions to be included in our executive employment agreements.

        We do not believe that our compensation policies and practices, for either our executive officers or our non-executive employees, are reasonably likely to give rise to risks that would have a material adverse affect on us.

        Taking into account the advice and input received from our benefits consultant, we have designed an executive employment program for our future operations that will include the elements discussed below.

Compensation Program

        Base Salary.    The base salaries of all of our executive officers were reviewed and adjusted to reflect individual roles and responsibilities and to take into account data related to salaries paid to similarly situated executives in the medical instrument and supplies industry. The revised salaries for our named executive officers are designed to place those salaries near the midpoint of the market

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salary range for each position. The new base salaries will take effect upon the closing of this offering and are as follows:

Executive Chairman:

  $ 150,000  

Chief Executive Officer:

  $ 275,000  

Chief Operating Officer:

  $ 200,000  

Executive Vice President:

  $ 200,000  

Chief Financial Officer:

  $ 245,000  

Chief Technology Officer:

  $ 180,000  

        Our Executive Compensation Committee will make periodic reviews of base salaries to determine if they remain competitive and continue to provide appropriate motivation and rewards for performance.

        Annual Incentive Compensation.    We have not historically paid cash incentive compensation or bonuses to our executives. As part of our review of our overall executive compensation in late 2010, however, based in part on the recommendations of our compensation consultant, we determined to implement a program for annual cash incentive compensation in future years. Our executive chairman and our chief executive officer will each be entitled to receive incentive compensation ranging from 20% to up to 60% of their respective base salaries upon attainment of specific performance criteria to be developed by the Executive Compensation Committee. The other named executive officers will be entitled to receive incentive compensation ranging from 15% to up to 50% of base salary, again based on attainment of objectives to be developed by the Executive Compensation Committee. We currently expect that the performance criteria will likely focus on objectives related to the installed base for our products, our fee income and product utilization.

        Long-term Incentives.    Base salary and annual incentive compensation are intended to compensate our executive officers for their performance in a particular year. We also use equity incentives to award longer-term performance and to align the interests of our executive officers with those of our shareholders. Our current long term incentives are in the form of option grants under our 2007 Long Term Incentive Plan or our 2010 Long Term Equity Incentive Plan. We believe the grant of stock options remains an important component of executive compensation. We have made grants of options to our executive officers on a periodic, but not necessarily annual, basis. Stock options provide our executive officers the right to purchase shares of our common stock at a fixed exercise price, typically for a period of up to ten years, subject to continued employment. Our stock options typically vest over a three year period and have an exercise price reflecting the fair market value of the stock on the date of grant. Fair market value historically has been determined by our Board of Directors based on a number of factors, including, among others: third party independent valuation reports; values implied by recent capital transactions; the market value of similarly situated public companies; recent financial results and prospects; the rights, preferences and privileges of our shares of preferred stock; and, historically, the lack of a liquid market for our stock. The fair market value of awards granted after the completion of this offering will have an exercise price equal to the closing price of a share of our common stock on the Nasdaq Global Select Market on the date of grant. Based in part on the guidance furnished by our compensation consultant, stock option awards were made to our executive officers in late 2010, all of which are described in this prospectus.

        Other Compensation.    All of our executive officers are eligible for health benefits and group insurance benefits made generally available to our other employees. We also have a 401(k) plan that all employees are eligible to participate in, including our named executive officers. The 401(k) plan is intended to qualify as a tax-qualified plan under Section 401(k) of the Internal Revenue Code. Employees contribute their own pre-tax compensation, as salary deductions. Contributions may be made up to plan limits, subject to government limits. The plan permits us to make discretionary

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matching contributions, again subject to established limits. We have not made any discretionary contributions in recent years.

        We have not historically provided compensation in the form of perquisites, although we do reimburse all of our executive officers for expenses incurred in the performance of their duties.

        Section 162(m) of the Internal Revenue Code limits our deduction for federal income tax purposes to not more than $1 million of compensation paid to certain of our executive officers in a calendar year. Compensation above $1 million may be deducted if it is "performance based compensation." In light of the levels of compensation paid to our executive officers in recent years, the Section 162(m) limits have not posed any issues for consideration by the Board of Directors. The Executive Compensation Committee and the Board, however, will consider the impact of this section in connection with future compensation determinations.

        All of the share amounts set out in the tables included in this "Management" section will be subject to adjustment in connection with the reverse stock split described elsewhere in this prospectus.

Summary Compensation Table

Name and Principal Position
  Year   Salary
($)(1)
  Bonus
($)
  Stock
Awards
($)
  Option
Awards
($)(2)
  Non-Equity
Incentive Plan
Compensation
($)
  Change in
Pension Value and
Nonqualified
Deferred
Compensation
Earnings
($)
  All Other
Compensation
  Total
($)
 
Jay M. Eastman     2010     150,000             1,388,322                 1,538,322  
Chief Executive Officer     2009     150,000                             150,000  

William J. Shea

 

 

2010

 

 


 

 


 

 


 

 

1,251,391

 

 


 

 


 

 

 

 

 

1,251,391

 
Acting Chief Financial     2009                                  
Officer(3)                                                        

L. Michael Hone

 

 

2010

 

 

19,231

 

 


 

 


 

 

821,587

 

 


 

 


 

 

 

 

 

840,818

 
Executive Vice     2009                                  
President, VivaNet                                                        

Marcy K. Davis-McHugh

 

 

2010

 

 

71,110

 

 

 

 

 

 

 

 

641,624

 

 


 

 


 

 


 

 

712,734

 
Chief Operating     2009     71,110                             71,110  
Officer                                                        

William J. Fox

 

 

2010

 

 

97,500

 

 

 

 

 

 

 

 

536,549

 

 


 

 


 

 


 

 

536,549

 
Chief Technology     2009     97,500                              
Officer                                                        

(1)
Amounts represent base salary paid during fiscal years 2010 and 2009; see "—Compensation Program" for a discussion of salaries following this offering.

(2)
The amounts represent the aggregate grant date fair value of stock options granted. The valuation of stock options is based on the assumptions and methodology set forth in Note 14 to our audited financial statements included in this prospectus.

(3)
Mr. Shea served as Acting Chief Financial Officer until March 2011, when these duties were assumed by Mr. Joyce, who is currently serving as our Chief Financial Officer.

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Grants of Plan-Based Awards for Years Ended December 31, 2010 and 2009

        There were no grants of plan-based awards to the named executive officers during the year ended December 31, 2009. The following table summarizes the grants of plan-based awards to each of the Named Executive Officers during 2010. All stock-based awards in 2010 were granted under either our 2007 Long Term Incentive Plan or our 2010 Long-Term Equity Incentive Plan. Under these plans, all stock options expire 10 years from the date of grant and vest in equal one-third increments. Prior to vesting, individuals who receive a grant of restricted stock are eligible to participate in the rights or privileges of a stockholder of our Company in respect to those shares, including the right to vote and receive any dividends. We have not paid cash dividends and currently intend to retain all earnings to further develop and grow our business.

Name and Principal Position
  Grant Date   All Other
Option Awards:
Number of Securities
Underlying
Options (#)
  Exercise or
Base Price of
Option Awards
($/Sh)
  Grant Date
Fair Value of
Stock and
Option Awards
 
Jay M. Eastman     5/27/2010 (1)   300,000     3.29     630,449  
Chief Executive Officer     5/27/2010 (2)   100,000     3.29     210,149  
      12/30/2010 (2)   200,000     4.16     547,724  

William J. Shea

 

 

5/27/2010

(1)

 

400,000

 

 

3.29

 

 

840,598

 
Acting Chief Financial Officer     12/30/2010 (2)   150,000     4.16     410,793  
(through 3/11)                          

L. Michael Hone(3)

 

 

12/30/2010

(2)

 

300,000

 

 

4.16

 

 

821,587

 
Executive Vice President,                          
VivaNet                          

Marcy K. Davis-McHugh

 

 

5/27/2010

(1)

 

175,000

 

 

3.29

 

 

367,762

 
Chief Operating Officer     12/30/2010 (2)   100,000     4.16     273,862  

William J. Fox

 

 

5/27/2010

(1)

 

125,000

 

 

3.29

 

 

262,687

 
Chief Technology Officer     12/30/2010 (2)   100,000     4.16     273,862  

(1)
Grant made under our 2007 Long-Term Incentive Plan.

(2)
Grant made under our 2010 Long-Term Equity Incentive Plan.

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Outstanding Equity Awards at 2010 Fiscal Year-End

 
  Option Awards   Stock Awards  
Name and Principal Position
  Number of
Securities
Underlying
Unexercised
Options
(#)
Exercisable
  Number of
Securities
Underlying
Unexercised
Options
(#)
Unexercisable(1)
  Equity
Incentive Plan
Awards:
Number of
Securities
Underlying
Unexercised
Unearned
Options (#)
  Option
Exercise
Price
($)
  Option
Expiration
Date
  Number
of Shares
or Units
of Stock
That Have
Not
Vested
(#)
  Market
Value of
Shares or
Units of
Stock
That Have
Not
Vested
(#)(2)
  Equity
Incentive
Plan
Awards:
Number
of Shares,
Units or
Other
Rights
That Have
Not
Vested
(#)
  Equity
Incentive
Plan
Awards:
Market or
Payout
Value of
Unearned
Shares,
Units or
Other
Rights
That Have
Not
Vested
($)
 
Jay M. Eastman     500,000             2.15     9/11/2017                  
Chief Executive Officer         400,000         3.29     5/26/2020                  
            200,000           4.16     12/29/2020                  

William J. Shea

 

 


 

 

400,000

 

 


 

 

3.29

 

 

5/26/2020

 

 


 

 


 

 


 

 


 
Acting Chief Financial Officer           150,000           4.16     12/29/2020                  
(through 3/11)                             125,000     41,250              

L. Michael Hone

 

 


 

 

300,000

 

 


 

 

4.16

 

 

12/29/2020

 

 


 

 


 

 


 

 


 
Executive Vice President, VivaNet                     12/29/2020     75,000     24,750          

Marcy K. Davis-McHugh

 

 

1,500

 

 

 

 

 

 

 

 

2.00

 

 

3/3/2011

 

 


 

 


 

 


 

 


 
Chief Operating Officer     17,600             0.15     8/11/2012                  
      50,400             2.00     10/31/2016                  
      25,000             2.15     9/11/2017                  
          175,000         3.29     5/26/2020                  
            100,000         4.16     12/29/2020                          

William J. Fox

 

 

53000

 

 


 

 


 

 

0.15

 

 

8/11/2012

 

 


 

 


 

 


 

 


 
Chief Technology Officer     20,000             2.00     10/31/2016                  
      35,000             2.15     9/11/2017                  
          125,000         3.29     5/26/2020                  
          100,000         4.16     12/29/2020                  

(1)
Stock option awards become exercisable in equal one-third increments annually over three years of continuous service.

(2)
Market value of shares of stock that have not vested is calculated using our estimate of the fair value of our common stock on December 31, 2010 of $4.14 and the number of restricted shares.

Option Exercises and Stock Vested During 2010

 
  Option Awards   Stock Awards  
Name and Principal Position
  Number of
Shares
Acquired on
Exercise
(#)
  Value
Realized on
Exercise
($)
  Number of
Shares
Acquired on
Vesting
(#)
  Value
Realized on
Vesting
($)
 

Marcy K. Davis-McHugh,(1)
Chief Operating Officer

    24,309     101,235          

William J. Fox,(1)
Chief Technology Officer

    67,167     277,938          

(1)
Stock options exercised were "net exercises," pursuant to which the optionee received shares of common stock equal to the intrinsic value of the options (fair market value of common stock on date of exercise less exercise price) reduced by any applicable withholding taxes.

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Director Compensation

        We historically have not paid fees to our non-employee directors for their service in that capacity. However, we have made grants of restricted stock to certain directors in connection with their election to the Board of Directors. In October and December 2010, we granted to each of Messrs Cox and King-Shaw, respectively, 25,000 shares of restricted stock. Each of these restricted stock awards cliff vests on the third anniversary of the grant date.

        After the offering, we plan to begin compensating our non-employee directors with an annual retainer of $20,000, paid quarterly in arrears, with the chairs of the compensation and audit committees earning an additional $7,500 annually and $10,000, respectively, for their additional services to the Board. In addition, non-employee directors will receive annual equity grants under our 2010 Long-Term Equity Incentive Plan which will vest on the first anniversary of the grant date.

Non-Employee Director Compensation Table for Year Ended December 31, 2010

Name
  Fees
Earned
or Paid
in Cash
($)
  Stock
Awards
($)(1)(2)
  Option
Awards
($)
  Non-Equity
Incentive Plan
Compensation
($)
  Change in
Pension
Value and
Nonqualified
Deferred
Compensation
Earnings
  All Other
Compensation
($)
  Total
($)
 

Charles H. Abdalian, Jr. 

        80,250                     80,250  

Brian Carty

                             

Matthew Cox

        104,000                     104,000  

David A. Lovenheim

                             

Ruben King-Shaw, Jr. 

        104,000                     104,000  

Ramey W. Tomson

                             

(1)
The amounts represent the aggregate grant date fair value of restricted stock granted. The valuation of restricted stock is based upon management's assessment of fair value as of the date of grant. Each of the awards reflected in this table represents 25,000 shares of restricted stock which cliff vest after three years of continuous service.

(2)
The following awards of restricted stock were outstanding as of December 31, 2010: Mr. Abdalian—75,000; Mr. Carty—25,000; Mr. Cox—25,000; Mr. Lovenheim—75,000; Mr. King-Shaw—25,000; and Ms. Tomson—75,000. Mr. Lovenheim's restricted stock award is held by Keystones Global LLC, an entity controlled by him.

        Employment Agreements.    In December 2010, we executed employment agreements with Ms. Davis-McHugh and each of Messrs. Eastman, Fox, Hone, and Shea. These agreements expire on January 1, 2016, and are automatically renewable in one-year increments thereafter. We entered into an employment agreement with Mr. Joyce on March 22, 2011. Mr. Joyce's employment agreement is set to expire on March 22, 2016, but is also automatically renewable for additional one-year terms. Each of these executives has agreed, pursuant to his or her respective employment agreement, not to compete with us, nor solicit our customers or employees, for a period of one year following the termination of such executive's employment. In addition to base salary, Messrs. Eastman and Shea are each eligible to receive a cash bonus of up to 60%, and Ms. Davis-McHugh and Messrs. Fox, Hone and Joyce are each eligible to receive a cash bonus of up to 50% of his or her base salary with respect to any calendar year. The executives are also eligible to receive equity grants under our 2010 Long-Term Equity Incentive Plan, which plan is administered by the Executive Compensation Committee of our Board of Directors. The Committee may approve grants under the 2010 Long-Term Equity Incentive Plan from time to time.

        In the event the employment agreement is terminated (i) by us without "just cause," or (ii) by the executive with "good reason," each as defined in each executive's respective employment agreement, then the executive is entitled to an immediate cash payment equal to two times his or her base salary plus bonus for the applicable year

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or, in the case of the bonus, for the immediately prior year, and all restrictions remaining on any shares of restricted stock will lapse and any options earned under the 2010 Long-Term Equity Incentive Plan will fully vest. In the event the agreement is terminated following a change-in-control, then the executive is entitled to an immediate cash payment equal to two and one half times his or her base salary plus bonus for the applicable year or, in the case of the bonus, for the immediately prior year, and all restrictions remaining on any shares of restricted stock will lapse and any options earned under the 2010 Long-Term Equity Incentive Plan will fully vest.

        Our employment agreements with Ms. Davis-McHugh and Messrs. Eastman, and Fox, also provide for an increase in each executive's base salary upon the occurrence of a qualified financing, which financing shall be deemed to have occurred at the sole discretion of the Executive Compensation Committee. The Executive Compensation Committee expects that the closing of this offering will be deemed a "qualified financing," and that the following increased base salaries will become effective concurrently with the closing: Mr. Eastman, $275,000; Ms. Davis-McHugh, $200,000; and, Mr. Fox $180,000. In addition, our newly-hired Chief Financial Officer, Martin Joyce, will be entitled to an increased base salary of $245,000 upon the occurrence of a qualified financing.

        Equity Compensation Plans.    There are currently awards outstanding under our three equity compensation plans, the Lucid,  Inc. Year 2000 Stock Option Plan, the Lucid, Inc. 2007 Long-Term Incentive Plan, and the Lucid, Inc. 2010 Long-Term Equity Incentive Plan. As of December 31, 2010, 2,985,000 shares remained available for issuance under the 2010 Long-Term Equity Incentive Plan. No further awards may be made under the Year 2000 Stock Option Plan or the 2007 Long-Term Incentive Plan.

Limitation of Liability and Indemnification of Directors and Officers

        Our certificate of incorporation and bylaws provide that we will indemnify our directors and executive officers and may indemnify our other officers and employees and other agents to the fullest extent permitted by the New York Business Corporation Law (the "NYBCL"). In addition, we have entered into indemnification agreements with each of our officers and directors. Pursuant to these agreements, we have agreed to indemnify each of our officers and directors for liabilities arising out of any action or threatened action to which such officer or director is made a party by reason of the fact that he or she is or was an officer or director of our Company, or served an affiliated entity in any capacity. We believe that these provisions and agreements are necessary to attract and retain qualified persons as directors and executive officers.


Related Party Transactions

        Our Board of Directors has adopted a written policy regarding the review and approval of transactions between our Company and related parties, which includes our senior officers, directors, holders of 5% or more of our capital stock, or any entity owned or controlled by any such person or in which any such person has a substantial ownership interest. For purposes of this policy, any proposed transaction between our Company any related party, other than transactions available to all of our employees generally or involving less than $10,000 when aggregated with all similar transactions, must be submitted to the Audit Committee of our Board of Directors for prior review and approval.

        We have issued our promissory note to Jay M. Eastman, our chief executive officer, in the aggregate principal amount of approximately $40,000. The note bears interest at an annual rate of 6% and matures on the earlier of January 1, 2012, or 30 days following our completion of an equity financing in an amount in excess of $8 million. During fiscal 2010 and 2009, we did not make any principal or interest payments in respect of this obligation. In addition, we have convertible note and warrant agreements with Jay M. Eastman, our chief executive officer, and William J. Shea, our executive chairman, on the same terms and conditions as these securities were issued to investors in our 2010/2011 Convertible Debt Offering, in the aggregate principal amounts of $100,000 and $50,000 respectively. The notes bear interest at an annual rate of 8% and mature on November 15, 2012. For a more detailed description of these transactions, see Note 8 to our audited financial statements included in this prospectus.

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        During fiscal 2010 and 2009, we received legal and consulting services from Mr. Lovenheim, through Keystones Global LLC, an entity controlled by David Lovenheim, a member of our Board of Directors. We paid fees aggregating $140,327 and $52,298 during 2010 and 2009, respectively. Mr. Lovenheim is the [sole member of Keystones Global LLC].

        In July 2010, we entered into a revolving line of credit facility, pursuant to which we may borrow up to $5.0 million, subject to cetain limitations. The loan is secured by all of our assets and life insurance policies on certain members of our Board of Directors and is personally guaranteed by certain members of our Board of Directors, and is further guaranteed on a limited basis by Northeast LCD Capital, which holds greater than 5% of our common stock. Northeast LCD Capital placed $2.0 million on deposit with our lender. In consideration for this arrangement, we recognize $100,000 in fees per quarter to be paid after an initial public offering of our common stock or converted into common stock at a discount of 30% from the initial public offering price. At December 31, 2010, we had approximaetly $191,000 accrued with respect to this liability. If we do not complete an initial public offering of our common stock before July 9, 2011, we will be obligated at that date to pay Northeast LCD Capital an amount equal to the pledged funds, together with the accrued fee at that date.

        During fiscal 2010 and 2009, we received consulting and outsourcing services from Insero and Company, a certified public accounting firm. Nancy Catarisano, a member of our Board of Directors, serves as Partner and Chief Operating Officer of Insero and Company. We paid Insero and Company fees aggregating $192,976 and $284,438 for 2010 and 2009, respectively. These fees represented less than 5% of that firm's revenues in each such year.

        Mr. Shea, Mr. Eastman, and Mr. Maggiotto hold $50,000, $100,000, and $50,000, respectively, in principal amount of convertible notes issued on the terms and conditions of the 2010/2011 Convertible Debt offering, along with warrants to purchase    •    ,    •    , and     •    shares of our common stock at an exercise price of $4.11 per share.

        In addition to the above transactions, from time to time, various of our shareholders and warrant holders have sold raw materials, parts and supplies to us or have rendered services to us. These transactions have taken place at prices that we considered comparable to those we would have paid in arm's length transactions.

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Principal Stockholders

        The following table reflects the holdings by directors, officers, and owners of five percent (5%) or more of all of the issued and outstanding shares of our common stock as of March 31, 2011, and the percentage of shares held by each stockholder.

Name of Beneficial Owner
  Number of
Common
Shares
  Percentage
Ownership(1)
  Number of
Common
Shares
Pro Forma(2)
  Percentage
Ownership
Pro Forma(2)
  Number of
Common
Shares
Pro Forma,
As Adjusted(3)
  Percentage
Ownership
Pro Forma(3)
 

Jay M. Eastman(4)

    1,423,592     24.3 %                

William J. Shea(5)

    871,217     18.9 %                

Brian Carty(6)

    75,000     1.7 %                

Nancy E. Catarisano

        *                  

Matthew Cox(7)

    25,000     0.6 %                

L. Michael Hone(8)

    206,972     4.6 %                

Ruben J. King-Shaw, Jr.(9)

    25,000     0.6 %                

David A. Lovenheim(10)

    245,266     5.4 %                

Rocco Maggiotto(20)

        *                  

Ramey W. Tomson(11)

    569,861     11.4 %                

Martin J. Joyce

        *                  

Marcy K. Davis-McHugh(12)

    176,903     3.8 %                

William J. Fox(13)

    216,833     4.7 %                

Dale Crane(14)

    642,176     14.2 %                

James A. Zavislan(15)

    579,545     12.3 %                

Northeast LCD Capital(16)

    544,190     12.1 %                

Robert Sperandio(17)

    375,000     8.1 %                

Richard LeFrois(18)

    257,202     5.7 %                

John Boles(19)

    235,010     5.2 %                

All Directors and Executive Officers as a Group (13 persons)

    3,835,644     56.3 %                

*
Represents beneficial ownership of less than one percent.

(1)
Percentages have been computed based upon 4,486,546 shares of common stock outstanding at March 31, 2011, plus, for each person (except where indicated otherwise) and the group, shares that such person or the group has the right to acquire pursuant to preferred stock, restricted common stock and common stock warrants or options, each to the extent exercisable within 60 days after March 31, 2011.

(2)
Numbers of Common Shares and Percentages have been computed based upon    •    shares of common stock outstanding, after assuming or giving effect to (i) a    •    for    •    reverse stock split of our common stock that we may complete prior to the closing of this offering, (ii) the conversion of our outstanding convertible debt notes, which notes were issued pursuant to the 2010/2011 Convertible Debt Offering, into     •    shares of our common stock, (iii) the conversion of our outstanding convertible debt notes, which notes were issued pursuant to the 2009 Convertible Debt Offering, into    •    shares of our common stock; and, the conversion of all of our shares of Series A and Series B preferred stock into     •    shares of our common stock at the closing of this offering. In addition, for each person and the group, these numbers of common shares and percentages reflect shares of our common stock that such person or the group has the right to acquire pursuant to restricted common stock and common stock warrants or options, each to the extent exercisable within 60 days of March 31, 2011.

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(3)
Numbers of Common Shares and Percentages have been computed based upon    •    shares of common stock outstanding after the offering, after assuming or giving effect to (i) a    •    for    •    reverse stock split of our common stock that we may complete prior to the closing of this offering, (ii) the conversion of our outstanding convertible debt notes, which notes were issued pursuant to the 2010/2011 Convertible Debt Offering, into    •    shares of our common stock, (iii) the conversion of our outstanding convertible debt notes, which notes were issued pursuant to the 2009 Convertible Debt Offering, into    •    shares of our common stock; and, the conversion of all of our shares of Series A and Series B preferred stock into    •    shares of our common stock at the closing of this offering. In addition, for each person and the group, these numbers of common shares and percentages reflect shares of our common stock that such person or the group has the right to acquire pursuant to restricted common stock and common stock warrants or options, each to the extent exercisable within 60 days of March 31, 2011. The table assumes no exercise of the underwriters' over-allotment option.

(4)
Includes 173,910 shares held by his spouse in trust for children, 500,000 shares that may be acquired upon exercise of an outstanding option. Excludes     •    shares of our common stock issuable upon exercise of warrants and conversion of convertible debt, each as issued on the terms and conditions of the 2010/2011 Convertible Debt Offering. Also includes 633,333 shares issuable upon exercise of stock options exercisable within 60 days of March 31, 2011. As adjusted amount includes the conversion of debt into    •    shares, calculated using an assumed initial offering price of $[    •    ] per share, which is the midpoint of the range set forth on the cover page of this prospectus.

(5)
Includes 125,000 shares of restricted stock, but excludes    •    shares of our common stock issuable upon exercise of warrants and conversion of convertible debt, each as issued on the terms and conditions of the 2010/2011 Convertible Debt Offering. Also includes 133,333 shares issuable upon exercise of stock options exercisable within 60 days of March 31, 2011. As adjusted amount includes the conversion of debt into    •    shares, calculated using an assumed initial offering price of $[    •    ] per share, which is the midpoint of the range set forth on the cover page of this prospectus.

(6)
Includes 75,000 shares of restricted stock.

(7)
Includes 25,000 shares of restricted stock.

(8)
Includes 75,000 shares of restricted stock.

(9)
Includes 25,000 shares of restricted stock.

(10)
Includes 30,000 shares of common stock held directly by Mr. Lovenheim (all of which have been pledged as collateral to secure a loan) and 123,600 shares of common stock held by Keystones Global, LLC, of which Mr. Lovenheim is the Managing Director. Also includes 75,000 shares of restricted stock and 16,666 shares issuable upon exercise of stock options, exercisable within 60 days of March 31, 2011, all of which are held by Keystones Global, LLC.

(11)
Includes 75,000 shares of restricted stock. Also includes 494,166 shares owned by Tomson Partners LLP and 695 shares owned by Tomson Partners, LLC, entities owned and controlled by Ramey Tomson.

(12)
Includes 151,333 shares issuable upon exercise of stock options exercisable within 60 days of March 31, 2011.

(13)
Includes 149,666 shares issuable upon exercise of stock options exercisable within 60 days of March 31, 2011

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(14)
The address of Mr. Crane is c/o Lucid, Inc., 2320 Brighton Henrietta Town Line Road, Rochester, New York 14623.

(15)
The address of Mr. Zavislan is c/o Lucid, Inc., 2320 Brighton Henrietta Town Line Road, Rochester, New York 14623. Amounts include shares held in Trust for Children and 210,000 shares issuable upon exercise of stock options exercisable within 60 days of March 31, 2011.

(16)
The address of Northeast LCD Capital is c/o Wesley Crowell, Bergen & Parkinson, LLC, 62 Portland Rd, Kennebunk Maine 04043.

(17)
Excludes    •    shares of our common stock issuable upon exercise of warrants and conversion of convertible debt, each as issued upon the terms and conditions of the 2009 Convertible Debt Offering. The address of Mr. Sperandio is c/o Lucid, Inc., 2320 Brighton Henrietta Town Line Road, Rochester, New York 14623.

(18)
The address of Mr. LeFrois is c/o Lucid, Inc., 2320 Brighton Henrietta Town Line Road, Rochester, New York 14623.

(19)
The address of Mr. Boles is c/o Lucid, Inc., 2320 Brighton Henrietta Town Line Road, Rochester, New York 14623.

(20)
Excludes    •    shares of our common stock issuable upon exercise of warrants and conversion of convertible debt, each as issued on the terms and conditions of the 2010/2011 Convertible Debt Offering.


Description of Capital Stock

        We have authorized capital of 70,000,000 shares, of which 60,000,000 shares have been designated as common stock, par value $0.01 per share, and 10,000,000 shares have been designated as preferred stock, par value $0.05 per share. The shares of preferred stock are undesignated, and are issued from time to time in series with such rights, preferences, and privileges and restrictions as may be designated by our Board of Directors. We had    •    shares of common stock held of record by approximately 65 holders,    •    shares of Series A preferred stock, and    •    shares of series B preferred stock issued and outstanding as of March 31, 2011. Upon completion of the offering, assuming that all shares offered hereunder are sold (excluding the over-allotment) and assuming the automatic conversion of all of our convertible debt and all of our outstanding preferred stock into our common stock immediately prior to the completion of the offering, there will be     •    shares of our common stock outstanding following the offering.

Common Stock

        The holders of our common stock are entitled to one vote for each share standing in the holder's name on our transfer books, and holders vote together as a single class on all matters requiring the vote of the stockholders. Common stock holders have no preemptive, subscription or redemption rights. Subject to law and the provisions of our Certificate of Incorporation, our Board of Directors may declare dividends on our stock, payable upon such dates as the Board of Directors may designate. No dividend may be paid on common stock unless all declared but unpaid dividends, if any, on the Preferred Stock have been paid. Under Section 510 of the NYBCL, the net assets of the corporation upon declaration or distribution of a dividend must remain at least equal to the amount of the corporation's stated capital.

Preferred Stock

        The holders of Series A preferred stock and Series B preferred stock (collectively referred to as "Preferred Stock") have the same voting rights as holders of our common stock and, in addition,

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holders of Preferred Stock are entitled to a class vote on (i) the sale of all or substantially all of our assets and (ii) a merger transaction. At the option of the holder, Preferred Stock is convertible at any time into shares of our common stock on a 1:1 basis. Our Board of Directors has approved and the Company will seek shareholder approval for an amendment to its restated certificate of incorporation to (i) provide for the automatic conversion of Series A and Series B preferred stock into common stock, on a 1:1 basis, at the closing of this offering, and (ii) provide for an equitable adjustment to the conversion price in connection with any recapitalization of the Company. Holders of our Preferred Stock have no preemptive, subscription or redemption rights. Holders of Preferred Stock are entitled to receive, when and as declared by the Board of Directors, non-cumulative dividends out of any assets legally available therefor, in a per share amount equal to at least that paid on shares of common stock, prior and in preference to any declaration or payment of any dividend on the common stock of the corporation. See Note 14 to our audited financial statements included in this prospectus for a description of the currently outstanding preferred stock.

        Holders of Series A preferred stock rank in preference to our common stockholders, but junior to holders of Series B preferred stock, regarding certain rights upon liquidation. The holders of both Series A and Series B preferred stock are entitled to receive, when and as declared by the Board of Directors, dividends in a per share amount equal at least to that paid on shares of common stock, prior and in preference to any dividends on common stock.

        In the event of any liquidation, dissolution, or winding up of the Corporation, the holders of Series B preferred stock are entitled to receive, prior and in preference to any distribution to the holders of Series A preferred stock and common stock, an amoutn per share equal to the original purchase price of such shares, plus any declared but unpaid dividends on such shares. After distribution of such amount, the holders of Series A preerred stock are entitled to receive, prior and in preference to any distribution to the holders of common stock, an amount equal to the original purchase price of such Series A preferred stock, plus any declared but unpaid dividends on such shares. After the preferred distributionsto the holders of Series A and Series B preferred stock, the holders of Common Stock are entitled to receive an amount equal to the original purchase price of such shares of common stock, plus declared but unpaid dividends. After the foregoing distributions, the remaining assets would be distributed among the holders of Series A preferred stock, Series B preferred stock, and common stock, pro rata based on the number of shares held by each.

Limitation of Personal Liability of Directors and Officers

        The Lucid certificate of incorporation provides that no officer or director shall be personally liable to the corporation or its shareholders for damages for any breach of duty in such capacity except where a judgment or other final adjudication adverse to said officer or director establishes: that the officer or director's acts or omissions were in bad faith or involved intentional misconduct or a knowing violation of law; that the officer or director personally gained a financial profit or other advantage to which he was not entitled.

        Section 402 of the NYBCL permits corporations to eliminate or limit the personal liability of directors to the corporation or its stockholders for damages for any breach of duty in such capacity except liability of a director: (i) whose acts or omissions were in bad faith, involved intentional misconduct or a knowing violation of law; (ii) who personally gained a financial profit or other advantage to which he or she was not legally entitled; or (iii) whose acts violated certain provisions of New York law.

Indemnification of Directors and Officers

        Our bylaws provide that we will indemnify (a) any person made or threated to be made a party to any action or preceeding by reason of the fact that he, his testator or intestate, is or was a director or

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officer of our Company, and (b) any director or officer of Lucid who served any other company in any capacity at our request, in the manner and to the maximum extent permitted by the NYBCL; and we may, in the discretion of the Board of Directors, indemnify all other corporate personnel to the extent permitted by law.

        Under Section 722 of the NYBCL, a corporation may indemnify its directors and officers made, or threatened to be made, a party to any action or proceeding, except for stockholder derivative suits, if the director or officer acted in good faith, for a purpose that he or she reasonably believed to be in or, in the case of service to another corporation or enterprise, not opposed to the best interests of the corporation, and, in addition, in criminal proceedings had no reasonable cause to believe his or her conduct was unlawful. In the case of stockholder derivative suits, the corporation may indemnify a director or officer if he or she acted in good faith for a purpose that he or she reasonably believed to be in or, in the case of service to another corporation or enterprise, not opposed to the best interests of the corporation, except that no indemnification may be made in respect of (i) a threatened action, or a pending action that is settled or otherwise disposed of, or (ii) any claim, issue or matter as to which such individual has been adjudged to be liable to the corporation, unless and only to the extent that the court in which the action was brought, or, if no action was brought, any court of competent jurisdiction, determines, upon application, that, in view of all the circumstances of the case, the individual is fairly and reasonably entitled to indemnity for the portion of the settlement amount and expenses as the court deems proper.

        Any individual who has been successful on the merits or otherwise in the defense of a civil or criminal action or proceeding will be entitled to indemnification. Except as provided in the preceding sentence, unless ordered by a court pursuant to Section 724 of the NYBCL, any indemnification under the NYBCL as described in the immediately preceding paragraph may be made only if, pursuant to Section 723 of the NYBCL, indemnification is authorized in the specific case and after a finding that the director or officer met the requisite standard of conduct by the disinterested directors if a quorum is available, or, if the quorum so directs or is unavailable, (i) the board of directors upon the written opinion of independent legal counsel or (ii) the stockholders.

Certain Provisions Having Potential Anti-Takeover Effects

        The following is a summary of the material provisions of the Business Corporation Law of the State of New York, which we refer to as the NYBCL, and our restated certificate of incorporation and our amended and restated bylaws (collectively, our "Charter Documents") that address matters of corporate governance and the rights of shareholders. Certain of these provisions may delay or prevent takeover attempts not first approved by our board of directors (including takeovers which certain shareholders may deem to be in their best interests). These provisions also could delay or frustrate the removal of incumbent directors or the assumption of control by shareholders. The primary purpose of these provisions is to encourage negotiations with our management by persons interested in acquiring control of the Company. All references to our Charter Documents are to our restated certificate of incorporation and our amended and restated bylaws in effect on the date of this prospectus.

        Vacancies occurring in our board of directors may be filled by the shareholders or a majority of the remaining directors, even if less than a quorum. Our amended and restated bylaws provide that special meetings of shareholders may be called only by our President, or by request of a majority of our board of directors.

        New York law does not require shareholder approval for any issuance of authorized shares. Authorized but unissued shares may be used for a variety of corporate purposes, including future public or private offerings to raise additional capital or to facilitate corporate acquisitions. One of the effects of the existence of authorized but unissued shares may be to enable the board of directors to issue shares to persons friendly to current management, which issuance could render more difficult or discourage an attempt to obtain control of us by means of a merger, tender offer, proxy contest or otherwise, and thereby protect the continuity of our management and possibly deprive the stockholders of opportunities to sell their shares of common stock at prices higher than prevailing market prices.

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        Under the terms of our restated certificate of incorporation, our board of directors is authorized to issue shares of preferred stock in one or more series without shareholder approval. Our board of directors has the discretion to determine the rights, preferences, privileges and restrictions, including voting rights, dividend rights, conversion rights, redemption privileges and liquidation preferences, of each series of preferred stock. The purpose of authorizing our board of directors to issue preferred stock and determine its rights and preferences is to provide flexibility and eliminate delays associated with a shareholder vote on specific issues. However, the ability of our board of directors to issue preferred stock and determine its rights and preferences may have the effect of delaying or preventing a change in control.

        Section 912 of the NYBCL generally provides that a New York corporation may not engage in a business combination with an interested stockholder for a period of five years following the interested stockholder's becoming such. Such a business combination would be permitted where it is approved by the board of directors before the interested stockholder's becoming such, or within 30 days thereafter, if a good faith proposal regarding a business combination is made in writing.

        Covered business combinations include certain mergers and consolidations, dispositions of assets or stock, plans for liquidation or dissolution, reclassifications of securities, recapitalizations and similar transactions. An interested stockholder is generally a stockholder owning at least 20% of a corporation's outstanding voting stock.

        In addition, New York corporations may not engage at any time with any interested stockholder in a business combination other than: (i) a business combination approved by the board of directors before the stock acquisition, or where the acquisition of the stock had been approved by the board of directors before the stock acquisition; (ii) a business combination approved by the affirmative vote of the holders of a majority of the outstanding voting stock not beneficially owned by the interested stockholder at a meeting for that purpose no earlier than five years after the stock acquisition; or (iii) a business combination in which the interested stockholder pays a formula price designed to ensure that all other stockholders receive at least the highest price per share that is paid by the interested stockholder and that meets certain other requirements.

        Further, New York law generally requires approval by two-thirds of the shareholders entitled to vote on merger and asset sale transactions, which is a higher threshold than many state statutes and could render a change of control more difficult to complete.

        These provisions are intended to enhance the likelihood of continuity and stability in the composition of the board and in policies formulated by the board and to discourage certain types of transactions that may involve an actual or threatened change of control of our Company. These provisions are designed to reduce our vulnerability to an unsolicited proposal for a takeover that does not contemplate the acquisition of all of our outstanding shares or an unsolicited proposal for the restructuring or sale of all or part of our Company.

Transactions Involving Officers or Directors

        Section 713 of the NYBCL provides that a corporation may enter into a contract or transaction with a director so long as (1) the material facts as to such director's interest in such contract or transaction are disclosed in good faith or known to the board, and the board approves such contract or transaction by a vote sufficient for such purpose without counting the vote of such interested director or, if the votes of the disinterested directors are insufficient to constitute an act of the board, by unanimous vote of the disinterested directors, (2) the material facts as to such director's interest in such contract or transaction are disclosed in good faith or known to the shareholders entitled to vote thereon, and such contract or transaction is approved by vote of such shareholders, or (3) the party or parties thereto establish affirmatively that the contract or transaction was fair and reasonable as to the corporation at the time it was approved by the board, a committee or the shareholders.

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        Section 714 of the NYBCL provides that a corporation may not lend money to or guarantee the obligation of a director unless: (1) the particular loan or guarantee is approved by the shareholders, with the holders of a majority of the votes of the shares entitled to vote thereon constituting a quorum, but shares held of record or beneficially by directors who are benefitted by such loan or guarantee shall not be entitled to vote or to be included in the determination of a quorum; or (2) with respect to any corporation in existence on or before February 22, 1998, the certificate of incorporation of which expressly provides such, and with respect to any corporation incorporated after February 22, 1998, the board determines that the loan or guarantee benefits the corporation and either approves the specific loan or guarantee or a general plan authorizing loans and guarantees.

Warrants

        As of December 31, 2010, there were oustanding warrants to purchase:    •    shares of our common stock at an exercise price of $    •    per share;    •    shares of our common stock at an exercise price of $    •    per share;    •    shares of our common stock at an exercise price of $    •    per share;     •    shares of our common stock at an exercise price of $    •    per share; and    •    shares of our common stock at an exercise price of $    •    per share, were outstanding. Each warrant contains provisions for the adjustment of the exercise price and the number of shares issuable upon the exercise of the warrant in the event of certain stock dividends, stock splits, reorganizations, reclassifications and consolidations. Certain of the holders of the shares issuable upon exercise of our warrants are entitled to registration rights with respect to such shares as described in greater detail under the heading "Registration Rights."

Registration Rights

        The holders of an aggregate of    •    shares of our common stock, including shares of common stock issuable upon the automatic conversion of our convertible debt, and shares of common stock issued upon exercise of warrants, or their permitted transferees, are entitled to rights with respect to the registration of these shares under the Securities Act.

        Piggyback Registration.    The participants in the 2010/2011 Convertible Debt Offering have certain registration rights, including the right to include the shares of common stock issuable upon conversion of their notes and exercise of their warrants in any registered offering of the Company. The Company intends to seek a waiver of any such registration rights in connection with this offering.

        Other Obligations.    These registration rights are subject to certain conditions and limitations, including the right of the underwriters of an offering to limit the number of shares of common stock to be included in the registration. We are generally required to bear the expenses of all registrations, except underwriting discounts and commissions. However, we will not be required to pay for any expenses of any demand or S-3 registration if the request is subsequently withdrawn by the holders who requested such registration unless the withdrawal is based on material adverse information about us different from that available at the time of the registration request or the holders of a majority of registrable securities forfeit their right to one requested demand registration (in which case the right is forfeited by all holders of the right).

Transfer Agent and Register

        The transfer agent and registrar for our securities, including our common stock, is the American Stock Transfer and Trust Company.

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Listing

        We have applied to have our common stock approved for listing, subject to official notice of issuance, on the Nasdaq Global Select Market under the symbol "LUCD." We have not applied to list our common stock on any other exchange or quotation system.


Shares Eligible for Future Sale

        Prior to this offering, there has been no public market for our common stock. Market sales of shares of our common stock after this offering and from time to time and the availability of shares for future sale, may reduce the market price of our common stock. Furthermore, since only a limited number of shares will be available for sale shortly after this offering because of contractual and legal restrictions on resale described below, sales of substantial amounts of our common stock, or the perception that these sales could occur, could adversely affect prevailing market prices for our common stock and could impair our future ability to obtain capital, especially through an offering of equity securities.

        Based upon    •    shares outstanding on December 31, 2010, assuming conversion of all outstanding preferred stock, and conversion of all of our convertible debt, upon completion of this offering    •    shares of common stock will be outstanding, assuming no exercise of the underwriters' over-allotment option and no exercise of outstanding options or warrants. Of these outstanding shares, all of the shares sold in this offering will be freely tradable without restrictions or further registration under the Securities Act, unless the shares are purchased by our certain of existing stockholders (some of which have entered into lock-up agreements as described below) or "affiliates" as that term is defined under Rule 144 under the Securities Act. The remaining shares of common stock are "restricted" securities, which means they were originally sold in offerings that were not registered under the Securities Act. Restricted securities may be sold in the public market only if registered or if they qualify for exemption from registration described below under Rule 144 or Rule 701 promulgated under the Securities Act. As a result of the lock-up agreements described below and the provisions of Rule 144 and Rule 701, the shares sold in this offering and the restricted shares will be available for sale in the public market as follows:

Date
  Number of Shares
Eligible for
Sale / Percent of
Outstanding Stock
  Comment
At the date of this prospectus       Shares sold in this offering or eligible for sale under Rule 144
Between 90 and 180 days (subject to extension) after the date of this prospectus       Shares eligible for sale under Rule 144 or Rule 701
After 180 days after the date of this prospectus and various times thereafter       Shares eligible for sale under Rules 144 or Rule 701 upon expiration of lock-up agreements

        Additionally, of the    •    shares of our common stock that were subject to stock options and warrants outstanding as of December 31, 2010, options and warrants to purchase approximately    •    shares of common stock will be vested and eligible for sale after 180 days after the date of this prospectus.

Rule 144

        In general, under Rule 144 under the Securities Act, as currently in effect, beginning 90 days after the date of this prospectus, a person who has beneficially owned shares of our common stock for at

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least six months is entitled to sell within any three-month period a number of shares that does not exceed the greater of:

    one percent of the number of shares of our common stock then outstanding, which will equal     •    shares immediately after the closing of this offering; or

    the average weekly trading volume of our common stock on the NASDAQ Global Select Market during the four calendar weeks preceding the filing of a notice on Form 144 with respect to the sale.

        Sales under Rule 144 are also subject to requirements on the manner of sale, notice and the availability of our current public information. Rule 144 also provides that affiliates that sell shares must comply with the same restrictions applicable to restricted shares, other than the holding period requirement.

        Under Rule 144, a person who is deemed not to have been one of our affiliates at any time during the 90 days preceding a sale and who has beneficially owned the shares proposed to be sold for at least one year, including the holding period of any prior owner other than an affiliate, is entitled to sell the shares without complying with the manner of sale, public information, volume limitation or notice provisions of Rule 144.

Rule 701

        Under Rule 701, shares of our common stock acquired upon the exercise of currently outstanding options, delivered as a result of the vesting of restricted stock, or acquired pursuant to other rights granted under our stock plans may be resold, beginning 90 days after the date of this prospectus, to the extent not subject to lock-up agreements, by:

    persons other than affiliates, subject only to the manner of sale provisions of Rule 144; and

    our affiliates, subject to the manner of sale, public information and filing requirements of Rule 144, in each case, without compliance with the one year holding period requirement of Rule 144.

        As of December 31, 2010, options to purchase a total of    •    shares of common stock were outstanding, of which approximately     •    were vested.

Registration Rights

        Upon the closing of this offering, the holders of    •    shares of our common stock including shares of our common stock issuable upon the automatic conversion of a portion of our convertible debt, or their permitted transferees, are entitled to rights with respect to the registration of these shares under the Securities Act. Registration of these shares under the Securities Act would result in the shares becoming freely tradable without restriction under the Securities Act immediately upon the effectiveness of the registration statement. See "Description of Capital Stock—Registration Rights."

Equity Compensation Awards

        Immediately after this offering, we intend to file with the SEC a registration statement on Form S-8 under the Securities Act covering the shares of common stock reserved for issuance pursuant to our Year 2000 Stock Option Plan, our 2007 Long-Term Incentive Plan, and our 2010 Long-Term Equity Incentive Plan. The registration statement is expected to be filed and become effective as soon as practicable after the closing of this offering. Accordingly, shares registered under the registration statement will, subject to Rule 144 volume limitations applicable to affiliates and the lock-up agreements described above, be available for sale in the open market.

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Underwriting

        We have entered into an underwriting agreement with [    •    ], acting as the representative of the underwriters named below, with respect to the shares of common stock subject to this offering. Subject to certain conditions, we have agreed to sell to the underwriters, and the underwriters have agreed to purchase, the number of shares of common stock provided below opposite their respective names.

Underwriters
  Number of Shares

   

   

   

   
     
 

Total

   

        The underwriters are offering the shares of common stock subject to their acceptance of the shares of common stock from us and subject to prior sale. The underwriting agreement provides that the obligations of the several underwriters to pay for and accept delivery of the shares of common stock offered by this prospectus are subject to the approval of certain legal matters by their counsel and to certain other conditions. The underwriters are obligated to take and pay for all of the shares of common stock if any such shares are taken. However, the underwriters are not required to take or pay for the shares of common stock covered by the underwriters' over-allotment option described below.

Over-Allotment Option

        We have granted the underwriters an option, exercisable for 45 days from the date of this prospectus, to purchase up to an aggregate of    •    additional shares of common stock to cover over-allotments, if any, at the public offering price set forth on the cover page of this prospectus, less underwriting discounts and commissions. The underwriters may exercise this option solely for the purpose of covering over-allotments, if any, made in connection with the offering of the shares of common stock offered by this prospectus. If the underwriters exercise this option, each underwriter will be obligated, subject to certain conditions, to purchase a number of additional shares proportionate to that underwriter's initial purchase commitment as indicated in the table above.

Commission and Expenses

        The underwriters have advised us that they propose to offer the shares of common stock to the public at the initial public offering price set forth on the cover page of this prospectus and to certain dealers at that price less a concession not in excess of $    •    per share. The underwriters may allow, and certain dealers may reallow, a discount from the concession not in excess of $    •    per share to certain brokers and dealers. After this offering, the initial public offering price, concession and reallowance to dealers may be reduced by the representatives. No such reduction shall change the amount of proceeds to be received by us as set forth on the cover page of this prospectus. The shares of common stock are offered by the underwriters as stated herein, subject to receipt and acceptance by them and subject to their right to reject any order in whole or in part. The underwriters have informed us that they do not intend to confirm sales to any accounts over which they exercise discretionary authority.

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        The following table shows the underwriting discounts and commissions payable to the underwriters by us in connection with this offering. Such amounts are shown assuming both no exercise and full exercise of the underwriters' over-allotment option to purchase shares.

 
  Fee per share(1)   Total Without
Exercise of
Over-Allotment
  Total With
Exercise of
Over-Allotment
 

Public offering price

  $     $     $    

Discount

  $     $     $    

(1)
The fees do not include the over-allotment option granted to the underwriters, the corporate finance fee in the amount of 2.5% of the gross proceeds payable to the representative of the underwriters, or the warrants to purchase shares of common stock equal to 10% of the number of shares sold in the offering issuance to the representative of the underwriters at the closing.

        We estimate that expenses payable by us in connection with the offering of our common stock, other than the underwriting discounts and commissions referred to above, will be approximately $    •    , which includes up to $275,000 that we have agreed to reimburse the representative of the underwriters for the legal fees and actual expenses incurred by them in connection with the offering. We have advanced $25,000 of such amount to the representative of the underwriters.

Underwriters' Warrants

        We have also agreed to issue to the underwriters warrants to purchase a number of our shares of common stock equal to an aggregate of 2% of the shares of common stock sold in this offering. The warrants will have an exercise price equal to 120% of the offering price of the shares of common stock sold in this offering and may be exercised on a cashless basis. The warrants are exercisable commencing six months after the effective date of the registration statement related to this offering, and will be exercisable for four and a half years thereafter. The warrants are not redeemable by us. The warrants also provide for one demand registration of the shares of common stock underlying the warrants at our expense, an additional demand at the warrant holder's expense and unlimited "piggyback" registration rights at our expense with respect to the underlying shares of common stock during the five year period after the date of this prospectus. The warrants and the underlying shares of common stock have been deemed compensation by FINRA and are therefore subject to a 180-day lock-up pursuant to Rule 5110(g)(1) of FINRA. The underwriters (or permitted assignees under the Rule) may not sell, transfer, assign, pledge, or hypothecate the warrants or the securities underlying the warrants, nor will they engage in any hedging, short sale, derivative, put, or call transaction that would result in the effective economic disposition of the warrants or the underlying securities for a period of 180 days from the date of this prospectus. The warrants will provide for adjustment in the number and price of such warrants (and the shares of common stock underlying such warrants) in the event of recapitalization, merger or other structural transaction to prevent mechanical dilution.

Indemnification

        We have agreed to indemnify the underwriters against certain liabilities, including liabilities under the Securities Act of 1933, as amended, or the Securities Act, and liabilities arising from breaches of representations and warranties contained in the underwriting agreement, or to contribute to payments that the underwriters may be required to make in respect of those liabilities.

Lock-up Agreements

        We, our officers, directors and certain of our shareholders, holding an aggregate of    •    shares of our common stock, have agreed, subject to limited exceptions, for a period of 180 days after the date

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of the underwriting agreement, not to offer, sell, contract to sell, pledge, grant any option to purchase, make any short sale or otherwise dispose of, directly or indirectly any shares of common stock or any securities convertible into or exchangeable for our common stock either owned as of the date of the underwriting agreement or thereafter acquired without the prior written consent of [    •    ]. This 180-day period may be extended if (1) during the last 17 days of the 180-day period, we issue an earnings release or material news or a material event regarding us occurs or (2) prior to the expiration of the 180-day period, we announce that we will release earnings results during the 16-day period beginning on the last day of the 180-day period, then the period of such extension will be 18-days, beginning on the issuance of the earnings release or the occurrence of the material news or material event. If after any announcement described in clause (2) of the preceding sentence, we announce that we will not release earnings results during the 16-day period, the lock-up period shall expire the later of the expiration of the 180-day period and the end of any extension of such period made pursuant to clause (1) of the preceding sentence. [    •    ] may, in its sole discretion and at any time or from time to time before the termination of the lock-up period, without notice, release all or any portion of the securities subject to lock-up agreements.

Listing

        We intend to apply to list our common stock on the Nasdaq Global Select Market under the trading symbol "LUCD".

Electronic Distribution

        A prospectus in electronic format may be made available on websites or through other online services maintained by one or more of the underwriters of this offering, or by their affiliates. Other than the prospectus in electronic format, the information on any underwriter's website and any information contained in any other website maintained by an underwriter is not part of this prospectus or the registration statement of which this prospectus forms a part, has not been approved and/or endorsed by us or any underwriter in its capacity as underwriter, and should not be relied upon by investors.

Price Stabilization, Short Positions and Penalty Bids

        In connection with the offering the underwriters may engage in stabilizing transactions, over-allotment transactions, syndicate covering transactions and penalty bids in accordance with Regulation M under the Exchange Act:

    Stabilizing transactions permit bids to purchase the underlying security so long as the stabilizing bids do not exceed a specified maximum.

    Over-allotment involves sales by the underwriters of shares in excess of the number of shares the underwriters are obligated to purchase, which creates a syndicate short position. The short position may be either a covered short position or a naked short position. In a covered short position, the number of shares over-allotted by the underwriter is not greater than the number of shares that it may purchase in the over-allotment option. In a naked short position, the number of shares involved is greater than the number of shares in the over-allotment option. The underwriter may close out any covered short position by either exercising its over-allotment option and/or purchasing shares in the open market.

    Syndicate covering transactions involve purchases of shares of the common stock in the open market after the distribution has been completed in order to cover syndicate short positions. In determining the source of shares to close out the short position, the underwriters will consider, among other things, the price of shares available for purchase in the open market as compared to the price at which it may purchase shares through the over-allotment option. If the

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      underwriters sell more shares than could be covered by the over-allotment option, a naked short position, the position can only be closed out by buying shares in the open market. A naked short position is more likely to be created if the underwriters are concerned that there could be downward pressure on the price of the shares in the open market after pricing that could adversely affect investors who purchase in the offering.

    Penalty bids permit the representative to reclaim a selling concession from a syndicate member when the common stock originally sold by the syndicate member is purchased in a stabilizing or syndicate covering transaction to cover syndicate short positions.

        These stabilizing transactions, syndicate covering transactions and penalty bids may have the effect of raising or maintaining the market price of our common stock or preventing or retarding a decline in the market price of the common stock. As a result, the price of our common stock may be higher than the price that might otherwise exist in the open market. Neither we nor the underwriters makes any representation or prediction as to the direction or magnitude of any effect that the transactions described above may have on the price of the common stock. In addition, neither we nor the underwriters makes any representations that the underwriters will engage in these stabilizing transactions or that any transaction, once commenced, will not be discontinued without notice.

No Public Market

        Prior to this offering, there has not been a public market for our common stock in the United States and the public offering price for our common stock will be determined through negotiations between us and the underwriters. Among the factors to be considered in these negotiations will be prevailing market conditions, our financial information, market valuations of other companies that we and the underwriters believe to be comparable to us, estimates of our business potential, the present state of our development and other factors deemed relevant.

        We offer no assurances that the initial public offering price will correspond to the price at which our common stock will trade in the public market subsequent to this offering or that an active trading market for our common stock will develop and continue after this offering.

Other

        The underwriters and/or their respective affiliates have provided, and may in the future provide, various investment banking and other financial services for us for which services they have received and, may in the future receive, customary fees. Except for services provided in connection with this offering or as otherwise disclosed in this prospectus, no underwriter has provided any investment banking or other financial services to us during the 180-day period preceding the date of this prospectus and we do not expect to retain any of the underwriters to perform any investment banking or other financial services for at least 90 days after the date of this prospectus.

Notice to Investors in the United Kingdom

        In relation to each Member State of the European Economic Area which has implemented the Prospectus Directive (each, a "Relevant Member State") an offer to the public of any securities which are the subject of the offering contemplated by this prospectus may not be made in that Relevant Member State except that an offer to the public in that Relevant Member State of any such securities may be made at any time under the following exemptions under the Prospectus Directive, if they have been implemented in that Relevant Member State:

        (a)   to legal entities which are authorized or regulated to operate in the financial markets or, if not so authorized or regulated, whose corporate purpose is solely to invest in securities;

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        (b)   to any legal entity which has two or more of (1) an average of at least 250 employees during the last financial year; (2) a total balance sheet of more than €43,000,000 and (3) an annual net turnover of more than €50,000,000, as shown in its last annual or consolidated accounts;

        (c)   by the underwriters to fewer than 100 natural or legal persons (other than qualified investors as defined in the Prospectus Directive); or

        (d)   in any other circumstances falling within Article 3(2) of the Prospectus Directive, provided that no such offer of shares shall result in a requirement for the publication by the issuer or the underwriters of a prospectus pursuant to Article 3 of the Prospectus Directive.

        For the purposes of this provision, the expression an "offer to the public" in relation to any security in any Relevant Member State means the communication in any form and by any means of sufficient information on the terms of the offer and any securities to be offered so as to enable an investor to decide to purchase such securities, as the same may be varied in that Member State by any measure implementing the Prospectus Directive in that Member State and the expression "Prospectus Directive" means Directive 2003/71/EC and includes any relevant implementing measure in each Relevant Member State.

        Each underwriter has represented, warranted and agreed that:

        (a)   it has only communicated or caused to be communicated and will only communicate or cause to be communicated any invitation or inducement to engage in investment activity (within the meaning of section 21 of the Financial Services and Markets Act 2000 (the FSMA)) received by it in connection with the issue or sale of any of our securities in circumstances in which section 21(1) of the FSMA does not apply to the issuer; and

        (b)   it has complied with and will comply with all applicable provisions of the FSMA with respect to anything done by it in relation to our securities in, from or otherwise involving the United Kingdom.

European Economic Area

        In particular, this document does not constitute an approved prospectus in accordance with European Commission's Regulation on Prospectuses no. 809/2004 and no such prospectus is to be prepared and approved in connection with this offering. Accordingly, in relation to each Member State of the European Economic Area which has implemented the Prospectus Directive (being the Directive of the European Parliament and of the Council 2003/71/EC and including any relevant implementing measure in each Relevant Member State) (each, a Relevant Member State), with effect from and including the date on which the Prospectus Directive is implemented in that Relevant Member State (the Relevant Implementation Date) an offer of securities to the public may not be made in that Relevant Member State prior to the publication of a prospectus in relation to such securities which has been approved by the competent authority in that Relevant Member State or, where appropriate, approved in another Relevant Member State and notified to the competent authority in that Relevant Member State, all in accordance with the Prospectus Directive, except that the underwriters may, with effect from and including the Relative Implementation Date, make an offer of securities to the public in that Relevant Member State at any time:

    to legal entities which are authorized or regulated to operate in the financial markets or, if not so authorized or regulated, whose corporate purpose is solely to invest in securities;

    to any legal entity which has two or more of (1) an average of at least 250 employees during the last financial year; (2) a total balance sheet of more than 43,000,000 euros; and (3) an annual net turnover of more than 50,000,000 euros, as shown in the last annual or consolidated accounts; or

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    in any other circumstances which do not require the publication by the issuer of a prospectus pursuant to Article 3 of the Prospectus Directive.

        For the purposes of this provision, the expression an "offer of securities to the public" in relation to any common shares in any Relevant Member State means the communication in any form and by any means of sufficient information on the terms of the offer and the securities to be offered so as to enable an investor to decide to purchase or subscribe such securities, as the same may be varied in that Member State by any measure implementing the Prospectus Directive in that Member State. For these purposes the units are "securities."


Experts

        The validity of the common stock being offered hereby is being passed upon for us by Harris Beach PLLC, Rochester, New York. Certain legal matters relating to the offering will be passed upon for the underwriters by Lowenstein Sandler PC.

        The financial statements of Lucid, Inc. as of and for the years ended December 31, 2010 and 2009, included in this prospectus have been audited by Deloitte & Touche LLP, an independent registered public accounting firm as stated in their report appearing herein. Such financial statements have been included herein in reliance upon the report of such firm given upon their authority as experts in accounting and auditing.


Where You Can Find Additional Information

        We have filed with the SEC a registration statement on Form S-1 under the Securities Act of 1933, as amended, with respect to the shares of common stock being offered by this prospectus. This prospectus does not contain all of the information in the registration statement and its exhibits. For further information with respect to Lucid, Inc. and the common stock offered by this prospectus, we refer you to the registration statement and its exhibits. Statements contained in this prospectus as to the contents of any contract or any other document referred to are not necessarily complete, and in each instance, we refer you to the copy of the contract or other document filed as an exhibit to the registration statement. Each of these statements is qualified in all respects by this reference.

        You can read our SEC filings, including the registration statement, on the Internet at the SEC's website at http://www.sec.gov. You may also read and copy any document we file with the SEC at its public reference facilities at 100 F Street, N.E., Washington, D.C. 20549. You may also obtain copies of these documents at prescribed rates by writing to the Public Reference Section of the SEC at 100 F Street, N.E., Washington, D.C. 20549. Please call the SEC at 1-800-SEC-0330 for further information on the operation of the public reference facilities.

        Upon completion of this offering, we will be subject to the information requirements of the Securities Exchange Act of 1934, as amended, and we will file reports, proxy statements and other information with the SEC. These reports, proxy statements and other information will be available for inspection and copying at the public reference room and web site of the SEC referred to above. We also maintain a website at http://www.lucid-tech.com, at which you may access these materials free of charge as soon as reasonably practicable after they are electronically filed with, or furnished to, the SEC. The information contained in, or that can be accessed through, our website is not part of this prospectus.

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LUCID, INC.

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders of
Lucid, Inc. and Subsidiary
Rochester, NY

        We have audited the accompanying consolidated balance sheets of Lucid, Inc. and subsidiary (the "Company") as of December 31, 2010 and 2009, and the related consolidated statements of operations, stockholders' deficit, and cash flows for the years then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the financial statements 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. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

        In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Lucid, Inc. and subsidiary at December 31, 2010 and 2009, and the results of their operations and their cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.

        The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 2 to the consolidated financial statements, the Company's recurring losses from operations, working capital deficiency, deficit in equity, and the need to raise additional capital to fund operations raise substantial doubt about its ability to continue as a going concern. Management's plans concerning these matters are also discussed in Note 2 to the consolidated financial statements. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

/s/ Deloitte & Touche LLP

Rochester, NY

April 15, 2011

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LUCID, INC.

CONSOLIDATED BALANCE SHEETS

AS OF DECEMBER 31, 2010 AND 2009

 
  2010   2009  

ASSETS

             

CURRENT ASSETS:

             
 

Cash

  $ 839,075   $ 29,331  
 

Accounts receivable

    327,751     96,145  
 

Other receivables

          22,125  
 

Inventories

    356,931     333,016  
 

Prepaid expenses and other current assets

    175,910     65,678  
           
   

Total current assets

    1,699,667     546,295  

PROPERTY AND EQUIPMENT—Net

    17,379     15,975  

DEFERRED FINANCING COSTS—Net

    287,191     62,222  

OTHER ASSETS

    12,199     15,030  
           

TOTAL ASSETS

  $ 2,016,436   $ 639,522  
           

LIABILITIES AND STOCKHOLDERS' DEFICIT

             

CURRENT LIABILITIES:

             
 

Line-of-credit

  $ 2,000,000   $ 128,733  
 

Current portion of long-term debt—net

    461,982     1,822,884  
 

Accounts payable

    1,077,402     1,965,391  
 

Accrued expenses and other current liabilities

    1,098,469     2,536,906  
 

Current portion of deferred revenue

    351,331     350,000  
           
   

Total current liabilities

    4,989,184     6,803,914  

LONG-TERM DEBT—Net

   
3,591,557
   
1,460,075
 

WARRANT LIABILITY

    1,674,170     368,034  

NOTES PAYABLE—related parties

    183,146     788,445  

DEFERRED REVENUE

          354,162  
           
   

Total Liabilities

    10,438,057     9,774,630  

COMMITMENTS AND CONTINGENCIES (NOTE 13)

             

STOCKHOLDERS' DEFICIT:

             
 

Preferred Stock—par value $.05 per share; 10,000,000 authorized in 2010, and 6,000,000 authorized in 2009; Series A—2,258,745 issued and outstanding (liquidation value of $112,937)

    112,937     112,937  
 

Series B—637,921 issued and outstanding (liquidation value of $31,896)

    31,896     31,896  
 

Common Stock—par value $.01 per share; 60,000,000 authorized in 2010, and 12,000,000 authorized in 2009; 4,508,239 issued and outstanding in 2010, and 2,105,157 issued and outstanding in 2009

    45,083     21,052  
 

Additional paid-in capital

    19,725,348     13,993,757  
 

Subscription receivable

    (739,218 )      
           
 

Accumulated deficit

    (27,597,667 )   (23,294,750 )
           
   

Total Stockholders' Deficit

    (8,421,621 )   (9,135,108 )
           

TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT

  $ 2,016,436   $ 639,522  
           

See notes to consolidated financial statements.

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LUCID, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

FOR THE YEARS ENDED DECEMBER 31, 2010 AND 2009

 
  2010   2009  

REVENUE:

             
 

Product sales

  $ 2,278,468   $ 1,857,418  
 

Non-product revenue

    348,324     350,004  
 

Grant revenue—net

          95,117  
           
   

Total revenue

    2,626,792     2,302,539  

OPERATING EXPENSES:

             
 

Cost of revenue

    1,143,035     1,064,214  
 

General and administrative

    3,799,268     3,232,441  
 

Sales and marketing

    798,925     879,482  
 

Engineering, research and development

    685,710     756,199  
           
   

Total operating expenses

    6,426,938     5,932,336  

OTHER OPERATING INCOME:

             
 

Refundable credit

    244,479        
 

Gain on settlement of research agreement

          85,049  
           
   

Total other operating income

    244,479     85,049  

LOSS FROM OPERATIONS

   
(3,555,667

)
 
(3,544,748

)

OTHER INCOME (EXPENSE):

             
 

Interest expense

    (594,935 )   (334,570 )
 

Loss on extinguishment of debt

    (75,875 )      
 

Fair value adjustment of warrants

    (73,049 )   (183,091 )
 

Other

    (3,391 )   11,058  
           

NET LOSS

  $ (4,302,917 ) $ (4,051,351 )
           

BASIC AND DILUTED NET LOSS PER COMMON SHARE

  $ (1.61 ) $ (1.72 )
           

WEIGHTED AVERAGE COMMON SHARES OUTSTANDING

    2,671,248     2,356,867  
           

See notes to consolidated financial statements.

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LUCID, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT

FOR THE YEARS ENDED DECEMBER 31, 2010 AND 2009

 
   
   
  Preferred Stock   Preferred Stock    
   
   
   
 
 
  Common Stock   Class A   Class B    
   
   
   
 
 
  Additional
Paid-In
Capital
  Subscription
Receivable
  Accumulated
Deficit
   
 
 
  Shares   Amount   Shares   Amount   Shares   Amount   Total  

BALANCE—January 1, 2009

    2,162,790   $ 21,628     2,258,745   $ 112,937     637,921   $ 31,896   $ 12,801,803   $ (140,625 ) $ (19,425,734 ) $ (6,598,095 )

Cumulative effect from the adoption of accounting principle

                                                   
182,335
   
182,335
 

Reclassification of warrants for the adoption of accounting principle

                                        (354,545 )               (354,545 )

Stock-based compensation

                                        1,686,548                 1,686,548  

Settlement of subscription receivable

    (57,633 )   (576 )                           (140,049 )   140,625              
 

Net loss

                                                    (4,051,351 )   (4,051,351 )
                                           

BALANCE—December 31, 2009

    2,105,157     21,052     2,258,745     112,937     637,921     31,896     13,993,757     0     (23,294,750 )   (9,135,108 )
                                           

Stock-based compensation

                                        1,410,933                 1,410,933  

Stock option net exercises

    91,476     915                             (28,316 )               (27,401 )

Warrants exercised

    913,852     9,139                             1,159,035                 1,168,174  

Shares issued to settle accrued expenses

    6,351     64                             20,820                 20,884  

Shares issued for services

    12,158     121                             39,878                 39,999  

Reclassification of restricted stock

    233,333     2,333                             (2,333 )                  

Issuance of restricted stock

    150,000     1,500                             (1,500 )                  

Reclassification of warrants to equity

                                        9,708                 9,708  

Conversion of debt to common stock

    713,028     7,130                             2,233,678                 2,240,808  

Conversion of related party debt to common stock

    282,884     2,829                             889,688                 892,517  

Warrant exercise receivable

                                              (739,218 )         (739,218 )
 

Net loss

                                                    (4,302,917 )   (4,302,917 )
                                           

BALANCE—December 31, 2010

    4,508,239   $ 45,083     2,258,745   $ 112,937     637,921   $ 31,896   $ 19,725,348   $ (739,218 ) $ (27,597,667 ) $ (8,421,621 )
                                           

See notes to consolidated financial statements.

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LUCID, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE YEARS ENDED DECEMBER 31, 2010 AND 2009

 
  2010   2009  

CASH FLOWS FROM OPERATING ACTIVITIES:

             
 

Net loss

  $ (4,302,917 ) $ (4,051,351 )
 

Adjustments to reconcile net loss to net cash used in operating activities:

             
   

Depreciation and amortization

    61,378     151,975  
   

Stock-based compensation

    1,410,933     1,686,548  
   

Stock issued for services

    39,999        
   

Warrants issued for services

    70,045        
   

Gain on settlement of research agreement

          (85,049 )
   

Fair value adjustment of warrants

    73,049     183,091  
   

Loss on extinguishment of debt

    75,875        
   

Accretion of debt discount

    78,053     56,491  
   

Change in:

             
     

Accounts receivable

    (231,606 )   90,128  
     

Inventories

    (23,915 )   (16,629 )
     

Prepaid expenses and other current assets

    (49,783 )   24,163  
     

Other receivables

    22,106     50,990  
     

Other assets

    2,830     4,948  
     

Accounts payable

    (797,989 )   572,820  
     

Accrued expenses and other current liabilities

    (89,954 )   502,653  
     

Deferred revenue

    (352,832 )   (610,693 )
           
       

Net cash used in operating activities

    (4,014,728 )   (1,439,915 )
           

CASH FLOWS FROM INVESTING ACTIVITIES—Purchases of property and equipment

    (15,377 )   (15,540 )
           

CASH FLOWS FROM FINANCING ACTIVITIES:

             
 

Borrowings on line-of-credit

    2,000,000        
 

Repayments of line-of-credit

    (128,733 )   (4,867 )
 

Borrowings on notes payable—related parties

    200,000     650,000  
 

Borrowings on debt

    3,975,000     925,000  
 

Repayments of debt

    (937,268 )   (18,631 )
 

Loan acquisition costs

    (272,375 )   (70,000 )
 

Warrant exercises

    3,225        
           
     

Net cash provided by financing activities

    4,839,849     1,481,502  
           

NET INCREASE IN CASH

    809,744     26,047  

CASH—Beginning of year

   
29,331
   
3,284
 
           

CASH—End of year

  $ 839,075   $ 29,331  
           

SUPPLEMENTAL CASH FLOW DATA—Cash paid for interest

  $ 487,070   $ 62,919  
           

SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES:

             
 

Insurance premiums financed through note payable

  $ 60,430   $ 48,086  
           
 

Issuance of warrants in connection with debt issuance

  $ 1,167,224   $ 9,201  
           
 

Issuance of warrants in connection with note payable—related parties

  $ 19,722   $ 3,532  
           
 

Issuance of promissory note in exchange for accrued interest

  $ 1,075,880        
           
 

Issuance of promissory note in exchange for accrued consulting fees

  $ 141,000        
           
 

Settlement of subscription receivable

        $ 140,625  
           
 

Exercise of warrants in connection with repayments of debt, net of subscription receivable

  $ 425,731        
           
 

Issuance of common stock to settle accounts payable to vendors

  $ 20,884        
           
 

Issuance of common stock upon conversion of debt

  $ 2,240,808        
           
 

Issuance of common stock upon conversion of debt—related parties

  $ 892,517        
           

See notes to consolidated financial statements.

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LUCID, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

AS OF AND FOR THE YEARS ENDED DECEMBER 31, 2010 AND 2009

1. NATURE OF OPERATIONS

        Lucid, Inc. (Lucid) and its wholly-owned subsidiary, Lucid International Ltd. (LIL) (collectively, the "Company"), is a medical device and information technology company that develops, manufactures, markets and sells noninvasive diagnostic confocal imagers for assessing skin lesions for skin cancer. The Company sells its products worldwide and is headquartered in Rochester, New York.

        The Company evaluated all events and transactions that occurred after December 31, 2010, through April 15, 2011, the date that the Company issued these consolidated financial statements.

2. LIQUIDITY AND CAPITAL RESOURCES

        The Company has incurred net losses of approximately $4.3 million and $4.1 million in 2010 and 2009, respectively. In addition, the Company had a working capital deficit of approximately $3.3 million and $6.3 million at December 31, 2010 and 2009, respectively, and a deficit in equity of approximately $8.4 million and $9.1 million at December 31, 2010 and 2009, respectively. Furthermore, the Company's operating plan for fiscal 2011 projects a net loss of approximately $3.5 million, and needs to raise additional capital to fund its operations in 2011 and beyond. The Company continues to explore strategic alternatives to finance its business plan, including but not limited to a potential initial public offering of its common stock, private equity or debt financings or other sources, such as strategic partnerships. The Company is also focusing on increasing sales of its products to generate cash flows to fund its operations.

        There can be no assurance that the Company will be successful in its plans described above or in attracting alternative debt or equity financing. These conditions raise substantial doubt about the Company's ability to continue as a going concern. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.

3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

        Principles of Consolidation—The consolidated financial statements include the accounts of Lucid and LIL. All inter-company accounts and transactions have been eliminated in consolidation.

        Use of Estimates—The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenue and expenses during the reporting period. On an ongoing basis, the Company evaluates its estimates, including those related to revenue recognition, allowances for doubtful accounts, inventories, impairment of long-lived assets, accrued expenses, income taxes including the valuation allowance for deferred tax assets, valuation of warrants, and stock-based compensation. The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable, the results of which form the basis for making judgments about the carrying values of assets and liabilities.

        Due to the inherent uncertainty involved in making estimates, actual results reported in future periods may differ from those estimates.

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LUCID, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

AS OF AND FOR THE YEARS ENDED DECEMBER 31, 2010 AND 2009

3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

        Revenue Recognition—The Company recognizes revenue when evidence of an arrangement exists, title has passed (generally upon shipment) or services have been rendered, the selling price is fixed or determinable and collectability is reasonable assured. When transactions include multiple deliverables, the Company applies the accounting guidance for multiple element arrangements to determine if those deliverables constitute separate units of accounting. Revenue on arrangements that include multiple elements is allocated to each element based on the relative fair value of each element. Each element's allocated revenue is recognized when the revenue recognition criteria for that element have been met, although multiple element arrangements have not been material through December 31, 2010. Fair value is generally determined by objective evidence, which is based on the price charged when each element is sold separately. All costs related to product shipment are recognized at time of shipment and included in cost of revenue. The Company does not provide for rights of return to customers on product sales.

        Grant revenue is recognized as it is earned, as determined by the terms of the grant, and is presented net of expenses directly related to the project being funded by the grant.

        Maintenance and service support contract revenues are recognized ratably over the term of the service contracts.

        Licensing fees related to the sale of a perpetual license to use certain technology in certain geographic areas are being recognized as earned.

        Product Warranty—Medical devices sold are covered by a warranty, ranging from one year to two years, for which estimated contractual warranty obligations are recorded as an expense at the time of shipment. As of December 31, 2010 and 2009, the Company's reserve for warranty liability was $25,000 and $12,000, respectively.

        Concentrations of Credit Risk—Financial instruments that subject the Company to concentrations of credit risk consist primarily of cash and accounts receivable. The Company maintains its cash in bank demand deposit accounts. The cash balances are insured by the FDIC up to $250,000 per depositor. At times, the amounts in these accounts may exceed the federally insured limits. The Company has not experienced any losses in these accounts and believes it is not exposed to any significant credit risk with respect to cash.

        The Company provides credit in the normal course of business to the majority of its customers. Accounts for which no payments have been received for several months are considered delinquent and customary collection efforts are begun. After all collection efforts are exhausted the account is written-off. Allowance for doubtful accounts is based on estimates of probable losses related to accounts receivable balances. At December 31, 2010 and 2009, management has determined that no allowance is required.

        For the year ended December 31, 2010, the Company had sales of $1,282,702 and $212,500 to two customers. These two customers accounted for 82% and 13%, respectively, of the Company's accounts receivable balance at December 31, 2010.

        For the year ended December 31, 2009, the Company had sales of approximately $890,000 and $259,000 to two customers. These two customers accounted for 75% and 0%, respectively, of the

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LUCID, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

AS OF AND FOR THE YEARS ENDED DECEMBER 31, 2010 AND 2009

3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)


Company's accounts receivable balance at December 31, 2009. One other customer had a significant accounts receivable balance, representing 23% of the Company's accounts receivable balance at December 31, 2009.

        Inventories—Inventories are stated at the lower of cost, determined on a first-in, first-out (FIFO) method, or market. Excess, obsolete or expired inventory are adjusted to net realizable value, based primarily on how long the inventory has been held as well as the Company's estimate of forecasted net sales of that product. A significant change in the timing or level of demand for our products may result in recording additional adjustments to the net realizable value of excess, obsolete or expired inventory in the future. Adjustments to inventory have not been material as of December 31, 2010 and 2009.

        Property and Equipment—Property and equipment is stated at cost, less accumulated depreciation. Depreciation is computed using the straight-line method over the estimated useful lives of the related assets as follows:

Computer hardware and software

  2 - 3 years

Furniture and fixtures

  5 years

Machinery and equipment

  2 - 5 years

Office equipment

  5 years

Vehicles

  5 years

        Repairs and maintenance are expensed as incurred.

        Impairment of Long-Lived Assets—The Company assesses the impairment of definite lived assets when events or changes in circumstances indicate that the carrying value of the assets may not be recoverable. Factors that are considered in deciding when to perform an impairment review include significant under-performance of a business or product line in relation to expectations, significant negative industry or economic trends, and significant changes or planned changes in the use of the assets.

        Recoverability potential is measured by comparing the carrying amount of the asset group to the asset group's related total future undiscounted cash flows. If an asset group's carrying value is not recoverable through its related cash flows, the asset group is considered to be impaired. Impairment is measured by comparing the asset group's carrying amount to its fair value.

        When it is determined that useful lives of assets are shorter than originally estimated, and there are sufficient cash flows to support the carrying value of the assets, the rate of depreciation is accelerated in order to fully depreciate the assets over their new shorter useful lives. The Company recognized no impairment expenses in 2010 or 2009.

        Deferred Financing Costs, Net—Deferred financing costs, net, represent amounts incurred in connection with the Company's 2010/2011 Convertible Debt Offering and the 2009 Convertible Debt Offering. These costs are amortized over the period from the date of issuance to the contractual maturity date. The Company expensed deferred fees of $47,406 and $7,778 for the years ended December 31, 2010 and December 31, 2009, respectively, which are included as Depreciation and Amortization in the consolidated statement of cash flows, and as interest expense within the consolidated statement of operations.

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LUCID, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

AS OF AND FOR THE YEARS ENDED DECEMBER 31, 2010 AND 2009

3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

        Fair Value Measurements—Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability (i.e. the "exit price") in an orderly transaction between market participants at the measurement date. The guidance establishes a hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the most observable inputs be used when available. Observable inputs are inputs that market participants would use in pricing the assets or liability developed based on market data obtained from sources independent of the Company. Unobservable inputs are inputs that reflect the Company's assumptions about the assumptions market participants would use in pricing the asset or liability developed based on the best information available in the circumstances. The hierarchy is broken down into three levels based on the reliability of inputs as follows:

            Level 1—Valuations based on quoted prices in active markets for identical assets or liabilities that the Company has the ability to access. Since valuations are based on quoted prices that are readily and regularly available in an active market, valuation of these products does not entail a significant degree of judgment.

            Level 2—Valuation is determined from quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar instruments in markets that are not active or by model-based techniques in which all significant inputs are observable in the market.

            Level 3—Valuations based on inputs that are unobservable and significant to the overall fair value measurement. The degree of judgment exercised in determining fair value is greatest for instruments categorized in Level 3.

        The availability of observable inputs can vary and is affected by a wide variety of factors, including, the type of asset/liability, whether the asset/liability is established in the marketplace, and other characteristics particular to the transaction. To the extent that valuation is based on models or inputs that are less observable or unobservable in the market, the determination of fair value requires more judgment. In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy.

        In such cases, for disclosure purposes the appropriate level in the fair value hierarchy is determined based on the lowest level input that is significant to the fair value measurement in its entirety.

        Fair value is a market-based measure considered from the perspective of a market participant rather than an entity-specific measure. Therefore, even when market assumptions are not readily available, assumptions are required to reflect those that market participants would use in pricing the asset or liability at the measurement date.

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LUCID, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

AS OF AND FOR THE YEARS ENDED DECEMBER 31, 2010 AND 2009

3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

        The Company considers warrants that are not indexed to the Company's own stock to be classified as Level 3. The following table presents the change in Level 3 liabilities: