10-Q

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

FORM 10-Q

     (MARK ONE)

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

For the quarterly period ended September 30, 2001 or

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

FOR THE TRANSITION PERIOD FROM ___________ TO _____________

Commission file number 000-0030755

CEPHEID
(Exact name of registrant as specified in its charter)

 

California	77-0441625
(State or Other Jurisdiction of Incorporation or Organization)	(I.R.S. Employer Identification Number)

1190 Borregas Avenue
Sunnyvale, California    94089-1302
(Address of principal executive offices including zip code)

(408) 541-4191
(Registrant's telephone number, including area code)

Check whether the issuer (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file reports), and (2) has been subject to such filing requirements for the past 90 days.    YES [X]   NO [   ].

As of November 1, 2001 there were 26,566,866 shares of Common Stock outstanding.

CEPHEID
Report On Form 10-Q For The
Quarter Ended September 30, 2001
INDEX

PART I. Financial Information	Page
Item 1. Financial Statements (unaudited):
Condensed Consolidated Balance Sheets as of            September 30, 2001 and December 31, 2000	1
Condensed Consolidated Statements of Operations for the            three and nine month periods ended September 30, 2001 and 2000	2
Condensed Consolidated Statements of Cash Flows for the            nine month periods ended September 30, 2001 and 2000	3
Notes to Condensed Consolidated Financial Statements	4
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations	8
Item 3. Quantitative and Qualitative Disclosures about Market Risk	10
PART II. Other Information
Item 1. Legal Proceedings	10
Item 2: Changes in Securities and Use of Proceeds	10
Item 3: Defaults Upon Senior Securities	10
Item 4: Submission of Matters to a Vote of Security Holders	10
Item 5: Other Information	10
Item 6. Exhibits and Reports on Form 8-K	10
Signatures	11

PART I - FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

CEPHEID

CONDENSED CONSOLIDATED BALANCE SHEETS
(amounts in thousands)

                                                       September 30,  December 31,
                                                            2001         2000(1)
                                                       ------------  ------------
                                                        (Unaudited)
ASSETS
Current assets:
   Cash and cash equivalents ........................ $     29,715  $     39,698
   Accounts receivable ..............................        1,742         2,407
   Inventory ........................................        4,009         1,772
   Prepaid expenses and other current assets ........          280           530
                                                       ------------  ------------
     Total current assets ...........................       35,746        44,407
Property and equipment, net .........................        3,207         2,892
Other assets ........................................           51            54
                                                       ------------  ------------
     Total assets ................................... $     39,004  $     47,353
                                                       ============  ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
   Accounts payable ................................. $        835  $        501
   Accrued compensation .............................          908           510
   Other accrued liabilities ........................        1,470         1,236
   Current portion of equipment financing ...........        1,035           879
   Current portion of deferred rent .................           31            22
                                                       ------------  ------------
     Total current liabilities ......................        4,279         3,148
Equipment financing, less current portion ...........        1,340         1,504
Deferred rent, less current portion .................           31            54

Commitments

Shareholders' equity:
   Common stock .....................................       65,200        64,944
   Additional paid-in capital .......................        8,378         8,310
   Note receivable from shareholder .................          --            (35)
   Deferred stock-based compensation ................       (1,560)       (3,238)
   Accumulated other comprehensive loss .............          (21)          (10)
   Accumulated deficit ..............................      (38,643)      (27,324)
                                                       ------------  ------------
     Total shareholders' equity .....................       33,354        42,647
                                                       ------------  ------------
     Total liabilities and shareholders' equity ..... $     39,004  $     47,353
                                                       ============  ============

(1) The balance sheet at December 31, 2000 has been derived from the audited financial statements at the date which are included in the Company's Form 10-K filed with the Securities and Exchange Commission.

See accompanying notes to Condensed Consolidated Fianancial Statements

CEPHEID

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
(in thousands, except per share amounts)

                                        Three Months Ended     Nine Months Ended
                                          September 30,         September 30,
                                       --------------------  --------------------
                                          2001       2000       2001       2000
                                       ---------  ---------  ---------  ---------
Revenues:

Product sales ....................... $   1,976  $   1,618  $   5,819  $   2,554
Contract revenue ....................       815        705      2,362      1,874
                                       ---------  ---------  ---------  ---------
Total revenues ......................     2,791      2,323      8,181      4,428
                                       ---------  ---------  ---------  ---------

Operating costs and expenses:
Cost of product sales ...............     1,394      1,410      4,637      2,224
Research and development.............     3,783      4,085     11,091     11,612
Selling, general and administrative..     1,869      1,295      4,866      3,302
                                       ---------  ---------  ---------  ---------
Total operating costs
 and expenses .......................     7,046      6,790     20,594     17,138
                                       ---------  ---------  ---------  ---------
Loss from operations ................    (4,255)    (4,467)   (12,413)   (12,710)
Interest income, net ................       229        679      1,094      1,060
                                       ---------  ---------  ---------  ---------
Net loss ............................    (4,026)    (3,788)   (11,319)   (11,650)
Deemed dividend to Series C
 preferred stockholders .............       --         --         --     (19,114)
                                       ---------  ---------  ---------  ---------
Net loss applicable  to
 common shareholders ................ $  (4,026) $  (3,788) $ (11,319) $ (30,764)
                                       =========  =========  =========  =========
Basic and diluted net loss
 per common share ................... $   (0.15) $   (0.15) $   (0.44) $   (2.42)
                                       =========  =========  =========  =========
Shares used in computing basic and
 diluted net loss per common share ..    26,054     25,035     25,861     12,726
                                       =========  =========  =========  =========

See accompanying notes to Condensed Consolidated Financial Statements.

CEPHEID

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)

                                                             Nine Months Ended
                                                              September 30,
                                                           --------------------
                                                               2001      2000
                                                           ---------  ---------
OPERATING ACTIVITIES:
Net loss ................................................ $ (11,319) $ (11,650)
Adjustments to reconcile net loss to net cash
  used in operating activities:
    Depreciation and amortization .......................       960        638
    Amortization of deferred stock-based compensation ...     1,748      2,598
    Issuance of options to purchase common stock
     for services rendered ..............................       --       1,266
    Amortization of deferred rent .......................       (17)        (8)
    Changes in operating assets and liabilities:
       Accounts receivable ..............................       665     (1,018)
       Inventory ........................................    (2,237)      (706)
       Prepaid expenses and other assets ................       253         88
       Accounts payable and other current liabilities ...       558        377
       Accrued compensation .............................       398        447
                                                           ---------  ---------
Net cash used in operating activities ...................    (8,991)    (7,968)
                                                           ---------  ---------
INVESTING ACTIVITY:
Capital expenditures ....................................    (1,275)    (1,543)
                                                           ---------  ---------
Net cash used in investing activities ...................    (1,275)    (1,543)
                                                           ---------  ---------
FINANCING ACTIVITIES:
Net proceeds from the sale of preferred and common
  shares ................................................       256     50,630
Proceeds from loan arrangements .........................       748        --
Proceeds from notes receivable from shareholder .........        35         35
Principal payments under loan arrangements ..............      (756)      (367)
                                                           ---------  ---------
Net cash provided by financing activities ...............       283     50,298
                                                           ---------  ---------

Net (decrease) increase in cash and cash equivalents ....    (9,983)    40,787
Cash and cash equivalents at beginning of period ........    39,698      1,493
                                                           ---------  ---------
Cash and cash equivalents at end of period .............. $  29,715  $  42,280
                                                           =========  =========

See accompanying notes to Condensed Consolidated Financial Statements.

CEPHEID
Notes to Condensed Consolidated Financial Statements
(unaudited)

1. ORGANIZATION, BUSINESS AND BASIS OF PRESENTATION

Organization and Business

Cepheid (the "Company") was incorporated in the State of California on March 4, 1996. The Company is commercializing its I-CORE® microfluidic and microelectronic technologies as the preferred platform for rapid, on-site detection of DNA (or RNA) in complex biological samples for scientific, medical and industrial applications. The Company is developing fast, versatile systems that can perform all the steps required to analyze DNA in complex biological samples - sample preparation, amplification and detection - with results in less than 30 minutes on a single instrument.

The accompanying unaudited condensed consolidated financial statements have been prepared by management in accordance with generally accepted accounting principles for interim financial information and with the instructions for Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include certain information and footnotes normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States. In the opinion of management, all adjustments (consisting of normal recurring entries) considered necessary for a fair presentation have been included. Operating results for the three and nine month periods ended September 30, 2001 are not necessarily indicative of the results that may be expected for the year ending December 31, 2001 or for any other future period. The accompanying financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in our Form 10-K for the year ended December 31, 2000 filed with the Securities and Exchange Commission.

2. SIGNIFICANT ACCOUNTING POLICIES

Principles of Consolidation

The consolidated financial statements of Cepheid include the accounts of the Company and its wholly-owned subsidiary. All significant intercompany balances and transactions have been eliminated.

Revenue Recognition

The Company recognizes revenue from product sales when goods are shipped, when there is persuasive evidence that an arrangement exists, delivery has occurred, the price is fixed and determinable, and collectibility is reasonably assured. No rights of return exist for product sales.

Contract revenues related to best efforts research and development agreements and government grants are recognized as the related services are performed. Revenue is earned based on the performance requirements of the contract. Non-refundable contract fees for which no further performance obligations exist, and there is no continuing involvement by the Company, are recognized on the earlier of when the payments are received or when collection is assured. Under these agreements, the Company is required to perform specific research and development activities and is reimbursed based on the costs associated with each specific contract over the term of the agreement. Milestone related revenues are recognized upon the achievement of the specified milestone. Deferred revenue is recorded when funds are received in advance of services to be performed.

Significant Concentrations

We distribute our products through our direct sales force and through third-party distributors. For the quarter ended September 30, 2001 product sales from our four distributors represented 47% of total product sales. Of those four distributors, Fisher Scientific Company L.L.C. represented 45% of total product sales while the remaining distributors represented 2% of total product sales in total. For the same quarter of the previous year, sales to Fisher represented 41% and Takara 27%. There was no other one direct customer that represented greater than 10% of total product sales for either the three months ended September 30, 2001 or the prior year period.

The Company relies on several companies as the sole source of various materials in its manufacturing process. Any extended interruption in the supply of these materials could result in the failure to meet customer demand.

Financial instruments that potentially subject the Company to concentrations of credit risk primarily consist of cash equivalent securities.

Comprehensive (Income) Loss

Comprehensive loss includes net loss as well as other comprehensive loss. Other comprehensive loss consists of unrealized losses on available-for-sale marketable securities. Total accumulated other comprehensive income is presented as a separate component of shareholders' equity in the accompanying Condensed Consolidated Balance Sheets.

Recently Issued Accounting Standards

In July 2001, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") Nos. 141 and 142, "Business Combinations" and "Goodwill and Other Intangibles". SFAS No141 requires all business combinations initiated after June 30, 2001 to be accounted for using the purchase method. Under SFAS No. 142, goodwill is no longer subject to amortization over its estimated useful life. Rather, goodwill is subject to at least an annual assessment for impairment, applying a fair- value based test. Additionally, an acquired intangible asset should be separately recognized if the benefit of the intangible asset is obtained through contractual or other legal rights, or if the intangible asset can be sold, transferred, licensed, rented, or exchanged, regardless of the acquirer's intention to do so. Other intangible assets will continue to be valued and amortized over their estimated lives; in-process research and development will continue to be written off immediately. The adoption of this pronouncement is not expected to have a material impact on the Company's financial position or results of operations.

3. NET LOSS PER COMMON SHARE

Basic net loss per common share has been calculated based on the weighted-average number of common shares outstanding during the period, less shares subject to the Company's right of repurchase. Diluted net loss per share would give effect to the impact of common stock equivalents consisting of stock options and warrants (calculated using the treasury stock method). Potentially dilutive securities have been excluded from the computation of diluted net loss per share as their inclusion would be antidilutive.

The computation of pro forma basic and diluted net loss per share includes shares issuable upon the conversion of outstanding shares of convertible preferred stock (using the as-if converted method) from the original date of issuance.

The following table presents the calculation of basic and diluted net loss per share (in thousands, except per share data):

                                                            Three Months Ended     Nine Months Ended
                                                              September 30,         September 30,
                                                           --------------------  --------------------
                                                              2001       2000       2001       2000
                                                           ---------  ---------  ---------  ---------
                                                                (unaudited)           (unaudited)
Net loss applicable to common shareholders .............. $  (4,026) $  (3,788) $ (11,319) $ (30,764)
                                                           =========  =========  =========  =========
Basic and diluted:

Weighted-average shares of common stock outstanding .....    26,458     26,614     26,426     14,464
Less: weighted-average shares subject to repurchase .....      (404)    (1,579)      (565)    (1,738)
                                                           ---------  ---------  ---------  ---------
Shares used in computing basic and diluted net
  loss per common share .................................    26,054     25,035     25,861     12,726
                                                           =========  =========  =========  =========

Basic and diluted net loss per common share ............. $   (0.15) $   (0.15) $   (0.44) $   (2.42)
                                                           =========  =========  =========  =========
Pro forma basic and diluted:

Shares used above .......................................    26,054     25,035     25,861     12,726
Pro forma adjustment to reflect the effect of assumed
  conversion of preferred stock as of the date of
  issuance through the date of actual conversion ........       --         --         --       7,876
                                                           ---------  ---------  ---------  ---------
Shares used in computing pro forma basic and
  diluted net loss per common share .....................    26,054     25,035     25,861     20,602
                                                           =========  =========  =========  =========

Pro forma basic and diluted net loss per common share ... $   (0.15) $   (0.15) $   (0.44) $   (1.49)
                                                           =========  =========  =========  =========

4. INVENTORY

The components of inventories (in thousands) are as follows:

                                                       September 30,  December 31,
                                                            2001         2000
                                                       ------------  ------------
                                                       (unaudited)
      Raw materials ................................. $      2,210  $        988
      Work in process ...............................        1,665           271
      Finished goods ................................          134           513
                                                       ------------  ------------
                                                      $      4,009  $      1,772
                                                       ============  ============

5. DEEMED DIVIDEND

In January through March 2000, the Company consummated the sale of 6,379,978 shares of Series C convertible preferred stock from which the Company received proceeds of approximately $19.1 million or $3.00 per share. At the date of issuance, the Company believed the per share price of $3.00 represented the fair value of the preferred stock. Subsequent to the commencement of the Company's initial public offering process, Cepheid re-evaluated the fair value of its common stock as of January and March 2000. Accordingly, the increase in fair value has resulted in a beneficial conversion feature of $19.1 million that has been recorded as a deemed dividend to preferred shareholders in 2000. The Company recorded the deemed dividend at the date of issuance by offsetting charges and credits to additional paid-in capital, without any effect on total shareholders' equity. This charge was made against additional paid-in capital, as the Company did not have retained earnings from which it could have deducted a deemed dividend. The preferred stock dividend increases the net loss applicable to common shareholders in the calculation of basic and diluted net loss per common share for the year ended December 31, 2000. The guidelines set forth in the Emerging Issues Task Force Consensus No. 98-5 limit the amount of the deemed dividend to the amount of the proceeds of the related financing.

6. SUBSEQUENT EVENT

On October 18, 2001, the Company entered into a ten-year lease agreement for 76,000 square feet of commercial space. In connection with the lease, the Company issued a letter of credit for approximately $661,000 as a security deposit. Minimum annual rent commitments under the lease for the next five years are as follows:

Year Ended December 31,
2002............	$ 881,600
2003............	1,355,460
2004............	1,396,124
2005............	1,438,008
2006............	1,481,148
Total minimum payments......	$ 6,552,340

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Certain statements in this Form 10-Q, including without limitation the information under the captions entitled "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Legal Proceedings," contain forward-looking statements within the meaning of the federal securities laws. We also may provide oral or written forward-looking statements in other materials we release to the public from time to time. Statements that are not statements of historical fact are forward-looking statements. They are based on current expectations. In some cases, you can identify forward-looking statements by terminology such as "may," "will," "should," "expect," "plan," "anticipate," "believe," "estimate," "predict," "intend," "potential" or "continue" or the negative of these terms or other comparable terminology. Forward-looking statements involve risks and uncertainties that could cause actual results and the timing of events to differ materially from those anticipated in our forward-looking statements. These risks and uncertainties include the impact of competitive products and pricing, market acceptance of new products, market conditions, reliance on the efforts of distributors, enforcement of intellectual property rights and other factors set forth under the caption "Risk Factors" in our Form 10-K for the year ended December 31, 2000. We assume no obligation to update any of the forward-looking statements after the date of this report or to conform these forward-looking statements to actual results.

OVERVIEW

Cepheid is commercializing its I-CORE microfluidic and microelectronic technologies as the preferred platform for rapid, on-site detection of DNA for scientific, medical and industrial applications. The Company is developing fast, versatile systems that can perform all the steps required to analyze DNA in complex biological samples - sample preparation, amplification and detection - with results in less than 30 minutes on a single instrument. In 2000, we launched our first product, the Smart Cycler system, a system which performs quantitative DNA amplification and detection in a single, random access platform. Our initial distribution agreement for the life sciences research market in the United States was finalized with Fisher Scientific Company L.L.C. ("Fisher") in early 2000 and the Smart Cycler was launched through Fisher in the United States in May 2000.

During the third quarter of 2000, we selected Takara Shuzo Co., LTD. ("Takara") as our distributor to the life science research markets in Japan, South Korea and Taiwan. In December 2000 we selected Eurogentec SA ("Eurogentec") to distribute our Smart Cycler system in Europe, and Fisher as our distribution partner in Canada. During the second quarter of 2001, we selected BioSyn Tech Sdn Bhd to distribute our Smart Cycler system in Malaysia and Singapore. During the second and third quarter of 2001, we established a small direct sales force that will focus on the food quality, biothreat testing, and other markets outside of life science research.

Our GeneXpert system, currently in development, is designed to integrate automated sample preparation with our Smart Cycler amplification and detection technology in a disposable cartridge format.

We are collaborating with strategic partners to co-develop assays, or biological tests, and to provide marketing and sales support across a broad rang of markets for both the Smart Cycler and GeneXpert. In 1998, we entered into a development and supply agreement with Innogenetics N.V. The focus of the collaboration is the development of products integrating our proprietary technologies with their proprietary methods for genetic testing and viral genotyping. In February 2000, the Company formed Aridia Corp., a joint venture with Infectio Diagnostic, Inc. The focus of the collaboration is the development of a line of proprietary molecular diagnostic tests for the rapid, time critical identification of bacterial and fungal infections such as group B strep, antibiotic resistant bacteria, meningitis, and sepsis. In July 2001, we entered into a cooperative research and development agreement with the University of Pittsburgh Medical Center. The focus of the collaboration is the identification and evaluation of new genetic markers for several cancers including lung, breast, esophagus, oral, head and neck cancer, and melanoma. In August 2001, we entered into a patent and technology licensing and supply agreement with Environmental Technologies Group, Inc., ("ETG"). ETG and the Company will collaborate to develop biological-agent detection systems for military and other domestic preparedness applications.

RESULTS OF OPERATIONS

THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2001 COMPARED TO THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2000

REVENUES

Total revenues for the three and nine month periods ended September 30, 2001 were $2.8 million and $8.2 million respectively, an increase over the prior year periods of $.5 million or 20%, and $3.7 million or 85%, respectively. The increase for both the three and nine month periods ended September 30, 2001 as compared to the prior year comparable periods is due to an increase in product sales of our Smart Cycler System, as this product continues to gain more acceptance in the overall marketplace. Additionally, the increase is due to an increase in government contract revenue resulting from an increased level of activity on our contracts during the quarter.

COST OF PRODUCT SALES

Cost of product sales for the three and nine month periods ended September 30, 2001 were $1.4 million and $4.6 million respectively, as compared to $1.4 million and $2.2 million for the three and nine month periods ended September 30, 2000, respectively. The increase in the nine month periods ended September 30, 2001 as compared to the prior year comparable periods results from a full nine months of Smart Cycler sales in 2001 compared to five months of Smart Cycler sales in 2000 following the product launch in May 2000.

RESEARCH AND DEVELOPMENT EXPENSES

Research and development expenses for the three and nine month periods ended September 30, 2001 were $3.8 million and $11.1 million respectively, a decrease over the prior year periods of $.3 million or 7% and $.5 million or 4%, respectively. Research & development efforts were shifted from primarily Smart Cycler development in 2000 to primarily GeneXpert development in 2001. The decrease for both the three and nine month periods ended September 30, 2001 as compared to the prior year comparable periods is primarily due to a decrease in the amortization of deferred compensation expenses offset by increased personnel and infrastructure costs.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES

Selling, general and administrative expenses for the three and nine month periods ended September 30, 2001 were $1.9 million and $4.9 million respectively, an increase over the prior year comparable periods of $.6 million or 44% and $1.6 million or 47%, respectively. The increase for both the three and nine month periods ended September 30, 2001 as compared to the prior year comparable periods is due to increased salaries and benefits due to the addition of direct sales personnel, travel costs, advertising, public relations, investor relations, and other ongoing costs associated with being a public company offset by a decrease in the amortization of deferred compensation expenses. In addition, the increase is due to increased salaries and benefits related to customer support and technical service personnel to support the launch of our SmartCycler system.

INTEREST INCOME, NET

Net interest income for the three month period ended September 30, 2001 was $.2 million which was a decrease of $.5 million or 66% over the three month period ended September 30, 2000. Net interest income for the nine month period ended September 30, 2001 was $1.1 million, which was consistent with the nine month period ended September 30, 2001. The decrease for the three month period ended September 30, 2001 as compared to the prior year comparable period was due to a decrease in our cash balance during the quarter resulting from our negative cash flow as well as a decrease in our investment yield due to lower interest rates as compared to the prior year.

NET LOSS PER COMMON SHARE

Basic and diluted net loss per common share for the three and nine month periods ended September 30, 2001 was $0.15 and $0.44 respectively, compared to $0.15 and $2.42 for the prior year comparable periods. The pro forma basic net loss per common share for the three and nine month periods ended September 30, 2001 was $0.15 and $0.44 respectively, compared to $0.15 and $1.49 for the prior year comparable periods. Pro forma net loss per share amounts assumes conversion of preferred stock to common at the time of their original issuance.

LIQUIDITY AND CAPITAL RESOURCES

We have financed our operations from inception through proceeds generated from our initial public offering of our common stock on June 21, 2000, and through private sales of convertible preferred stock, contract payments to us under government and commercial research and development agreements, product sales and equipment financing arrangements. Through September 30, 2001, we received net proceeds of $65.2 million from issuances of common and convertible preferred stock. In addition, through September 30, 2001, we had financed equipment purchases and leasehold improvements totaling approximately $4.0 million. As of September 30, 2001, we had $2.4 million in equipment financing obligations. These obligations are secured by the equipment financed, bear interest at a weighted average fixed rate of 11.0% and are due in monthly installments through July 2005. Under the terms of the equipment financing agreement a balloon payment is due at the end of the loan term. The equipment financing line of credit expired on October 31, 2001.

As of September 30, 2001, we had $29.7 million in cash and cash equivalents, as compared to $39.7 million as of December 31, 2000. Net cash used for operating activities was $9.0 million for the nine months ended September 30, 2001, and $8.0 million for the nine months ended September 30, 2000. The increase in net cash used in operating activities for the nine months ended September 30, 2001 as compared to the prior year period is due to an increased investment in inventory offset by a slight decrease in our net loss and a decrease in our accounts receivable balance.

Capital expenditures for property and equipment were $1.3 million in the first nine months of 2001 compared to $1.5 million for the same period in 2000. In the first nine months of 2001, we received $0.2 million from the sale of common shares and received proceeds from equipment financing of $0.7 million, offset by repayments of $0.7 million under equipment financing arrangements. We received $50.6 million, net of issuance costs, in cash from the sale of preferred and common shares during the nine month period ended September 30, 2000, and used $0.4 million to repay equipment financing obligations.

We expect to have negative cash flow from operations through at least 2003. We expect to incur increasing research and development expenses, as well as expenses for additional personnel for production and commercialization efforts. Our future capital requirements depend on a number of factors, including market acceptance of our products, the resources we devote to developing and supporting our products, continued progress of our research and development of potential products, the need to acquire licenses to new technology and the availability of other financing. We believe that our current cash balances, together with revenue to be derived from product sales and research and development collaborations, will be sufficient to fund our operations at least through the end of 2002. As previously disclosed, we will need to obtain a license for thermal cycling in the field of clinical diagnostics from Applied Biosystems. The amount and the timing of payments for this license is not know at this time, and may affect the rate at which cash is consumed. To the extent our capital resources are insufficient to meet future capital requirements, we will need to raise additional capital or incur indebtedness to fund our operations. There can be no assurance that additional debt or equity financing will be available on acceptable terms, if at all. If adequate funds are not available, we may be required to delay, reduce the scope of or eliminate our research and development programs, reduce our commercialization efforts or obtain funds through arrangements with collaborative partners or others that may require us to relinquish rights to technologies or products that we might otherwise seek to develop or commercialize.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

There have not been any material changes in our exposure to market risk during the nine months ended September 30, 2001 which would require an update to the disclosures provided in our Annual Report on Form 10-K for the fiscal year ended December 31, 2000.

PART II

ITEM 1. LEGAL PROCEEDINGS

In August 2001, Fisher Scientific dismissed their lawsuit against the Company with prejudice.

ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS

None.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS

None.

ITEM 5. OTHER INFORMATION

On May 11, 2001, Allen Northrup resigned from his position as the Company's Chief Technical Officer to pursue other career interests.

In September 2001, Ernest Mario, Ph.D resigned from the Company's board of directors to pursue other career interests.

ITEM 6. EXHIBITS AND REPORTS ON FORMS 8-K

(a) Exhibits

Exhibit 10.1    Patent and Technology Licensing and Supply Agreement dated August 9, 2001 between Cepheid and Environmental Technologies Group, Inc.

Exhibit 10.2    Modification and Restatement of January 10, 2000 Letter Agreement dated August 30, 2001 between Cepheid and Fisher Scientific Company L.L.C.

(b) Reports on Form 8-K

None.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized, in the City of Sunnyvale, State of California on this 14^th day of November, 2001.

CEPHEID
(Registrant)

By: /s/ THOMAS L. GUTSHALL
Thomas L. Gutshall
Chairman of the Board and Chief Executive Officer
(Duly Authorized Officer)

By: /s/ CATHERINE A. SMITH
Catherine A. Smith
Chief Financial Officer
(Principal Accounting Officer)

Exhibit Index

The following exhibits are filed as part of this Quarterly Report on Form 10-Q:

Exhibit No.	Description
*10.1	Patent and Technology Licensing Supply Agreement , dated August 9, 2001, between Cepheid and Environmental Technologies Group, Inc.
*10.2	Modification and Restatement of January 10, 2000 Letter Agreement, dated August 30, 2001, between Cepheid and Fisher Scientific Company LLC

* Confidential treatment has been granted with respect to portions of this exhibit. A complete copy of the agreement, including redacted terms, has been separately filed with the Securities and Exchange Commission.

EX-10.1 4 exh10-1.htm EXHIBIT

THE SYMBOL "[***]" IS USED TO INDICATE THAT A PORTION OF THE EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS."

PATENT AND TECHNOLOGY LICENSING AND SUPPLY AGREEMENT

This Agreement, by and between CEPHEID, a California Corporation having its principal place of business in Sunnyvale, California (hereinafter "CEPHEID") and ENVIRONMENTAL TECHNOLOGIES GROUP, INC., a Delaware Corporation with offices located in Baltimore, Maryland (hereinafter "ETG").

WHEREAS, CEPHEID is the owner of certain patents, patent applications, inventions, and licenses and possesses certain technical information and know-how relating to systems for processing polymerase chain reaction ("PCR") technology and other nucleic acid-based analysis methods for both integrated military bioagent detection systems and for hand- held bioagent detection instruments; and

WHEREAS, ETG desires to obtain worldwide licenses with respect to those patents, patent applications, inventions, licenses, technical information, and know-how to develop and commercialize bioagent detection devices and to purchase certain related subsystems, components, and supplies from CEPHEID;

NOW, THEREFORE, in consideration of the promises and of the mutual covenants and obligations hereinafter set forth, it is agreed as follows:

1. DEFINITIONS
1. "AAA" means the American Arbitration Association.
2. "Affiliate" means any corporation or other entity that directly, or indirectly through one or more intermediaries, controls, is controlled by, or is under common control with the designated Party but only for so long as such relationship exists. For the purposes of this definition, "control" means i) ownership of at least fifty percent (50%) of the shares of stock entitled to vote for directors in the case of a corporation, or of at least fifty percent (50%) of the interests in profits of a business entity other than a corporation; or ii) the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of an individual, corporation, or other legal entity, whether through the ownership of voting securities, by contract, or otherwise.
3. "Agreement" means this Patent and Technology Licensing and Supply Agreement between CEPHEID and ETG.
4. "Agreement Term" means the term of this Agreement,which commences upon the date hereof and will remain in effect until all of the CEPHEID Patent Rights in any jurisdiction have expired.
5. "Amplification/Detection Technology" means CEPHEID's technologies for facilitating the process of chemically multiplying the numbers of target sequences of DNA or RNA in order to facilitate their identification or detection using fluorescent labels or similar approaches. Such multiplication of target sequences can be accomplished using PCR or other nucleic acid amplification methods. Applicable Cepheid technologies include, but are not limited to I-CORE Modules, reaction tubes, and proprietary Reagents. This CEPHEID Technology is protected by CEPHEID Patents listed in Schedule A, I. CEPHEID Patent Rights- A. Amplification/Detection Technology.
6. "Bioagent" means a toxic biologic agent used by humans to inflict harm.
7. "Budget" means the budgetary and monetary understanding that is to be negotiated by the Parties within one hundred twenty (120) days of the signing of the Letter of Intent (signed March 20, 2001), and which is to be updated by the Parties annually.
8. "CEPHEID Patent Rights" means those CEPHEID Patent Rights currently owned by CEPHEID that are listed under that topic in Schedule A.
9. "CEPHEID Technical Information" means know-how, trade secrets, inventions, data, scientific records, technology and information relating to the Licensed Products that is now owned by CEPHEID and which CEPHEID has the right to disclose.
10. "CEPHEID Technology" means the Licensed Patents and CEPHEID Technical Information. The Technology concerns CEPHEID's PCR and other nucleic acid amplification related technology, including, without limitation, sample preparation technology, amplification and detection technology, reaction tube design, microfluidic systems, rapid lysing, and nucleic acid extraction and purification.
11. "Confidential Information" means any and all knowledge, know-how, or other information disclosed by either Party to the other, either orally or in writing, and materials transferred under this Agreement, if so marked at the time of delivery and, in the case of oral information, if so designated at the time of delivery and confirmed in writing by the disclosing party within thirty (30) days after oral disclosure. Notwithstanding the foregoing, Confidential Information will not include information or materials that:
1. the receiving party can demonstrate by competent, contemporaneous written records was known to it prior to the date of disclosure hereunder by the disclosing party;
2. is public knowledge, or becomes public knowledge, other than by breach of this Agreement by the receiving party or by anyone to whom the receiving party disclosed such information;
3. is lawfully disclosed to the receiving party by a Third Party who is not obligated to the disclosing party or any other party to retain such information in confidence; or
4. is independently developed by the receiving party without knowledge of the information of the disclosing party as demonstrated by competent, contemporaneous written records.
5. is not marked or designated as Confidential Information.
   Any Confidential Information that is used to develop Inventions will continue to be the Confidential Information of the disclosing Party and will be governed by Paragraph 10 of this Agreement. However, Confidential Information developed or created by CEPHEID with ETG funds shall be ETG's Confidential Information.
12. "Consumables" means reaction tubes, cartridges, or other hardware used in conjunction with the Licensed Products to generate assay results, excluding those supplies defined as Reagents. Such consumables are intended to be single use and disposable, unless incorporated into a flow through device.
13. "DP Field" in this Agreement, means Hand Held Systems for the domestic preparedness and military markets.
14. "Dispute" means any disagreement between the Parties arising out of or in connection with this Agreement.
15. "ETG Developments" means any and all modifications or refinements related to the CEPHEID Technology or any Licensed Products or their use or the manufacturing processes thereof, that are created, developed, conceived, or reduced to practice by ETG (or its Affiliates), or by ETG (or its Affiliates) together with or in conjunction with any other entities or parties, or by CEPHEID with ETG funding under a specific project requested by ETG, whether patented or not patented, and which arise after the date of this Agreement; provided, however, that ETG Developments do not include Joint Developments.
16. "Fluidics/Lysing Technology" means CEPHEID's technologies for fluid handling and processing as applied to the preparation of samples for DNA or RNA based analysis, including filtration, lysing of cells or cellular organisms, capture and purification of DNA or RNA, mixing of sample with Reagents, and delivery to a reaction tube or chamber. Applicable CEPHEID technologies include but are not limited to fluidic processing blocks, fluidic sample preparation cartridges and cartridge processing Modules, and ultrasonic lysing Modules. This technology is protected by CEPHEID Patents listed in Schedule A, I. CEPHEID Patent Rights- B. Fluidics &/or Lysing Technology.
17. "Fully Burdened Cepheid Product Cost" means CEPHEID's cost of goods to produce I-CORE modules, I-CORE reaction tubes, disposable fluidic sample preparation cartridges, fluidic processing blocks, ultrasonic lysing modules, and/or other applicable subsystems or consumables to be sold to ETG under the terms of this Agreement. Such costs will be defined as Cepheid's direct purchased material and direct production labor costs, together with the associated direct overheads for purchased material and direct production labor in the manufacture of a product, in so far as these costs would be capitalisable into inventory under US GAAP. However, it does not include Selling, General and Administrative (S, G&A) overhead costs nor does it include engineering or development costs, direct or otherwise, that are not directly related to the production of the product concerned.
18. "Fully Burdened ETG Product Cost" is defined as ETG's direct purchased material and direct production labor costs, together with the associated direct overheads for purchased material and direct production labor in the manufacture of a product, in so far as these costs would be capitalisable into inventory under US GAAP. However, it does not include Selling, General and Administrative (S, G&A) overhead costs nor does it include engineering or development costs, direct or otherwise, that are not directly related to the production of the product concerned.
19. "Fully Burdened RD&E Costs" means costs for CEPHEID research, development, and engineering (RD&E) support, corresponding to fully burdened RD&E costs which shall be comprised of direct RD&E costs, RD&E overhead, and direct costs and allocated overhead associated with constructing and delivering any prototype Modules or Consumables required by ETG. Fully Burdened RD&E Costs will be estimated in terms of average cost per Full Time Equivalent (FTE) and will be established in accordance with the Budget
20. "Hand-Held System" means [***]
21. [***]
22. "I-CORE Module" means a CEPHEID proprietary nucleic acid amplification Module comprised of (1) a single site, discrete, individually controllable heater sleeve containing a heater element and designed to accept a disposable reaction tube or cartridge, (2) an integrated cooling mechanism, such as a fan, that enables passage of ambient or cooled air across the heater sleeve, and (3) optical blocks containing solid state components that enable optical interrogation of the reaction solution in the reaction tube or cartridge, as it may be modified and improved from time to time.
23. "Integrated Military Bioagent Detection System" means a system comprised of distinct component parts, each capable of carrying out a specific phase of a complete field-based, non- laboratory-based analysis for the presence of Bioagents, with component parts that include, but are not limited to, sample collection (usually air samples) component, nucleic acid-based analysis component (identifier), and reporter/data transmitter component. Although the components could operate independently, the system is designed to operate in an integrated fashion.
24. [***]
25. "Joint Developments" means any and all modifications or refinements related to any Licensed Products or their use or the manufacturing processes thereof, that are created, developed, conceived, or reduced to practice by ETG and CEPHEID, together, after the date of this Agreement. Modifications, refinements, or any other developments that are funded solely by ETG shall not be considered Joint Developments, but shall be considered ETG Developments as defined in Paragraph 1.15.
26. "JPO" means the United States Government's Joint Program Office for Biological Defense.
27. "Letter of Intent" means the document signed by the Parties on March 20, 2001, relating to the terms of this Agreement. This Agreement supercedes the Letter of Intent in its entirety.
28. "Licensed Fields" means the DP Field and the Military Field, as licensed under Section 2 of this Agreement.
29. "Licensed Patents" means the CEPHEID Patent Rights listed in Schedule A.
30. "Licensed Product(s)" means any product that, in whole or part (a) is made using, or that uses or embodies, CEPHEID Technical Information; or (b) is covered by, a Valid Claim of an unexpired Licensed Patent. For the purposes of this definition, a Product is "covered by" a Valid Claim of a Patent if, but for this Agreement, its manufacture, use, or sale would infringe a Valid Claim.
31. "Military Field" means Integrated Military Bioagent Detection Systems for use by governmental military customers only for the detection of Bioagents, excluding Hand-Held Systems.
32. "Modules" means a subsystem or subcomponent designed for incorporation into a system or instrument and capable of carrying out a particular designated function; however, modules are not capable of independent function, but operate only in conjunction with other subsystems or subcomponents.
33. [***]
34. "Net Sales" means the total consideration, whether in dollars or otherwise, paid on sales of a Licensed Product by ETG or its Affiliates to unrelated Third Parties in bona fide arms length transactions, less the following deductions, in each case related specifically to the Licensed Product: (1) trade, distribution, cash and quantity discounts and sales commissions; (2) taxes on sales, such as sales or use taxes to the extent added to the sales price and set forth separately as such in the total amount invoiced; (3) freight, insurance and other transportation charges to the extent added to the sales price and set forth separately as such in the total amount invoiced; and (4) amounts repaid or credited by reason of rejections, defects or returns or because of retroactive price reductions, chargebacks or rebates under government programs. Net Sales shall also include the fair market value of non- monetary consideration received by ETG or its Affiliates with respect to sales by them of the Licensed Products to unrelated Third Parties.
35. "Parties" shall mean CEPHEID and ETG and their Affiliates and Successors.
36. "Patent" means valid and enforceable letters patent, patent applications, and all related continuations, continuations-in-part, reexaminations, divisions, reissues, extensions, patents of addition, or inventor's certificates, and all foreign counterparts thereof.
37. "PCR" means DNA and RNA replication through polymerase chain reactions.
38. "Reagents" means enzymes, nucleic probes, nucleic acid primers, and other biological components, fluorescent labels, buffers, and other chemicals that are used for carrying out a nucleic acid amplification and detection reaction in the CEPHEID technology. Such Reagents may or may not be single use, and may be presented in a variety of formulations and mixtures including, but not limited to, liquid, surface, immobilized, or dried.
39. "Running Royalty" means any payment regarding sale of Licensed Products that is directly or indirectly affected by the volume of such sales, whether in a linear or stepped fashion.
40. "Successor" means a successor or assignee of a Party in accordance with Paragraph 15.1 of this Agreement.
41. "Territory" means all countries of the world.
42. "Third Party" means any individual, estate, trust, partnership, joint venture, association, firm, corporation, company, or other entity, other than the Parties to this Agreement.
43. [***]
44. "Valid Claim" means any claim contained in any patent application or in any issued and unexpired patent included within the Licensed Patents which has not been abandoned or held unenforceable by a court or other governmental agency of competent jurisdiction, and which has not been disclaimed or admitted to be invalid or unenforceable.
2. GRANT OF LICENSES
1. Licenses to ETG. In consideration of the Royalties and other consideration provided under this Agreement in Section 5, and subject to the limitations set forth in Paragraph 2.2 and the other terms and conditions of this Agreement:
1. CEPHEID grants to ETG and its Affiliates and their Successors the exclusive worldwide right and license, under the Licensed Patents and CEPHEID Technical Information, to manufacture, have made, use, develop, sell, and have sold Licensed Products within the DP Field in the Territory during the Agreement Term.
2. CEPHEID grants to ETG and its Affiliates and their Successors the non-exclusive worldwide right and license, under the Licensed Patents and CEPHEID Technical Information, to manufacture, have made, use, develop, sell, and have sold Licensed Products within the Military Field in the Territory during the Agreement Term.
3. No licenses or rights to any intellectual property or to any patents other than those specified in the above Paragraphs 2.1.1 and 2.1.2 are granted or conferred to ETG by CEPHEID under this Agreement.
2. Exclusions and Limitations on ETG's License.
1. The Smart Cycler, Smart Cycler TD, and Smart Cycler XC, current Cepheid products, are excluded from the licenses granted in this Agreement. This exclusion does not prohibit in any way the use of the CEPHEID Technology by ETG in accordance with the remainder of this Agreement.
2. The license in Paragraph 2.1, above does not include the right to make or have made any Modules or Consumables or components thereof that are part of the Licensed Products that are based on, embody, or incorporate the Cepheid Technology that CEPHEID decides, in its discretion, to make or have made.
3. CEPHEID will retain sole rights to manufacture, or have manufactured, sell, have sold, develop, and use the I-CORE Module, I-CORE Module derivatives, fluidic cartridge processing Modules and Consumables that are based on the Cepheid Technology, even if such Modules or Consumables contain, include, or embody ETG Developments or Joint Developments; provided, however, that, in the DP Field, CEPHEID will sell and have sold such products only to ETG. For any Modules or Consumables containing, including, or embodying ETG Developments, CEPHEID will sell and have sold such products only to ETG in the DP and Military Fields. CEPHEID will sell Modules and Consumables to ETG under this Paragraph 2.2.3 for CEPHEID's Fully Burdened Cepheid Product Cost plus a % mark-up, dependent upon the field, as specified in Paragraph 5.5.
4. Notwithstanding anything to the contrary in this Agreement, if ETG desires to manufacture any Module and/or Consumable that is based, in whole or part, on the CEPHEID Technology, it may do so only if CEPHEID, in its sole discretion, authorizes ETG, in writing, to do so. In this case, ETG will pay to CEPHEID a royalty on net end-user sales equivalent to the rates owed to CEPHEID (as per Paragraph 5.5) as if the product had been manufactured by CEPHEID.
5. The rights and licenses granted pursuant to Paragraph 2.1.1 shall be subject to the right of CEPHEID to conduct research and development activities using the CEPHEID Technology, including the Licensed Patents and the CEPHEID Technical Information.

2.2.6 CEPHEID and ETG agree that ETG will manufacture and integrate or have manufactured or integrated on its behalf in its sole discretion the Hand-Held Systems and the Integrated Military Bioagent Detection Systems for the DP and Military Fields.

2.2.7 Should CEPHEID ever stop production or be unable to meet the production needs of ETG of the Modules and/or Consumables within ninety (90) days of any reasonable request, CEPHEID grants ETG the right to manufacture the Modules and/or Consumables for the DP and Military Fields; provided, however, that, in the case of I-Core Modules, the parties must first negotiate a mutually-satisfactory sublicense of any necessary patents or technology.

3. Assignments and Sublicenses. ETG and/or Cepheid may not Sublicense or assign, in whole or part, any of its license rights under this Agreement except as provided in Paragraph 14.1 of this Agreement.
4. Licenses and Grants to CEPHEID.
1. ETG Developments. ETG hereby grants to CEPHEID a non-exclusive, perpetual, worldwide license to CEPHEID under ETG Developments (including without limitation any ETG-developed Licensed Products), to sell and have sold any Licensed Products outside the Licensed Fields.
1. If such Licensed Products contain ETG Developments, CEPHEID will pay to ETG a royalty, to be negotiated between the parties but not to exceed [***] of Net Sales.
2. Notwithstanding Paragraph 2.4.1.A of this Agreement, if such Licensed Products are manufactured by ETG, they will be transferred to CEPHEID for a mutually-agreeable price but not to exceed Fully Burdened ETG Product Cost plus [***].
3. Regarding ETG Developments, CEPHEID may sell, and have sold Licensed Products that are not manufactured by or on behalf of ETG only if the Parties reach an agreement as to the appropriate Royalty. Cepheid will provide ETG written notice prior to utilizing any ETG Developments.
2. Joint Developments. Except as otherwise specified in this Agreement, ETG and CEPHEID each hereby grant to one another non-exclusive, perpetual, royalty-free worldwide licenses to use, have use, sell, have sold, and exploit the Joint Developments. ETG's licenses under this Section 2.4.2 shall only apply to the DP and Military Fields and CEPHEID's licenses under this Section 2.4.2 shall only apply to fields other than the DP and Military Fields.
3. DEVELOPMENT RESPONSIBILITIES
1. ETG Responsibilities
1. ETG will, in addition to the CEPHEID Technology to be licensed under this Agreement, also obtain whatever licenses are necessary from Applied Biosystems and/or Hoffman La-Roche, or otherwise to fully carry out its responsibilities under this Agreement. When necessary, CEPHEID will provide reasonable support to ETG in obtaining these additional licenses. This Agreement will be voidable in the event the Parties conclude that ETG is unable to execute all necessary licenses; provided however, that CEPHEID will have the option to "step in" and provide a source for necessary Reagents if ETG is unable to obtain licenses or make other arrangements for Reagents with reasonable terms for the required Reagents. The supply of Reagents by CEPHEID to ETG, if required, shall be the subject of a separate agreement, to be negotiated, as required, between the Parties.
2. ETG will use its best efforts to develop, manufacture, market and sell products that include the CEPHEID Technology in the DP Field. [***].
3. [***]
4. ETG will diligently market the CEPHEID Technology in the domestic and international Military Field.
5. ETG will use its best efforts, as appropriate, to submit proposals that include the CEPHEID Technology for the [***]and any other future military development and/or production contracts in which the CEPHEID Technology is applicable, subject to any limitations of the license(s) and/or customer and program requirements.
6. ETG will purchase Modules and Consumables from CEPHEID as required to develop, manufacture and sell DP Hand-Held Systems or other systems developed by ETG under this Agreement.
7. ETG will develop or have developed on its behalf at its sole discretion PCR primers, enzymes, fluorescent tags, and other Reagents for DP and Military Fields or call upon CEPHEID to provide these services if the economics, including license terms, are more favorable to the Parties. The supply of Reagents by CEPHEID to ETG, if required, shall be the subject of a separate agreement, to be negotiated as required between the Parties. If Reagent development services were to be provided by CEPHEID on behalf of ETG, such services would be subject to funding from ETG as described in 3.1.9.
8. ETG will participate at its own cost in a continuing dialog and consultation with CEPHEID on any changes/improvements to the I-CORE technology and associated disposables.
9. ETG will fund agreed research, development, engineering, and other work to be carried out by CEPHEID under the direction and specification of ETG, at rates equivalent to CEPHEID'S Fully Burdened RD&E Costs and according to the Budget to be developed by CEPHEID and ETG. If the Parties cannot reach agreement on the Budget, this Agreement is void.
10. ETG will provide to CEPHEID access to all data, information, and records relating to the performance of the CEPHEID Technology and the Licensed Products, , including without limitation results of any research, development, or field trials, subject to export, government security, or other legal restrictions.
2. CEPHEID Responsibilities
1. CEPHEID will provide reasonable technical support to ETG, at ETG's cost, consistent with the Budget, in the following technical areas: I-CORE Module, flow through fluidics, disposable sample processing systems, primer performance, and other detector/identifier technology as necessary to enable the design and integration of the applicable CEPHEID Technology into ETG Licensed Products, in whole or part, under this Agreement. In cases where CEPHEID and ETG agree, in their mutual discretion, that ETG should manufacture a specific Module or Consumable employing the CEPHEID Technology, CEPHEID will provide to ETG the drawings, manufacturing processes, and other documentation in CEPHEID's possession, or in the possession of Cepheid's subcontractors or vendors, necessary to manufacture the key CEPHEID Technology-related components of the Hand-Held Systems and Integrated Military Bioagent Detection Systems. CEPHEID will provide the above-described technical support by making its technical personnel available in Sunnyvale, CA, to assist the transition of the CEPHEID Technology to ETG. ETG shall pay CEPHEID for such technical support on an full time employee (FTE) basis and according to the Budget, defined in Section 5.4, developed by CEPHEID and ETG.
2. CEPHEID will participate at its own cost within reasonable commercial standards, during the term of this Agreement, in a continuing dialogue and consultation with ETG on changes/improvements to the I- CORE technology and associated disposables.
3. CEPHEID will supply I-CORE Modules, I-CORE reaction tubes, disposable fluidic sample prep cartridges, and/or other applicable Modules or Consumables to ETG at transfer prices as described in the Payments & Royalties Section of this Agreement, as long as they are appropriate for Licensed Products developed by ETG under this Agreement. Except where CEPHEID has applicable pre-existing or parallel Reagent formulations, ETG will be responsible for the development, stabilization, and supply of Reagents for loading by CEPHEID into the reaction tubes or disposable cartridges, providing that such Reagents are compatible with the CEPHEID components and are developed according to CEPHEID specifications.
4. CEPHIED will provide to ETG access to and use of all data, information, and records relating to the performance of the CEPHEID Technology applicable to the endeavors contemplated under this Agreement, the Licensed Products, and related systems, including without limitation results of any research, development, or field trials, subject to export, government security, or other legal restrictions. Where appropriate ETG will support trial work by direct participation.
4. ATTRIBUTION
1. Attribution. ETG shall make appropriate reference in all labeling and printed materials to any contribution by CEPHEID or the CEPHEID Technology to the Licensed Products.
5. PAYMENTS AND ROYALTIES
1. Upfront Payment. In consideration of the exclusive license for the DP Field granted to ETG by CEPHEID:
1. ETG will pay to CEPHEID an upfront non-refundable license fee payment of [***] payable upon signing of this Agreement. The license fee will cover the following CEPHEID PCR-related technology components and must be taken in total:

A. A license to CEPHEID's technologies for reactor tube(s) design [***];

B. [***]; and

C. [***]

5.1.2 In consideration for this payment, Cepheid shall provide at a minimum the information and documentation listed in Schedule B.

2. Minimum Royalty Payments. ETG will begin paying to CEPHEID minimum royalty payments to retain the exclusivity of its license in the DP Field according to the following schedule. Minimum royalty payments are creditable against payments due to CEPHEID only in the preceding 12 month period to which they apply:
1. [***]
2. [***]
3. [***]
4. [***]
5. [***]

If such payments are not made, then the CEPHEID license in the DP Field shall revert from an exclusive to a non-exclusive license.

3. ETG Research and Support. ETG will pay CEPHEID at CEPHEID's Fully Burdened RD&E Costs, as set forth in the Budget, for CEPHEID's support for:
1. Transfer to ETG of existing applicable CEPHEID Technology covered in this Agreement, not to exceed [***], as defined in the Budget developed in accordance with Section 5.4, unless agreed upon in writing by both the President of ETG and the President of CEPHEID.
2. Consultation to ETG for adaptation of existing technology covered in this Agreement.
3. Modification of existing technology or development of new technology as required under this Agreement.
4. Budget for Support Activities. Within one hundred twenty (120)days of the execution of the Letter of Intent (March 20, 2001), a Budget is to be developed and agreed upon by the parties outlining ETG requirements in the above-specified areas, as well as a budget for funding to cover CEPHEID's support activities. This Agreement will be void should the parties be unable to mutually agree to the Budget.
5. Transfer Prices andRunning Royalties.

5.5.1 For sales in the DP Field:

A. ETG shall pay CEPHEID'S Fully Burdened Cepheid Product Cost plus [***] for all subsystems, Modules, and Consumables supplied to ETG by CEPHEID. If Reagents are supplied by CEPHEID to ETG, such supply shall occur under a separate agreement, to be negotiated between the Parties. Should this transfer pricing increase more than two times the prior year's Consumer Price Index (CPI), the parties will reevaluate this pricing formula and confirm the parties' mutually agreement to this Section.

B. ETG will also pay CEPHEID Running Royalties on Net Sales of Licensed Products at one of the following rates determined by the CEPHEID Technology incorporated in the Hand-Held System(s):

5.5.1B.1 Amplification/Detection Technology only: [***]; or

5.5.1.B.2 Integrated with Fluidics &/or Lysing Technology: [***].

In the DP Field, the Running Royalty shall be payable on Net Sales of the Hand-Held System, including all accessories needed to operate the Licensed Products and Consumables (except independently packaged Reagents) sold with the Licensed Products.

5.5.2 For sales in the Military Field:

A. ETG shall pay CEPHEID'S Fully Burdened Cepheid Product Cost plus [***] for all subsystems, Modules, and Consumables supplied to ETG by CEPHEID. Should this transfer pricing increase more than two times the prior year's Consumer Price Index (CPI), the parties will reevaluate this pricing formula and confirm the parties' mutually agreement to this Section.

B. ETG will pay to CEPHEID Running Royalties on the Net Sales price of all nucleic acid-based analysis components (identifiers) and related sample processing components in the Integrated Military Bioagent Detection Systems that are sold by ETG and that incorporate the CEPHEID Technology. Royalty rates will be based on one of the following rates, determined by the CEPHEID Technology integrated into the Licensed Product:

5.5.2.B.1 Amplification/Detection Technology only: [***]; or

5.5.2.B.2 Integrated with Fluidics &/or Lysing Technology: [***].

If the nucleic acid-based analysis component (identifier) or any other component of an Integrated Military Bioagent Detection System that contains CEPHEID Technology is invoiced separately to the end-user, then the Running Royalty shall be applied to the invoiced price of the applicable components. If the Integrated Military Bioagent Detection System is invoiced in its entirety to the end-user, then the Parties will agree upon a formula for allocating a portion of the total Net Sales of each Integrated Military Bioagent Detection System corresponding to the number and nature of components containing CEPHEID Technology, and the Running Royalty shall be applied against such allocated portion of the total Net Sales.

C. As the Military Field opportunities become better defined with regards to customer and program requirements, CEPHEID and ETG may adopt a mutually acceptable alternative compensation formula.

6. REPORTS AND PAYMENTS
1. Royalty Reports. Reports, accompanied by statements of minimum Royalties and running Royalties due, under Section 5 of this Agreement, shall be furnished to CEPHEID by ETG within forty-five (45) days after the completion of each calendar quarter. Such reports shall show gross sales of each Licensed Product, the deducted amounts used to calculate Net Sales, in accordance with Paragraph 1.35, and the Royalties due for the preceding fiscal quarter. Such reports shall also show calculations for all minimum Royalties and running Royalties due. Such reports shall also provide sales and sales price information for sales of Licensed Products to the U.S. Government such that CEPHEID can compile progress and royalty reports due under the Lawrence Livermore National Laboratory License.
2. Invoices. Invoices shall reasonably reflect the Fully Burdened Cepheid Product Cost or Fully Burdened ETG Product Cost, as appropriate, for which a cost plus percentage payment is due.
3. Records and Inspection.
1. ETG shall keep accurate records of account on behalf of itself and its Affiliates, Successors, Sublicensees, and sellers, for the purposes of compliance with its obligations hereunder, and shall maintain them for at least 5 years from the date of their creation. ETG shall permit its records to be inspected and arrange for such inspection of the records of its Affiliates, Successors, Sublicensees, and sellers during normal business hours by independent certified public accountants to inspect and verify the accuracy of ETG payments. Such inspection shall be upon reasonable notice. If the inspection reveals an underpayment of greater than 5% between the payments owed to CEPHEID under this Agreement and the payments actually paid by ETG to CEPHEID, ETG will promptly pay CEPHEID's costs of conducting the inspection, along with the amount of the discrepancy. If no such underpayment is found, or if that underpayment is 5% or less, the cost of inspection shall be borne by CEPHEID.
2. CEPHEID shall keep accurate records of account on behalf of itself and its Affiliates, Successors, Sublicensees, and sellers, for the purposes of compliance with its obligations hereunder, and shall maintain them for at least 5 years from the date of their creation. CEPHEID shall permit its records to be inspected and arrange for such inspection of the records of its Affiliates, Successors, Sublicensees, and sellers during normal business hours by independent certified public accountants to inspect and verify the accuracy of CEPHEID's Fully Burdened Cepheid Product Costs that are used as a basis for establishing the transfer prices of Modules and Consumables sold to ETG and to verify and/or identify any utilization of ETG Developments. Such inspection shall be upon reasonable notice. If the inspection reveals an overpayment of greater than 5% between the transfer prices to be charged by CEPHEID under this Agreement and the transfer prices actually paid by ETG to CEPHEID, CEPHEID will promptly pay ETG's costs of conducting the inspection, along with the amount of the overpayment. If no such overpayment is found, or if that overpayment is 5% or less, the cost of inspection shall be borne by ETG.
4. Payments. Payments, other than Royalty payments, shall be payable in United States currency within 45 days of its receipt of the invoices specified in Paragraph 6.2, along with its cooperation in any audits requested under Paragraph 6.3. Royalty payments shall be paid with the Royalty reports described in Section 6.1. The dollar volume represented by sales in countries foreign to the United States shall be calculated using the average of the daily exchange rate published by the Wall Street Journal for the country in question during the fiscal quarter for which a report is required. Payments of Running Royalties shall be made within 45 days of the end of each fiscal quarter during which the Running Royalties apply. A failure to make payments in accordance with this Paragraph 6.4 will be considered a material breach of this Agreement.
5. Currency. In the event consideration or Running Royalties are due for sales in a country where by reason of currency regulations of any kind or taxes of any kind it is impossible to make royalty payments for such country's sales in accordance with Paragraph 6.4, said Running Royalties shall be deposited in whatever currency is allowable for the benefit or credit of CEPHEID in an accredited bank of that country as mutually agreed to by the Parties.
6. Taxes. All taxes with no right of offset required to be withheld from royalty payments hereunder shall be deducted by ETG from said payments and evidence of such payment or withholding shall be delivered to CEPHEID at the time the accounting for such royalty payment is made to CEPHEID.
7. INTELLECTUAL PROPERTY
1. Each party retains ownership of its own intellectual property developed prior to the date of this Agreement.
2. Any intellectual property developed solely by either party during the term of this Agreement will be solely owned by that developing party; however, subject to the licenses and limitations set forth in Section 2 of this Agreement.
3. Any Joint Developments will be jointly owned by the parties and may be used without restriction by either party, consistent with the provisions of Paragraph 2.4.2 of this Agreement. The Parties will implement steps with respect to Joint IP reasonably appropriate to facilitate its protection, use and appropriate exploitation by the parties.
4. CEPHEID Patent Rights. CEPHEID will at all times own and be responsible for and fully maintain the CEPHEID Patent rights, except as set forth in Sections 7.5 and 7.6.
5. Failure to Prosecute or Maintain. If CEPHEID fails to, or elects not to, prosecute any application or patent in the CEPHEID Patent rights, CEPHEID will, within a reasonable time after making such election, notify ETG and ETG will have the right, at its expense, to pursue such filing, prosecution and maintenance. Regardless of whether CEPHEID or ETG prosecutes a Patent right hereunder, ETG will retain the same rights in the Licensed Field as it would have been entitled to under this Agreement if CEPHEID had controlled the prosecution. Should the parties determine that only ETG would benefit in the prosecution and/or maintenance of any particular Patent rights under this paragraph, ETG shall be fully responsible for the associated costs; otherwise, ETG shall charge back any and all expenditures to Cepheid, initially by crediting ETG for Royalties as defined in Section 5.
6. Failure to Seek Protection or Maintain. If CEPHEID decides not to seek patent protection in a particular country or other jurisdiction in the Territory, or to not maintain patent protection on any of the CEPHEID Patent rights in any country or other jurisdiction in the Territory where such CEPHEID Patent rights exist, CEPHEID will notify ETG of such decision in writing within a reasonable time after the decision is made. ETG will then have the right, at ETG option and expense, to file, prosecute, and maintain any such patent applications and patents. With respect to any such prosecution, ETG will retain the same rights in the Licensed Fields as it would have been entitled to under this Agreement if CEPHEID had controlled the prosecution. Should the parties determine that only ETG would benefit in the protection and/or maintenance of any particular Patent rights under this paragraph, ETG shall be fully responsible for the associated costs; otherwise, ETG shall charge back any and all expenditures to Cepheid, initially by crediting ETG for Royalties as defined in Section 5.
7. ETG Developments. ETG will have the right, but not the obligation, to file, prosecute and maintain any Patent Rights which claim ETG Developments, at its cost and expense. If ETG fails to, or elects not to, prosecute any Patent rights which claim ETG Developments, ETG will, within a reasonable time after making such election, notify CEPHEID and CEPHEID will have the right to pursue such filing, prosecution, and maintenance, at CEPHEID's cost and expense. Regardless of whether CEPHEID or ETG prosecutes a Patent right in any ETG Improvement hereunder, CEPHEID will retain the same rights outside the Licensed Fields as it would have been entitled to under this Agreement if ETG had controlled the prosecution.
8. WARRANTIES
1. CEPHEID Representations and Warranties. CEPHEID warrants and represents that as of the effective date of this Agreement:

(a) It has the appropriate rights to license or, as appropriate, sublicense such rights to ETG.

(b) It has identified all PCR-related patents and patent applications for which Cepheid has rights to license and/or sublicense in Schedule A.

(c) It has the right to grant this license to the Licensed Patents.

(d) Except as set forth hereunder, it has neither executed agreements nor granted rights in conflict with the rights and license granted hereunder.

(e) There are no current or pending Patent Office or court proceedings in which the ownership, inventorship, validity, patentability or enforceability of any of the Licensed Patents is being contested.

(f) This Agreement has been authorized by all requisite corporate action of CEPHEID and the Agreement constitutes a valid and binding obligation of CEPHEID and is enforceable against CEPHEID in accordance with its terms.

(g) CEPHEID SHALL PROVIDE ETG ITS STANDARD COMMERCIAL WARRANTY AS PROVIDED TO THIRD PARTY CUSTOMERS FOR ALL MODULES AND CONSUMABLE SOLD TO ETG UNDER THE TERMS OF THIS AGREEMENT.

(h) EXCEPT AS PROVIDED FOR ABOVE, CEPHEID HEREBY DISCLAIMS ANY WARRANTIES, WHETHER EXPRESS OR IMPLIED, OF ANY KIND REGARDING ANY WARRANTY OF MERCHANTABILITY OR FITNESS FOR ANY PARTICULAR PURPOSE, WITH RESPECT TO THE LICENSED PRODUCT, OR THAT THE LICENSED PRODUCT CAN BE SUCCESSFULLY DEVELOPED BY USE OF THE LICENSED PATENTS OR KNOW-HOW. IN NO EVENT SHALL CEPHEID BE LIABLE TO ETG FOR ANY SPECIAL, INCIDENTAL INDIRECT, OR CONSEQUENTIAL DAMAGES (INCLUDING WITHOUT LIMITATION LOSS OF USE OR LOSS OF PROFITS) ARISING DIRECTLY OR INDIRECTLY OUT OF THIS AGREEMENT, INCLUDING ITS PERFORMANCE OR ANY BREACH, DELAY, OR DEFAULT. THIS LIMITATION SHALL APPLY WHETHER A CLAIM ARISES IN CONTRACT, TORT, OR STRICT LIABILITY.

2. ETG Representations and Warranties. ETG warrants and represents that, as of the effective date of this Agreement, to the best of its knowledge:

(a) Except as set forth hereunder, it has neither executed agreements nor granted rights in conflict with the rights and licenses granted hereunder.

(b) This Agreement has been authorized by all requisite corporate action of ETG and the Agreement constitutes a valid and binding obligation of ETG and is enforceable against ETG in accordance with its terms.

(c) ETG SHALL PROVIDE CEPHEID ITS STANDARD COMMERCIAL WARRANTY AS PROVIDED TO THIRD PARTY CUSTOMERS FOR ALL COMPONENTS AND INSTRUMENTS SOLD TO CEPHEID UNDER THE TERMS OF THIS AGREEMENT.

(d) EXCEPT AS PROVIDED FOR ABOVE, ETG HEREBY DISCLAIMS ANY WARRANTIES, WHETHER EXPRESS OR IMPLIED, OF ANY KIND REGARDING ANY WARRANTY OF MERCHANTABILITY OR FITNESS FOR ANY PARTICULAR PURPOSE, WITH RESPECT TO COMPONENTS, INSTRUMENTS, OR LICENSED PRODUCTS, OR THAT THE ETG DEVELOPMENTS CAN BE SUCCESSFULLY DEVELOPED BY USE OF THE LICENSED PATENTS OR KNOW-HOW. IN NO EVENT SHALL ETG BE LIABLE TO CEPHEID FOR ANY SPECIAL, INCIDENTAL INDIRECT, OR CONSEQUENTIAL DAMAGES (INCLUDING WITHOUT LIMITATION LOSS OF USE OR LOSS OF PROFITS) ARISING DIRECTLY OR INDIRECTLY OUT OF THIS AGREEMENT, INCLUDING ITS PERFORMANCE OR ANY BREACH, DELAY, OR DEFAULT. THIS LIMITATION SHALL APPLY WHETHER A CLAIM ARISES IN CONTRACT, TORT, OR STRICT LIABILITY.

9. PATENT INDEMNIFICATION

1. If the Owner of a patent or copyright or trademark sues ETG alleging that the Licensed Products delivered under this Agreement or ETG's use of the Licensed Products infringe a patent or copyright identified in Schedule A and if ETG gives prompt notice of the suit, CEPHEID will defend the suit, provided that ETG gives CEPHEID reasonable cooperation in the defense of the suit.
2. In any suit CEPHEID defends under paragraph 9.1, CEPHEID may control the defense, will pay all litigation costs including incurred attorney fees, and will indemnify ETG for all damages awarded by a court or any settlement payments approved by CEPHEID.
3. In any suit CEPHEID defends under paragraph 9.1, if ETG is enjoined by court order or by settlement approved by CEPHEID from using the CEPHEID Technology and Licensed Products as sold by CEPHEID, CEPHEID shall, at no cost to ETG and as mutually agreed to in writing between the Parties, (a) procure for ETG the right to continue using the Licensed Products, (b) replace or modify the Licensed Products to avoid infringement, or (c) repossess the Licensed Products in exchange for a full refund of the Licensed Products.

1. CONFIDENTIALITY
1. No Use. The receiving party will not use Confidential Information of the disclosing party except for the purposes expressly set forth in this Agreement.
2. Nondisclosure. The receiving party will not disclose Confidential Information to others (except to its employees, consultants, agents, and potential and actual collaboration partners, distributors and contract manufacturers, who reasonably require same for the purposes of this Agreement and who are bound to the receiving party by like obligations as to confidentiality) without the express written permission of the disclosing party.
3. Authorized Disclosure. The receiving party may disclose Confidential Information to the extent such disclosure is reasonably required by law or judicial order; provided, however, that the party required to make such disclosure shall seek confidential treatment of the Confidential Information to the fullest extent possible and shall give the other party prompt written notice thereof and opportunity to seek protective treatment of the Confidential Information.
4. Regulatory Disclosures. The confidentiality obligations in this Section 10 shall not apply to the extent that the Confidential Information or information created pursuant to this Agreement is a necessary or appropriate part of the information and data submitted for purposes of regulatory approval (including, but not limited to export) of the Licensed Product; provided, however, that to the extent practicable such submissions shall be made on a confidential basis. Such a regulatory disclosure shall in no way be interpreted as a public disclosure.
5. Confidentiality Term. The confidentiality and non-use obligations under this Section 10 shall extend for the term of this Agreement and five years thereafter.
6. Publications. Subject to prior written approval by ETG for all publications and releases, CEPHEID may use the ETG and its Affiliates, including Smiths Group, names and logos in publications and press releases on the collaboration.
7. Affiliates. Nothing in this Section 10 or this Agreement shall be construed to prevent either Party from disclosing to its Affiliated Companies Confidential Information obtained from the other Party during this Agreement, provided that such Confidential Information is used in a manner consistent with this Agreement, and further provided that said Affiliated Companies are bound by a like confidentiality obligation with respect to such Confidential Information.
2. TERM

The term of this Agreement shall be for the Agreement Term, unless earlier terminated pursuant to Section 13 of this Agreement.

3. INDEMNIFICATION
1. ETG Indemnification. ETG shall indemnify, defend, and hold CEPHEID and its current, past, and future Affiliates and their Successors and their respective directors, officers, employees, representative and agents harmless from and against any and all liabilities, claims, demands, costs, expenses, judgments or settlements (including legal expenses and attorneys' fees) which arise out of or result from the use, testing, manufacture, recall, processing, commercializing, promoting, packaging, labeling, sale, or distribution of Licensed Product by or on behalf of, or as a result of the activities of, ETG or its Affiliates, Successors, Sublicensees, sellers, or agents.

12.2 CEPHEID Indemnification. In addition to that set forth in Section 9, CEPHEID shall indemnify, defend, and hold ETG and its current, past, and future Affiliates and their Successors and their respective directors, officers, employees, representative and agents harmless from and against any and all liabilities, claims, demands, costs, expenses, judgments or settlements (including legal expenses and attorneys' fees) which arise out of or result from any third party claims of patent, license or intellectual property rights infringement or other violations against the CEPHEID technology or other information provided by CEPHEID to ETG under this Agreement or as a result of the activities of CEPHEID or its Affiliates, Successors, Sublicensees, sellers, or agents.

2. Notice. The parties shall give each other prompt notice in writing, in the manner set forth in Paragraph 16.6 below, of any claim or demand made against them that may be covered by this Section 12. Except as defined in Section 9, the parties shall have the right to participate, at its own expense, in the defense of any such claim or demand to the extent it so desires.
3. Insurance. Each party warrants that it has and will maintain during the term of this Agreement and for five (5) years thereafter product liability and general liability insurance in commercially reasonable amounts customary for similarly situated companies and sufficient to support its indemnification obligations under this Agreement. The parties will give each other reasonable prior written notice of any cancellation or failure to renew such insurance. Such insurance will be placed with insurers having a Best or Standard and Poors rating of "A" or better. Upon request by the other party, ETG or CEPHEID shall promptly provide a customary certificate of insurance, evidencing the coverage required by this Paragraph 12.3.
4. TERMINATION
1. This agreement shall terminate with 30 days notice from either party if any of the following occurs:
1. A Purchase Order for the sale of a Hand- Held System using the Cepheid Technology is not issued within three years of the date of the Letter of Intent (March 20, 2001); or

13.1.2 The Parties mutually agree, in writing, that all or specified licenses granted by this Agreement shall terminate.

13.1.3 The Agreement may also be terminated if there has been a material breach of this Agreement by either party. If CEPHEID or ETG is in material default of any obligations hereunder, the non-defaulting party may give written notice to the defaulting party of its intention to terminate this Agreement, and this Agreement shall terminate sixty (60) days after the giving of such notice unless during such sixty (60) day period a cure for the default has commenced to the reasonable satisfaction of the non-defaulting party.

2. In the event of a termination by ETG, except if termination is due to a material breach by Cepheid, CEPHEID shall have the option to retain access to the Hand-Held Systems developed under this Agreement, for sale into any markets, under terms and conditions to be reasonably agreed upon by the Parties, but in no event to exceed the costs and Running Royalties established under this Agreement. Should ETG terminate this Agreement due to a material breach by Cepheid, ETG shall have the ability to continue to sell any remaining inventory of Hand-Held Systems and/or components until the inventory is exhausted under the terms and conditions of this Agreement.
3. Rights Upon Termination. Upon termination of this Agreement, all rights and obligations of the Parties shall cease with respect thereto, except (a) for any payments and Running Royalties under Sections 5 and 6 of this Agreement which have accrued to the date of termination, including a pro-rata share of such payments and Running Royalties, if applicable; and (b) any obligations set forth in this Agreement that specifically survive termination.
4. Inventories. After the effective date of termination, Licensed Product that ETG has on hand as of the date of termination may be sold, provided that any applicable payment or royalty under this Agreement is paid to CEPHEID.
5. ASSIGNMENT
1. This Agreement shall not be assigned by either Party without the prior written consent of the other Party, except that either Party may assign this Agreement, in whole or in part, to an Affiliate of such Party or to the successor (including the surviving company in any consolidation, reorganization, or merger) or assignee of all or substantially all of its business ("Successor"). This Agreement will be binding upon any permitted Successor of either Party. No assignment shall have the effect of relieving any Party to this Agreement of any of its obligations hereunder.
6. DISPUTE RESOLUTION
1. Resolution by Party Representatives. In the event of any Dispute, either Party may, by written notice to the other, refer such Dispute to the officers designated below for attempted good faith negotiations within 30 days after such notice is received, as may be extended by mutual written agreement of both officers for up to 90 days:

For CEPHEID: Chris McReynolds, VP of Marketing and Business Development

For ETG: Jill McClune Myrick, Contracts Manager

2. Arbitration. Except as provided in Paragraph 15.1, and except for the right of either Party to apply to a court of competent jurisdiction for a temporary restraining order to preserve the status quo or prevent irreparable harm, any and all Disputes shall be finally determined by arbitration in accordance with then existing commercial rules of the AAA. Title 9, "Arbitration," of the California Code of Civil Procedure (CCP), including without limitation the provisions of CCP Section 1283.05 shall apply. Unless the Parties agree in writing to one arbitrator, the arbitration panel shall be composed of three (3) arbitrators, one of whom will be named by each Party. The third arbitrator, who shall act as chairman, shall be determined by the arbitrators named by each Party or, if they cannot agree in 30 days from date of the later-designated arbitrator's appointment, by the AAA. The arbitrators shall meet and decide in Santa Clara County, California. The arbitrators shall decide each issue presented to them by a majority vote, and their decisions shall be final and conclusive and binding upon the Parties. The amount of the costs of any such arbitration and by whom they shall be paid will be determined as part of the arbitration. The agreement regarding dispute resolution set forth in this Section 16 shall be final and enforceable and judgment upon any award rendered by the arbiters may be entered in any court having jurisdiction.
7. MISCELLANEOUS
1. Applicable Law. This Agreement shall be construed under and governed by the laws of the State of California, regardless of the choice of law principles of that state or any other jurisdiction.
2. Complete Agreement; Modification. This Agreement sets forth the entire agreement and understanding between the Parties as to the subject matter hereof and has priority over all documents, verbal consents or understandings made between CEPHEID and ETG before the conclusion of this Agreement with respect to matters hereof. None of the terms of this Agreement shall be amended or modified except in writing signed by the Parties hereto. Any waiver by any Party hereto of a breach of any provisions of this Agreement shall not be implied and shall not be valid unless such waiver is recited in writing and signed by such Party. Failure of any Party to require, in one or more instances, performance by the other Party in strict accordance with the terms and conditions of this Agreement shall not be deemed a waiver or relinquishment of the future performance of any such terms or conditions or of any other terms and conditions of this Agreement. A waiver by either Party of any term or condition of this Agreement shall not be deemed or construed to be a waiver of such term or condition for any other term. All rights, remedies, undertakings, obligations and agreements contained in this Agreement shall be cumulative and none of them shall be a limitation of any other remedy, right, undertaking, obligation or agreement of either Party.
3. Relationship of the Parties. For all purposes of this Agreement, CEPHEID and ETG shall be deemed to be independent contractors and anything in this Agreement to the contrary notwithstanding, nothing herein shall be deemed to constitute CEPHEID and ETG as partners, joint venturers, co-owners, an association or any entity separate and apart from each Party itself, nor shall this Agreement constitute any Party hereto an employee or agent, legal or otherwise, of the other Party for any purposes whatsoever. Neither Party is authorized to make any statements or representations on behalf of the other Party or in any way obligate the other Party, except as expressly authorized in writing by the other Party. Anything in this Agreement to the contrary notwithstanding, no Party hereto shall assume nor shall be liable for any liabilities or obligations of the other Party, whether past, present or future.
4. Severability. If any provision of this Agreement is held by a court of competent jurisdiction to be invalid or unenforceable, it shall be modified, if possible, to the minimum extent necessary to make it valid and enforceable or, if such modification is not possible, it shall be stricken and the remaining provisions shall remain in full force and effect; provided, however, that if a provision is stricken so as to significantly alter the economic arrangements of this Agreement, the Party adversely affected may terminate this Agreement, as well as any related agreements (including without limitation any agreements concerning the Licensed Products), upon 90 days' prior written notice to the other Party.
5. Publicity. CEPHEID and ETG shall agree to the text of an initial announcement of this Agreement to the public, and shall not publicly disclose any further details of the Agreement without mutual written consent.
6. Notice. Any notice required or provided for by the terms of this Agreement shall be in writing and sent by registered or certified mail, postage prepaid, or by telex or facsimile and confirmed by registered or certified mail addressed to the Parties at the following addresses:

To ETG: Richard R. Thomas, President

ENVIRONMENTAL TECHNOLOGIES

GROUP, INC.
1400 Taylor Avenue
Baltimore, MD 21234

To CEPHEID: Kurt Petersen, President
CEPHEID
1190 Borregas Avenue
Sunnyvale, California 94089

7. Survival. All obligations of Paragraphs 8.1(g) and (h), 8.2 (c) and (d), 9, 10.1 - 10.7, 12.1 - 12.3, 13.2 - 13.3, 15.1 - - 15.2, and 16.1 - 16.7 shall survive the Agreement Term or the termination, for any reason, of this Agreement.

IN WITNESS WHEREOF, the Parties have executed this Agreement as of the day and year written below.

ENVIRONMENTAL TECHNOLOGIES GROUP, INC


BY: Jill Mclune Myrick


TITLE: Senior Contract Manager

CEPHEID

BY: Thomas Gutshall


TITLE: Chief Executive Officer

DATE: August 9, 2001

SCHEDULE A

I. CEPHEID Patent Rights.

1. Amplification/Detection Technology

TITLE US SERIAL# FILED STATUS

[***]

2. Fluidics and/or Lysing Technology

TITLE US SERIAL# FILED STATUS

[***]

SCHEDULE B

MINIMUM DOCUMENTATION SUPPLIED TO ETG BY CEPHEID

1. A copy of all patents and patent applications listed in Schedule A.

2. A copy of all patents resulting from applications listed in Schedule A.

3. All drawings, specifications, and processes related to the following: I-CORE module, other PCR technology applicable to the DP and military markets, and all sample processing technology (including, but not limited [***]

4. Government and Cepheid test reports of relevant Cepheid technology including, but not limited to, [***]

5. Component vendor list.

THE SYMBOL "[***]" IS USED TO INDICATE THAT A PORTION OF THE EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS."

EX-10.2 5 exh10-2.htm EXHIBIT

THE SYMBOL [***] IS USED TO INDICATE THAT A PORTION OF THE EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS.

August 9, 2001

Mr. Thomas L. Gutshall
Chairman and CEO
Cepheid
1190 Borregas Avenue
Sunnyvale, CA 94089-1302

RE: Modification and Restatement of January 10, 2000 Letter Agreement

Dear Mr. Gutshall:

This serves to confirm the mutually agreed modification and restatement of our letter agreement dated January 10, 2000 (the "Distribution Agreement"). The Distribution Agreement between Cepheid ("SUPPLIER") and Fisher Scientific Company L.L.C. ("FISHER") concerns the SmartCycler™ System, accessories and reaction tubes developed by and made by or for SUPPLIER.

1. In Paragraph 1, in the sixth line, the parenthetical "(the `Field')" is deleted.
2. Paragraph 2 of the Distribution Agreement is deleted in its entirety and replaced as follows:

Distribution Rights. SUPPLIER grants to FISHER the right to distribute the Products and designates FISHER as an authorized distributor of the Products as outlined in this Paragraph 2:

1. Geographic Scope. FISHER is hereby designated an authorized distributor of the Products within the United States and the territory of Puerto Rico.
2. Market Scope. FISHER is hereby designated an authorized distributor of the Products in the life science research market (the "Field"). Specifically included within the Field are research activities in the biotech, pharmaceutical, scientific, and university/educational industries. Specifically excluded from the Field are human and veterinary diagnostics (including applications subject to regulatory labeling including "For Investigational Use Only" or "For Research Use Only"), environmental testing, quality assurance and control testing, identity and forensic testing, and testing for biothreat agents.
3. Supplier's Reserved Rights. Notwithstanding any rights granted to FISHER hereunder, including exclusive rights, SUPPLIER reserves the right to: (i) sell directly to the end user customers listed in Exhibit B to the Distribution Agreement; and (ii) make OEM sales of thermal cyclers, accessories and/or reaction tubes similar to Products which SUPPLIER may sell and ship to a firm for resale under that firm's label.
4. Term. The distribution rights granted to FISHER pursuant to Paragraphs 2(a) through 2(c) above shall continue through and including May 31, 2004.
5. Exclusivity. Subject to the provisions of Paragraphs 2(a) through 2(c) above, SUPPLIER hereby designates FISHER as SUPPLIER's exclusive distributor of the Products through and including May 31, 2002. During any period of FISHER's exclusivity hereunder, SUPPLIER shall: (i) refer all inquiries regarding the purchase of Products within the Field to FISHER; and, (ii) not appoint any other person or entity as an authorized distributor of the Products within the Field. Nothing in the prior sentence is in derogation of SUPPLIER's rights under paragraph (c) above.
6. Extension of Exclusivity. In the event that FISHER purchases (deemed to be the issuance of a purchase order for which delivery is completed within 30 days) from SUPPLIER between June 1, 2001 and May 31, 2002 at least [***] (not including the [***] units under purchase order # PR3206412 dated July 12, 2001) SmartCycler™ units (a unit defined as the total number of 16-site SmartCycler™ processing blocks, either as part of a Starter System or as Add-On Blocks), FISHER's exclusive distributor status granted by Paragraph 2(e) above shall continue through and including May 31, 2003. In the event that FISHER purchases from SUPPLIER between June 1, 2002 and May 31, 2003 at least [***] SmartCycler™ units, FISHER's exclusive distributor status granted by Paragraph 2(e) above shall continue through and including May 31, 2004.
7. Exclusive Source. During any period of time that the exclusivity provisions of Paragraph 2(e) and 2(f) are in effect, FISHER will use SUPPLIER as its exclusive supplier of systems capable of performing thermal cycling with real-time optical detection.
8. Sales Reporting. FISHER shall provide SUPPLIER within 30 days after the first day of each March, June, September and December a true and accurate accounting report of Products (including units sold and selling price) sold during the preceding 3 months in sufficient detail, as mutually agreed, for SUPPLIER to use for royalty reporting and sales compensation purposes. In addition, FISHER shall provide to SUPPLIER on a weekly basis an updated customer and contact list solely for SUPPLIER to use in monitoring sales and administering warranty and customer service.
9. Forecasts. Within one week of signing this addendum, FISHER shall provide SUPPLIER with one-year monthly purchase and sales forecasts that will be updated on a monthly basis during the first week of each month. In order to assist Cepheid with manufacturing planning, FISHER shall also within the first week of each month provide SUPPLIER with a purchase projection for the next three (3) month period. While the one year forecast will not be binding in total, the three month projections shall constitute a purchase commitment by FISHER for such period. Such three (3) month purchase projection/commitment shall be updated monthly, taking into account FISHER's sales experience and inventory levels over the previous month.

1. The first two sentences of Paragraph 3 of the Distribution Agreement are deleted in their entirely and replaced as follows:

The Product list prices, discounts and transfer prices to FISHER shall be as listed in Exhibit A. Prices shall be firm through December 31, 2001. Cepheid has the right to change the discount listed in Exhibit A; however, Cepheid's current intention is to maintain the discount for so long as FISHER is performing all of its responsibilities under the Distribution Agreement, including its Marketing Support responsibilities under Exhibit C, to the satisfaction of Cepheid.

2. Paragraph 5 of the Distribution Agreement is deleted in its entirety and replaced as follows:

Shipping. SUPPLIER will ship all SmartCycler™ System Products (systems, accessories and reaction tubes) FOB Sunnyvale, CA to FISHER's distribution center in Santa Clara, CA (freight collect) or to such other address as Fisher may reasonably designate. SUPPLIER shall follow FISHER's routing guide in the shipment of Products, and all products shall be shipped within thirty (30) days of order receipt.

3. Paragraph 7 of the Distribution Agreement is deleted in its entirety and replaced as follows:

Marketing Support. SUPPLIER and FISHER shall each provide Marketing Support, as described in Exhibit C.

4. Paragraph 8 of the Distribution Agreement is deleted in its entirety and replaced as follows:

Term. The term of this Agreement shall be from the date of mutual execution through and including May 31, 2004. Thereafter, the Agreement shall remain in force for successive six month periods, unless either party gives written notice of non-renewal to the other at least sixty (60) days prior to the then current expiration date.

5. Paragraph 12 of the Distribution Agreement is deleted in its entirety and replaced as follows:

Public Announcements. Neither SUPPLIER nor FISHER shall issue or cause to be issued any press release or public announcement or otherwise disclose or discuss the relationship between SUPPLER and FISHER, the existence of this Agreement or the transactions contemplated hereby (a) except as and to the extent that FISHER and SUPPLIER jointly agree in writing and (b) except as may be required by applicable law, court process or Nasdaq/NYSE regulation. Each party shall make reasonable efforts to inform the other prior to any authorized public announcement or disclosure.

6. A new Paragraph 13 is inserted into the Distribution Agreement as follows:

Non-Hire Agreement. Both parties agree that, during the term of this Agreement and for one year after termination for any reason, neither party will hire nor attempt to hire one another's employees (or any person who was employed by the other within the past one year) without the prior written consent of the other party. Notwithstanding the foregoing, in the event that a court of competent jurisdiction shall declare the agreement represented by the foregoing sentence to be unenforceable, and one party employs, directly or indirectly, or retains in a consulting or other capacity, any person employed by the other party within the previous one (1) year, the hiring party shall compensate other party for such employment at a fee of $30,000 per person, which each party acknowledges and agrees is fair and just compensation and does not constitute punitive or liquidated damages.

Except as expressly stated herein, the terms and provisions of the Distribution Agreement remain in full force and effect.

Please signify your acceptance and agreement on behalf of Cepheid to the above-stated modification and restatement of our January 10, 2000 letter agreement by counter-signing this letter on behalf of Cepheid where indicated below.

Very truly yours,

/s/J. Bradley Mahood

J. Bradley Mahood

Vice President Strategic Sourcing

AGREED AND ACCEPTED:

Cepheid

By:_/s/Thomas Gutshall

Name: Thomas Gutshall

Title: Chief Executive Officer

Date: August 9, 2001

THE SYMBOL [***] IS USED TO INDICATE THAT A PORTION OF THE EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS.

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EX-10.1

THE SYMBOL "[***]" IS USED TO INDICATE THAT A PORTION OF THE EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS."

PATENT AND TECHNOLOGY LICENSING AND SUPPLY AGREEMENT

This Agreement, by and between CEPHEID, a California Corporation having its principal place of business in Sunnyvale, California (hereinafter "CEPHEID") and ENVIRONMENTAL TECHNOLOGIES GROUP, INC., a Delaware Corporation with offices located in Baltimore, Maryland (hereinafter "ETG").

WHEREAS, CEPHEID is the owner of certain patents, patent applications, inventions, and licenses and possesses certain technical information and know-how relating to systems for processing polymerase chain reaction ("PCR") technology and other nucleic acid-based analysis methods for both integrated military bioagent detection systems and for hand- held bioagent detection instruments; and

WHEREAS, ETG desires to obtain worldwide licenses with respect to those patents, patent applications, inventions, licenses, technical information, and know-how to develop and commercialize bioagent detection devices and to purchase certain related subsystems, components, and supplies from CEPHEID;

NOW, THEREFORE, in consideration of the promises and of the mutual covenants and obligations hereinafter set forth, it is agreed as follows:

1. DEFINITIONS
1. "AAA" means the American Arbitration Association.
2. "Affiliate" means any corporation or other entity that directly, or indirectly through one or more intermediaries, controls, is controlled by, or is under common control with the designated Party but only for so long as such relationship exists. For the purposes of this definition, "control" means i) ownership of at least fifty percent (50%) of the shares of stock entitled to vote for directors in the case of a corporation, or of at least fifty percent (50%) of the interests in profits of a business entity other than a corporation; or ii) the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of an individual, corporation, or other legal entity, whether through the ownership of voting securities, by contract, or otherwise.
3. "Agreement" means this Patent and Technology Licensing and Supply Agreement between CEPHEID and ETG.
4. "Agreement Term" means the term of this Agreement,which commences upon the date hereof and will remain in effect until all of the CEPHEID Patent Rights in any jurisdiction have expired.
5. "Amplification/Detection Technology" means CEPHEID's technologies for facilitating the process of chemically multiplying the numbers of target sequences of DNA or RNA in order to facilitate their identification or detection using fluorescent labels or similar approaches. Such multiplication of target sequences can be accomplished using PCR or other nucleic acid amplification methods. Applicable Cepheid technologies include, but are not limited to I-CORE Modules, reaction tubes, and proprietary Reagents. This CEPHEID Technology is protected by CEPHEID Patents listed in Schedule A, I. CEPHEID Patent Rights- A. Amplification/Detection Technology.
6. "Bioagent" means a toxic biologic agent used by humans to inflict harm.
7. "Budget" means the budgetary and monetary understanding that is to be negotiated by the Parties within one hundred twenty (120) days of the signing of the Letter of Intent (signed March 20, 2001), and which is to be updated by the Parties annually.
8. "CEPHEID Patent Rights" means those CEPHEID Patent Rights currently owned by CEPHEID that are listed under that topic in Schedule A.
9. "CEPHEID Technical Information" means know-how, trade secrets, inventions, data, scientific records, technology and information relating to the Licensed Products that is now owned by CEPHEID and which CEPHEID has the right to disclose.
10. "CEPHEID Technology" means the Licensed Patents and CEPHEID Technical Information. The Technology concerns CEPHEID's PCR and other nucleic acid amplification related technology, including, without limitation, sample preparation technology, amplification and detection technology, reaction tube design, microfluidic systems, rapid lysing, and nucleic acid extraction and purification.
11. "Confidential Information" means any and all knowledge, know-how, or other information disclosed by either Party to the other, either orally or in writing, and materials transferred under this Agreement, if so marked at the time of delivery and, in the case of oral information, if so designated at the time of delivery and confirmed in writing by the disclosing party within thirty (30) days after oral disclosure. Notwithstanding the foregoing, Confidential Information will not include information or materials that:
1. the receiving party can demonstrate by competent, contemporaneous written records was known to it prior to the date of disclosure hereunder by the disclosing party;
2. is public knowledge, or becomes public knowledge, other than by breach of this Agreement by the receiving party or by anyone to whom the receiving party disclosed such information;
3. is lawfully disclosed to the receiving party by a Third Party who is not obligated to the disclosing party or any other party to retain such information in confidence; or
4. is independently developed by the receiving party without knowledge of the information of the disclosing party as demonstrated by competent, contemporaneous written records.
5. is not marked or designated as Confidential Information.
   Any Confidential Information that is used to develop Inventions will continue to be the Confidential Information of the disclosing Party and will be governed by Paragraph 10 of this Agreement. However, Confidential Information developed or created by CEPHEID with ETG funds shall be ETG's Confidential Information.
12. "Consumables" means reaction tubes, cartridges, or other hardware used in conjunction with the Licensed Products to generate assay results, excluding those supplies defined as Reagents. Such consumables are intended to be single use and disposable, unless incorporated into a flow through device.
13. "DP Field" in this Agreement, means Hand Held Systems for the domestic preparedness and military markets.
14. "Dispute" means any disagreement between the Parties arising out of or in connection with this Agreement.
15. "ETG Developments" means any and all modifications or refinements related to the CEPHEID Technology or any Licensed Products or their use or the manufacturing processes thereof, that are created, developed, conceived, or reduced to practice by ETG (or its Affiliates), or by ETG (or its Affiliates) together with or in conjunction with any other entities or parties, or by CEPHEID with ETG funding under a specific project requested by ETG, whether patented or not patented, and which arise after the date of this Agreement; provided, however, that ETG Developments do not include Joint Developments.
16. "Fluidics/Lysing Technology" means CEPHEID's technologies for fluid handling and processing as applied to the preparation of samples for DNA or RNA based analysis, including filtration, lysing of cells or cellular organisms, capture and purification of DNA or RNA, mixing of sample with Reagents, and delivery to a reaction tube or chamber. Applicable CEPHEID technologies include but are not limited to fluidic processing blocks, fluidic sample preparation cartridges and cartridge processing Modules, and ultrasonic lysing Modules. This technology is protected by CEPHEID Patents listed in Schedule A, I. CEPHEID Patent Rights- B. Fluidics &/or Lysing Technology.
17. "Fully Burdened Cepheid Product Cost" means CEPHEID's cost of goods to produce I-CORE modules, I-CORE reaction tubes, disposable fluidic sample preparation cartridges, fluidic processing blocks, ultrasonic lysing modules, and/or other applicable subsystems or consumables to be sold to ETG under the terms of this Agreement. Such costs will be defined as Cepheid's direct purchased material and direct production labor costs, together with the associated direct overheads for purchased material and direct production labor in the manufacture of a product, in so far as these costs would be capitalisable into inventory under US GAAP. However, it does not include Selling, General and Administrative (S, G&A) overhead costs nor does it include engineering or development costs, direct or otherwise, that are not directly related to the production of the product concerned.
18. "Fully Burdened ETG Product Cost" is defined as ETG's direct purchased material and direct production labor costs, together with the associated direct overheads for purchased material and direct production labor in the manufacture of a product, in so far as these costs would be capitalisable into inventory under US GAAP. However, it does not include Selling, General and Administrative (S, G&A) overhead costs nor does it include engineering or development costs, direct or otherwise, that are not directly related to the production of the product concerned.
19. "Fully Burdened RD&E Costs" means costs for CEPHEID research, development, and engineering (RD&E) support, corresponding to fully burdened RD&E costs which shall be comprised of direct RD&E costs, RD&E overhead, and direct costs and allocated overhead associated with constructing and delivering any prototype Modules or Consumables required by ETG. Fully Burdened RD&E Costs will be estimated in terms of average cost per Full Time Equivalent (FTE) and will be established in accordance with the Budget
20. "Hand-Held System" means [***]
21. [***]
22. "I-CORE Module" means a CEPHEID proprietary nucleic acid amplification Module comprised of (1) a single site, discrete, individually controllable heater sleeve containing a heater element and designed to accept a disposable reaction tube or cartridge, (2) an integrated cooling mechanism, such as a fan, that enables passage of ambient or cooled air across the heater sleeve, and (3) optical blocks containing solid state components that enable optical interrogation of the reaction solution in the reaction tube or cartridge, as it may be modified and improved from time to time.
23. "Integrated Military Bioagent Detection System" means a system comprised of distinct component parts, each capable of carrying out a specific phase of a complete field-based, non- laboratory-based analysis for the presence of Bioagents, with component parts that include, but are not limited to, sample collection (usually air samples) component, nucleic acid-based analysis component (identifier), and reporter/data transmitter component. Although the components could operate independently, the system is designed to operate in an integrated fashion.
24. [***]
25. "Joint Developments" means any and all modifications or refinements related to any Licensed Products or their use or the manufacturing processes thereof, that are created, developed, conceived, or reduced to practice by ETG and CEPHEID, together, after the date of this Agreement. Modifications, refinements, or any other developments that are funded solely by ETG shall not be considered Joint Developments, but shall be considered ETG Developments as defined in Paragraph 1.15.
26. "JPO" means the United States Government's Joint Program Office for Biological Defense.
27. "Letter of Intent" means the document signed by the Parties on March 20, 2001, relating to the terms of this Agreement. This Agreement supercedes the Letter of Intent in its entirety.
28. "Licensed Fields" means the DP Field and the Military Field, as licensed under Section 2 of this Agreement.
29. "Licensed Patents" means the CEPHEID Patent Rights listed in Schedule A.
30. "Licensed Product(s)" means any product that, in whole or part (a) is made using, or that uses or embodies, CEPHEID Technical Information; or (b) is covered by, a Valid Claim of an unexpired Licensed Patent. For the purposes of this definition, a Product is "covered by" a Valid Claim of a Patent if, but for this Agreement, its manufacture, use, or sale would infringe a Valid Claim.
31. "Military Field" means Integrated Military Bioagent Detection Systems for use by governmental military customers only for the detection of Bioagents, excluding Hand-Held Systems.
32. "Modules" means a subsystem or subcomponent designed for incorporation into a system or instrument and capable of carrying out a particular designated function; however, modules are not capable of independent function, but operate only in conjunction with other subsystems or subcomponents.
33. [***]
34. "Net Sales" means the total consideration, whether in dollars or otherwise, paid on sales of a Licensed Product by ETG or its Affiliates to unrelated Third Parties in bona fide arms length transactions, less the following deductions, in each case related specifically to the Licensed Product: (1) trade, distribution, cash and quantity discounts and sales commissions; (2) taxes on sales, such as sales or use taxes to the extent added to the sales price and set forth separately as such in the total amount invoiced; (3) freight, insurance and other transportation charges to the extent added to the sales price and set forth separately as such in the total amount invoiced; and (4) amounts repaid or credited by reason of rejections, defects or returns or because of retroactive price reductions, chargebacks or rebates under government programs. Net Sales shall also include the fair market value of non- monetary consideration received by ETG or its Affiliates with respect to sales by them of the Licensed Products to unrelated Third Parties.
35. "Parties" shall mean CEPHEID and ETG and their Affiliates and Successors.
36. "Patent" means valid and enforceable letters patent, patent applications, and all related continuations, continuations-in-part, reexaminations, divisions, reissues, extensions, patents of addition, or inventor's certificates, and all foreign counterparts thereof.
37. "PCR" means DNA and RNA replication through polymerase chain reactions.
38. "Reagents" means enzymes, nucleic probes, nucleic acid primers, and other biological components, fluorescent labels, buffers, and other chemicals that are used for carrying out a nucleic acid amplification and detection reaction in the CEPHEID technology. Such Reagents may or may not be single use, and may be presented in a variety of formulations and mixtures including, but not limited to, liquid, surface, immobilized, or dried.
39. "Running Royalty" means any payment regarding sale of Licensed Products that is directly or indirectly affected by the volume of such sales, whether in a linear or stepped fashion.
40. "Successor" means a successor or assignee of a Party in accordance with Paragraph 15.1 of this Agreement.
41. "Territory" means all countries of the world.
42. "Third Party" means any individual, estate, trust, partnership, joint venture, association, firm, corporation, company, or other entity, other than the Parties to this Agreement.
43. [***]
44. "Valid Claim" means any claim contained in any patent application or in any issued and unexpired patent included within the Licensed Patents which has not been abandoned or held unenforceable by a court or other governmental agency of competent jurisdiction, and which has not been disclaimed or admitted to be invalid or unenforceable.
2. GRANT OF LICENSES
1. Licenses to ETG. In consideration of the Royalties and other consideration provided under this Agreement in Section 5, and subject to the limitations set forth in Paragraph 2.2 and the other terms and conditions of this Agreement:
1. CEPHEID grants to ETG and its Affiliates and their Successors the exclusive worldwide right and license, under the Licensed Patents and CEPHEID Technical Information, to manufacture, have made, use, develop, sell, and have sold Licensed Products within the DP Field in the Territory during the Agreement Term.
2. CEPHEID grants to ETG and its Affiliates and their Successors the non-exclusive worldwide right and license, under the Licensed Patents and CEPHEID Technical Information, to manufacture, have made, use, develop, sell, and have sold Licensed Products within the Military Field in the Territory during the Agreement Term.
3. No licenses or rights to any intellectual property or to any patents other than those specified in the above Paragraphs 2.1.1 and 2.1.2 are granted or conferred to ETG by CEPHEID under this Agreement.
2. Exclusions and Limitations on ETG's License.
1. The Smart Cycler, Smart Cycler TD, and Smart Cycler XC, current Cepheid products, are excluded from the licenses granted in this Agreement. This exclusion does not prohibit in any way the use of the CEPHEID Technology by ETG in accordance with the remainder of this Agreement.
2. The license in Paragraph 2.1, above does not include the right to make or have made any Modules or Consumables or components thereof that are part of the Licensed Products that are based on, embody, or incorporate the Cepheid Technology that CEPHEID decides, in its discretion, to make or have made.
3. CEPHEID will retain sole rights to manufacture, or have manufactured, sell, have sold, develop, and use the I-CORE Module, I-CORE Module derivatives, fluidic cartridge processing Modules and Consumables that are based on the Cepheid Technology, even if such Modules or Consumables contain, include, or embody ETG Developments or Joint Developments; provided, however, that, in the DP Field, CEPHEID will sell and have sold such products only to ETG. For any Modules or Consumables containing, including, or embodying ETG Developments, CEPHEID will sell and have sold such products only to ETG in the DP and Military Fields. CEPHEID will sell Modules and Consumables to ETG under this Paragraph 2.2.3 for CEPHEID's Fully Burdened Cepheid Product Cost plus a % mark-up, dependent upon the field, as specified in Paragraph 5.5.
4. Notwithstanding anything to the contrary in this Agreement, if ETG desires to manufacture any Module and/or Consumable that is based, in whole or part, on the CEPHEID Technology, it may do so only if CEPHEID, in its sole discretion, authorizes ETG, in writing, to do so. In this case, ETG will pay to CEPHEID a royalty on net end-user sales equivalent to the rates owed to CEPHEID (as per Paragraph 5.5) as if the product had been manufactured by CEPHEID.
5. The rights and licenses granted pursuant to Paragraph 2.1.1 shall be subject to the right of CEPHEID to conduct research and development activities using the CEPHEID Technology, including the Licensed Patents and the CEPHEID Technical Information.

2.2.6 CEPHEID and ETG agree that ETG will manufacture and integrate or have manufactured or integrated on its behalf in its sole discretion the Hand-Held Systems and the Integrated Military Bioagent Detection Systems for the DP and Military Fields.

2.2.7 Should CEPHEID ever stop production or be unable to meet the production needs of ETG of the Modules and/or Consumables within ninety (90) days of any reasonable request, CEPHEID grants ETG the right to manufacture the Modules and/or Consumables for the DP and Military Fields; provided, however, that, in the case of I-Core Modules, the parties must first negotiate a mutually-satisfactory sublicense of any necessary patents or technology.

3. Assignments and Sublicenses. ETG and/or Cepheid may not Sublicense or assign, in whole or part, any of its license rights under this Agreement except as provided in Paragraph 14.1 of this Agreement.
4. Licenses and Grants to CEPHEID.
1. ETG Developments. ETG hereby grants to CEPHEID a non-exclusive, perpetual, worldwide license to CEPHEID under ETG Developments (including without limitation any ETG-developed Licensed Products), to sell and have sold any Licensed Products outside the Licensed Fields.
1. If such Licensed Products contain ETG Developments, CEPHEID will pay to ETG a royalty, to be negotiated between the parties but not to exceed [***] of Net Sales.
2. Notwithstanding Paragraph 2.4.1.A of this Agreement, if such Licensed Products are manufactured by ETG, they will be transferred to CEPHEID for a mutually-agreeable price but not to exceed Fully Burdened ETG Product Cost plus [***].
3. Regarding ETG Developments, CEPHEID may sell, and have sold Licensed Products that are not manufactured by or on behalf of ETG only if the Parties reach an agreement as to the appropriate Royalty. Cepheid will provide ETG written notice prior to utilizing any ETG Developments.
2. Joint Developments. Except as otherwise specified in this Agreement, ETG and CEPHEID each hereby grant to one another non-exclusive, perpetual, royalty-free worldwide licenses to use, have use, sell, have sold, and exploit the Joint Developments. ETG's licenses under this Section 2.4.2 shall only apply to the DP and Military Fields and CEPHEID's licenses under this Section 2.4.2 shall only apply to fields other than the DP and Military Fields.
3. DEVELOPMENT RESPONSIBILITIES
1. ETG Responsibilities
1. ETG will, in addition to the CEPHEID Technology to be licensed under this Agreement, also obtain whatever licenses are necessary from Applied Biosystems and/or Hoffman La-Roche, or otherwise to fully carry out its responsibilities under this Agreement. When necessary, CEPHEID will provide reasonable support to ETG in obtaining these additional licenses. This Agreement will be voidable in the event the Parties conclude that ETG is unable to execute all necessary licenses; provided however, that CEPHEID will have the option to "step in" and provide a source for necessary Reagents if ETG is unable to obtain licenses or make other arrangements for Reagents with reasonable terms for the required Reagents. The supply of Reagents by CEPHEID to ETG, if required, shall be the subject of a separate agreement, to be negotiated, as required, between the Parties.
2. ETG will use its best efforts to develop, manufacture, market and sell products that include the CEPHEID Technology in the DP Field. [***].
3. [***]
4. ETG will diligently market the CEPHEID Technology in the domestic and international Military Field.
5. ETG will use its best efforts, as appropriate, to submit proposals that include the CEPHEID Technology for the [***]and any other future military development and/or production contracts in which the CEPHEID Technology is applicable, subject to any limitations of the license(s) and/or customer and program requirements.
6. ETG will purchase Modules and Consumables from CEPHEID as required to develop, manufacture and sell DP Hand-Held Systems or other systems developed by ETG under this Agreement.
7. ETG will develop or have developed on its behalf at its sole discretion PCR primers, enzymes, fluorescent tags, and other Reagents for DP and Military Fields or call upon CEPHEID to provide these services if the economics, including license terms, are more favorable to the Parties. The supply of Reagents by CEPHEID to ETG, if required, shall be the subject of a separate agreement, to be negotiated as required between the Parties. If Reagent development services were to be provided by CEPHEID on behalf of ETG, such services would be subject to funding from ETG as described in 3.1.9.
8. ETG will participate at its own cost in a continuing dialog and consultation with CEPHEID on any changes/improvements to the I-CORE technology and associated disposables.
9. ETG will fund agreed research, development, engineering, and other work to be carried out by CEPHEID under the direction and specification of ETG, at rates equivalent to CEPHEID'S Fully Burdened RD&E Costs and according to the Budget to be developed by CEPHEID and ETG. If the Parties cannot reach agreement on the Budget, this Agreement is void.
10. ETG will provide to CEPHEID access to all data, information, and records relating to the performance of the CEPHEID Technology and the Licensed Products, , including without limitation results of any research, development, or field trials, subject to export, government security, or other legal restrictions.
2. CEPHEID Responsibilities
1. CEPHEID will provide reasonable technical support to ETG, at ETG's cost, consistent with the Budget, in the following technical areas: I-CORE Module, flow through fluidics, disposable sample processing systems, primer performance, and other detector/identifier technology as necessary to enable the design and integration of the applicable CEPHEID Technology into ETG Licensed Products, in whole or part, under this Agreement. In cases where CEPHEID and ETG agree, in their mutual discretion, that ETG should manufacture a specific Module or Consumable employing the CEPHEID Technology, CEPHEID will provide to ETG the drawings, manufacturing processes, and other documentation in CEPHEID's possession, or in the possession of Cepheid's subcontractors or vendors, necessary to manufacture the key CEPHEID Technology-related components of the Hand-Held Systems and Integrated Military Bioagent Detection Systems. CEPHEID will provide the above-described technical support by making its technical personnel available in Sunnyvale, CA, to assist the transition of the CEPHEID Technology to ETG. ETG shall pay CEPHEID for such technical support on an full time employee (FTE) basis and according to the Budget, defined in Section 5.4, developed by CEPHEID and ETG.
2. CEPHEID will participate at its own cost within reasonable commercial standards, during the term of this Agreement, in a continuing dialogue and consultation with ETG on changes/improvements to the I- CORE technology and associated disposables.
3. CEPHEID will supply I-CORE Modules, I-CORE reaction tubes, disposable fluidic sample prep cartridges, and/or other applicable Modules or Consumables to ETG at transfer prices as described in the Payments & Royalties Section of this Agreement, as long as they are appropriate for Licensed Products developed by ETG under this Agreement. Except where CEPHEID has applicable pre-existing or parallel Reagent formulations, ETG will be responsible for the development, stabilization, and supply of Reagents for loading by CEPHEID into the reaction tubes or disposable cartridges, providing that such Reagents are compatible with the CEPHEID components and are developed according to CEPHEID specifications.
4. CEPHIED will provide to ETG access to and use of all data, information, and records relating to the performance of the CEPHEID Technology applicable to the endeavors contemplated under this Agreement, the Licensed Products, and related systems, including without limitation results of any research, development, or field trials, subject to export, government security, or other legal restrictions. Where appropriate ETG will support trial work by direct participation.
4. ATTRIBUTION
1. Attribution. ETG shall make appropriate reference in all labeling and printed materials to any contribution by CEPHEID or the CEPHEID Technology to the Licensed Products.
5. PAYMENTS AND ROYALTIES
1. Upfront Payment. In consideration of the exclusive license for the DP Field granted to ETG by CEPHEID:
1. ETG will pay to CEPHEID an upfront non-refundable license fee payment of [***] payable upon signing of this Agreement. The license fee will cover the following CEPHEID PCR-related technology components and must be taken in total:

A. A license to CEPHEID's technologies for reactor tube(s) design [***];

B. [***]; and

C. [***]

5.1.2 In consideration for this payment, Cepheid shall provide at a minimum the information and documentation listed in Schedule B.

2. Minimum Royalty Payments. ETG will begin paying to CEPHEID minimum royalty payments to retain the exclusivity of its license in the DP Field according to the following schedule. Minimum royalty payments are creditable against payments due to CEPHEID only in the preceding 12 month period to which they apply:
1. [***]
2. [***]
3. [***]
4. [***]
5. [***]

If such payments are not made, then the CEPHEID license in the DP Field shall revert from an exclusive to a non-exclusive license.

3. ETG Research and Support. ETG will pay CEPHEID at CEPHEID's Fully Burdened RD&E Costs, as set forth in the Budget, for CEPHEID's support for:
1. Transfer to ETG of existing applicable CEPHEID Technology covered in this Agreement, not to exceed [***], as defined in the Budget developed in accordance with Section 5.4, unless agreed upon in writing by both the President of ETG and the President of CEPHEID.
2. Consultation to ETG for adaptation of existing technology covered in this Agreement.
3. Modification of existing technology or development of new technology as required under this Agreement.
4. Budget for Support Activities. Within one hundred twenty (120)days of the execution of the Letter of Intent (March 20, 2001), a Budget is to be developed and agreed upon by the parties outlining ETG requirements in the above-specified areas, as well as a budget for funding to cover CEPHEID's support activities. This Agreement will be void should the parties be unable to mutually agree to the Budget.
5. Transfer Prices andRunning Royalties.

5.5.1 For sales in the DP Field:

A. ETG shall pay CEPHEID'S Fully Burdened Cepheid Product Cost plus [***] for all subsystems, Modules, and Consumables supplied to ETG by CEPHEID. If Reagents are supplied by CEPHEID to ETG, such supply shall occur under a separate agreement, to be negotiated between the Parties. Should this transfer pricing increase more than two times the prior year's Consumer Price Index (CPI), the parties will reevaluate this pricing formula and confirm the parties' mutually agreement to this Section.

B. ETG will also pay CEPHEID Running Royalties on Net Sales of Licensed Products at one of the following rates determined by the CEPHEID Technology incorporated in the Hand-Held System(s):

5.5.1B.1 Amplification/Detection Technology only: [***]; or

5.5.1.B.2 Integrated with Fluidics &/or Lysing Technology: [***].

In the DP Field, the Running Royalty shall be payable on Net Sales of the Hand-Held System, including all accessories needed to operate the Licensed Products and Consumables (except independently packaged Reagents) sold with the Licensed Products.

5.5.2 For sales in the Military Field:

A. ETG shall pay CEPHEID'S Fully Burdened Cepheid Product Cost plus [***] for all subsystems, Modules, and Consumables supplied to ETG by CEPHEID. Should this transfer pricing increase more than two times the prior year's Consumer Price Index (CPI), the parties will reevaluate this pricing formula and confirm the parties' mutually agreement to this Section.

B. ETG will pay to CEPHEID Running Royalties on the Net Sales price of all nucleic acid-based analysis components (identifiers) and related sample processing components in the Integrated Military Bioagent Detection Systems that are sold by ETG and that incorporate the CEPHEID Technology. Royalty rates will be based on one of the following rates, determined by the CEPHEID Technology integrated into the Licensed Product:

5.5.2.B.1 Amplification/Detection Technology only: [***]; or

5.5.2.B.2 Integrated with Fluidics &/or Lysing Technology: [***].

If the nucleic acid-based analysis component (identifier) or any other component of an Integrated Military Bioagent Detection System that contains CEPHEID Technology is invoiced separately to the end-user, then the Running Royalty shall be applied to the invoiced price of the applicable components. If the Integrated Military Bioagent Detection System is invoiced in its entirety to the end-user, then the Parties will agree upon a formula for allocating a portion of the total Net Sales of each Integrated Military Bioagent Detection System corresponding to the number and nature of components containing CEPHEID Technology, and the Running Royalty shall be applied against such allocated portion of the total Net Sales.

C. As the Military Field opportunities become better defined with regards to customer and program requirements, CEPHEID and ETG may adopt a mutually acceptable alternative compensation formula.

6. REPORTS AND PAYMENTS
1. Royalty Reports. Reports, accompanied by statements of minimum Royalties and running Royalties due, under Section 5 of this Agreement, shall be furnished to CEPHEID by ETG within forty-five (45) days after the completion of each calendar quarter. Such reports shall show gross sales of each Licensed Product, the deducted amounts used to calculate Net Sales, in accordance with Paragraph 1.35, and the Royalties due for the preceding fiscal quarter. Such reports shall also show calculations for all minimum Royalties and running Royalties due. Such reports shall also provide sales and sales price information for sales of Licensed Products to the U.S. Government such that CEPHEID can compile progress and royalty reports due under the Lawrence Livermore National Laboratory License.
2. Invoices. Invoices shall reasonably reflect the Fully Burdened Cepheid Product Cost or Fully Burdened ETG Product Cost, as appropriate, for which a cost plus percentage payment is due.
3. Records and Inspection.
1. ETG shall keep accurate records of account on behalf of itself and its Affiliates, Successors, Sublicensees, and sellers, for the purposes of compliance with its obligations hereunder, and shall maintain them for at least 5 years from the date of their creation. ETG shall permit its records to be inspected and arrange for such inspection of the records of its Affiliates, Successors, Sublicensees, and sellers during normal business hours by independent certified public accountants to inspect and verify the accuracy of ETG payments. Such inspection shall be upon reasonable notice. If the inspection reveals an underpayment of greater than 5% between the payments owed to CEPHEID under this Agreement and the payments actually paid by ETG to CEPHEID, ETG will promptly pay CEPHEID's costs of conducting the inspection, along with the amount of the discrepancy. If no such underpayment is found, or if that underpayment is 5% or less, the cost of inspection shall be borne by CEPHEID.
2. CEPHEID shall keep accurate records of account on behalf of itself and its Affiliates, Successors, Sublicensees, and sellers, for the purposes of compliance with its obligations hereunder, and shall maintain them for at least 5 years from the date of their creation. CEPHEID shall permit its records to be inspected and arrange for such inspection of the records of its Affiliates, Successors, Sublicensees, and sellers during normal business hours by independent certified public accountants to inspect and verify the accuracy of CEPHEID's Fully Burdened Cepheid Product Costs that are used as a basis for establishing the transfer prices of Modules and Consumables sold to ETG and to verify and/or identify any utilization of ETG Developments. Such inspection shall be upon reasonable notice. If the inspection reveals an overpayment of greater than 5% between the transfer prices to be charged by CEPHEID under this Agreement and the transfer prices actually paid by ETG to CEPHEID, CEPHEID will promptly pay ETG's costs of conducting the inspection, along with the amount of the overpayment. If no such overpayment is found, or if that overpayment is 5% or less, the cost of inspection shall be borne by ETG.
4. Payments. Payments, other than Royalty payments, shall be payable in United States currency within 45 days of its receipt of the invoices specified in Paragraph 6.2, along with its cooperation in any audits requested under Paragraph 6.3. Royalty payments shall be paid with the Royalty reports described in Section 6.1. The dollar volume represented by sales in countries foreign to the United States shall be calculated using the average of the daily exchange rate published by the Wall Street Journal for the country in question during the fiscal quarter for which a report is required. Payments of Running Royalties shall be made within 45 days of the end of each fiscal quarter during which the Running Royalties apply. A failure to make payments in accordance with this Paragraph 6.4 will be considered a material breach of this Agreement.
5. Currency. In the event consideration or Running Royalties are due for sales in a country where by reason of currency regulations of any kind or taxes of any kind it is impossible to make royalty payments for such country's sales in accordance with Paragraph 6.4, said Running Royalties shall be deposited in whatever currency is allowable for the benefit or credit of CEPHEID in an accredited bank of that country as mutually agreed to by the Parties.
6. Taxes. All taxes with no right of offset required to be withheld from royalty payments hereunder shall be deducted by ETG from said payments and evidence of such payment or withholding shall be delivered to CEPHEID at the time the accounting for such royalty payment is made to CEPHEID.
7. INTELLECTUAL PROPERTY
1. Each party retains ownership of its own intellectual property developed prior to the date of this Agreement.
2. Any intellectual property developed solely by either party during the term of this Agreement will be solely owned by that developing party; however, subject to the licenses and limitations set forth in Section 2 of this Agreement.
3. Any Joint Developments will be jointly owned by the parties and may be used without restriction by either party, consistent with the provisions of Paragraph 2.4.2 of this Agreement. The Parties will implement steps with respect to Joint IP reasonably appropriate to facilitate its protection, use and appropriate exploitation by the parties.
4. CEPHEID Patent Rights. CEPHEID will at all times own and be responsible for and fully maintain the CEPHEID Patent rights, except as set forth in Sections 7.5 and 7.6.
5. Failure to Prosecute or Maintain. If CEPHEID fails to, or elects not to, prosecute any application or patent in the CEPHEID Patent rights, CEPHEID will, within a reasonable time after making such election, notify ETG and ETG will have the right, at its expense, to pursue such filing, prosecution and maintenance. Regardless of whether CEPHEID or ETG prosecutes a Patent right hereunder, ETG will retain the same rights in the Licensed Field as it would have been entitled to under this Agreement if CEPHEID had controlled the prosecution. Should the parties determine that only ETG would benefit in the prosecution and/or maintenance of any particular Patent rights under this paragraph, ETG shall be fully responsible for the associated costs; otherwise, ETG shall charge back any and all expenditures to Cepheid, initially by crediting ETG for Royalties as defined in Section 5.
6. Failure to Seek Protection or Maintain. If CEPHEID decides not to seek patent protection in a particular country or other jurisdiction in the Territory, or to not maintain patent protection on any of the CEPHEID Patent rights in any country or other jurisdiction in the Territory where such CEPHEID Patent rights exist, CEPHEID will notify ETG of such decision in writing within a reasonable time after the decision is made. ETG will then have the right, at ETG option and expense, to file, prosecute, and maintain any such patent applications and patents. With respect to any such prosecution, ETG will retain the same rights in the Licensed Fields as it would have been entitled to under this Agreement if CEPHEID had controlled the prosecution. Should the parties determine that only ETG would benefit in the protection and/or maintenance of any particular Patent rights under this paragraph, ETG shall be fully responsible for the associated costs; otherwise, ETG shall charge back any and all expenditures to Cepheid, initially by crediting ETG for Royalties as defined in Section 5.
7. ETG Developments. ETG will have the right, but not the obligation, to file, prosecute and maintain any Patent Rights which claim ETG Developments, at its cost and expense. If ETG fails to, or elects not to, prosecute any Patent rights which claim ETG Developments, ETG will, within a reasonable time after making such election, notify CEPHEID and CEPHEID will have the right to pursue such filing, prosecution, and maintenance, at CEPHEID's cost and expense. Regardless of whether CEPHEID or ETG prosecutes a Patent right in any ETG Improvement hereunder, CEPHEID will retain the same rights outside the Licensed Fields as it would have been entitled to under this Agreement if ETG had controlled the prosecution.
8. WARRANTIES
1. CEPHEID Representations and Warranties. CEPHEID warrants and represents that as of the effective date of this Agreement:

(a) It has the appropriate rights to license or, as appropriate, sublicense such rights to ETG.

(b) It has identified all PCR-related patents and patent applications for which Cepheid has rights to license and/or sublicense in Schedule A.

(c) It has the right to grant this license to the Licensed Patents.

(d) Except as set forth hereunder, it has neither executed agreements nor granted rights in conflict with the rights and license granted hereunder.

(e) There are no current or pending Patent Office or court proceedings in which the ownership, inventorship, validity, patentability or enforceability of any of the Licensed Patents is being contested.

(f) This Agreement has been authorized by all requisite corporate action of CEPHEID and the Agreement constitutes a valid and binding obligation of CEPHEID and is enforceable against CEPHEID in accordance with its terms.

(g) CEPHEID SHALL PROVIDE ETG ITS STANDARD COMMERCIAL WARRANTY AS PROVIDED TO THIRD PARTY CUSTOMERS FOR ALL MODULES AND CONSUMABLE SOLD TO ETG UNDER THE TERMS OF THIS AGREEMENT.

(h) EXCEPT AS PROVIDED FOR ABOVE, CEPHEID HEREBY DISCLAIMS ANY WARRANTIES, WHETHER EXPRESS OR IMPLIED, OF ANY KIND REGARDING ANY WARRANTY OF MERCHANTABILITY OR FITNESS FOR ANY PARTICULAR PURPOSE, WITH RESPECT TO THE LICENSED PRODUCT, OR THAT THE LICENSED PRODUCT CAN BE SUCCESSFULLY DEVELOPED BY USE OF THE LICENSED PATENTS OR KNOW-HOW. IN NO EVENT SHALL CEPHEID BE LIABLE TO ETG FOR ANY SPECIAL, INCIDENTAL INDIRECT, OR CONSEQUENTIAL DAMAGES (INCLUDING WITHOUT LIMITATION LOSS OF USE OR LOSS OF PROFITS) ARISING DIRECTLY OR INDIRECTLY OUT OF THIS AGREEMENT, INCLUDING ITS PERFORMANCE OR ANY BREACH, DELAY, OR DEFAULT. THIS LIMITATION SHALL APPLY WHETHER A CLAIM ARISES IN CONTRACT, TORT, OR STRICT LIABILITY.

2. ETG Representations and Warranties. ETG warrants and represents that, as of the effective date of this Agreement, to the best of its knowledge:

(a) Except as set forth hereunder, it has neither executed agreements nor granted rights in conflict with the rights and licenses granted hereunder.

(b) This Agreement has been authorized by all requisite corporate action of ETG and the Agreement constitutes a valid and binding obligation of ETG and is enforceable against ETG in accordance with its terms.

(c) ETG SHALL PROVIDE CEPHEID ITS STANDARD COMMERCIAL WARRANTY AS PROVIDED TO THIRD PARTY CUSTOMERS FOR ALL COMPONENTS AND INSTRUMENTS SOLD TO CEPHEID UNDER THE TERMS OF THIS AGREEMENT.

(d) EXCEPT AS PROVIDED FOR ABOVE, ETG HEREBY DISCLAIMS ANY WARRANTIES, WHETHER EXPRESS OR IMPLIED, OF ANY KIND REGARDING ANY WARRANTY OF MERCHANTABILITY OR FITNESS FOR ANY PARTICULAR PURPOSE, WITH RESPECT TO COMPONENTS, INSTRUMENTS, OR LICENSED PRODUCTS, OR THAT THE ETG DEVELOPMENTS CAN BE SUCCESSFULLY DEVELOPED BY USE OF THE LICENSED PATENTS OR KNOW-HOW. IN NO EVENT SHALL ETG BE LIABLE TO CEPHEID FOR ANY SPECIAL, INCIDENTAL INDIRECT, OR CONSEQUENTIAL DAMAGES (INCLUDING WITHOUT LIMITATION LOSS OF USE OR LOSS OF PROFITS) ARISING DIRECTLY OR INDIRECTLY OUT OF THIS AGREEMENT, INCLUDING ITS PERFORMANCE OR ANY BREACH, DELAY, OR DEFAULT. THIS LIMITATION SHALL APPLY WHETHER A CLAIM ARISES IN CONTRACT, TORT, OR STRICT LIABILITY.

9. PATENT INDEMNIFICATION

1. If the Owner of a patent or copyright or trademark sues ETG alleging that the Licensed Products delivered under this Agreement or ETG's use of the Licensed Products infringe a patent or copyright identified in Schedule A and if ETG gives prompt notice of the suit, CEPHEID will defend the suit, provided that ETG gives CEPHEID reasonable cooperation in the defense of the suit.
2. In any suit CEPHEID defends under paragraph 9.1, CEPHEID may control the defense, will pay all litigation costs including incurred attorney fees, and will indemnify ETG for all damages awarded by a court or any settlement payments approved by CEPHEID.
3. In any suit CEPHEID defends under paragraph 9.1, if ETG is enjoined by court order or by settlement approved by CEPHEID from using the CEPHEID Technology and Licensed Products as sold by CEPHEID, CEPHEID shall, at no cost to ETG and as mutually agreed to in writing between the Parties, (a) procure for ETG the right to continue using the Licensed Products, (b) replace or modify the Licensed Products to avoid infringement, or (c) repossess the Licensed Products in exchange for a full refund of the Licensed Products.

1. CONFIDENTIALITY
1. No Use. The receiving party will not use Confidential Information of the disclosing party except for the purposes expressly set forth in this Agreement.
2. Nondisclosure. The receiving party will not disclose Confidential Information to others (except to its employees, consultants, agents, and potential and actual collaboration partners, distributors and contract manufacturers, who reasonably require same for the purposes of this Agreement and who are bound to the receiving party by like obligations as to confidentiality) without the express written permission of the disclosing party.
3. Authorized Disclosure. The receiving party may disclose Confidential Information to the extent such disclosure is reasonably required by law or judicial order; provided, however, that the party required to make such disclosure shall seek confidential treatment of the Confidential Information to the fullest extent possible and shall give the other party prompt written notice thereof and opportunity to seek protective treatment of the Confidential Information.
4. Regulatory Disclosures. The confidentiality obligations in this Section 10 shall not apply to the extent that the Confidential Information or information created pursuant to this Agreement is a necessary or appropriate part of the information and data submitted for purposes of regulatory approval (including, but not limited to export) of the Licensed Product; provided, however, that to the extent practicable such submissions shall be made on a confidential basis. Such a regulatory disclosure shall in no way be interpreted as a public disclosure.
5. Confidentiality Term. The confidentiality and non-use obligations under this Section 10 shall extend for the term of this Agreement and five years thereafter.
6. Publications. Subject to prior written approval by ETG for all publications and releases, CEPHEID may use the ETG and its Affiliates, including Smiths Group, names and logos in publications and press releases on the collaboration.
7. Affiliates. Nothing in this Section 10 or this Agreement shall be construed to prevent either Party from disclosing to its Affiliated Companies Confidential Information obtained from the other Party during this Agreement, provided that such Confidential Information is used in a manner consistent with this Agreement, and further provided that said Affiliated Companies are bound by a like confidentiality obligation with respect to such Confidential Information.
2. TERM

The term of this Agreement shall be for the Agreement Term, unless earlier terminated pursuant to Section 13 of this Agreement.

3. INDEMNIFICATION
1. ETG Indemnification. ETG shall indemnify, defend, and hold CEPHEID and its current, past, and future Affiliates and their Successors and their respective directors, officers, employees, representative and agents harmless from and against any and all liabilities, claims, demands, costs, expenses, judgments or settlements (including legal expenses and attorneys' fees) which arise out of or result from the use, testing, manufacture, recall, processing, commercializing, promoting, packaging, labeling, sale, or distribution of Licensed Product by or on behalf of, or as a result of the activities of, ETG or its Affiliates, Successors, Sublicensees, sellers, or agents.

12.2 CEPHEID Indemnification. In addition to that set forth in Section 9, CEPHEID shall indemnify, defend, and hold ETG and its current, past, and future Affiliates and their Successors and their respective directors, officers, employees, representative and agents harmless from and against any and all liabilities, claims, demands, costs, expenses, judgments or settlements (including legal expenses and attorneys' fees) which arise out of or result from any third party claims of patent, license or intellectual property rights infringement or other violations against the CEPHEID technology or other information provided by CEPHEID to ETG under this Agreement or as a result of the activities of CEPHEID or its Affiliates, Successors, Sublicensees, sellers, or agents.

2. Notice. The parties shall give each other prompt notice in writing, in the manner set forth in Paragraph 16.6 below, of any claim or demand made against them that may be covered by this Section 12. Except as defined in Section 9, the parties shall have the right to participate, at its own expense, in the defense of any such claim or demand to the extent it so desires.
3. Insurance. Each party warrants that it has and will maintain during the term of this Agreement and for five (5) years thereafter product liability and general liability insurance in commercially reasonable amounts customary for similarly situated companies and sufficient to support its indemnification obligations under this Agreement. The parties will give each other reasonable prior written notice of any cancellation or failure to renew such insurance. Such insurance will be placed with insurers having a Best or Standard and Poors rating of "A" or better. Upon request by the other party, ETG or CEPHEID shall promptly provide a customary certificate of insurance, evidencing the coverage required by this Paragraph 12.3.
4. TERMINATION
1. This agreement shall terminate with 30 days notice from either party if any of the following occurs:
1. A Purchase Order for the sale of a Hand- Held System using the Cepheid Technology is not issued within three years of the date of the Letter of Intent (March 20, 2001); or

13.1.2 The Parties mutually agree, in writing, that all or specified licenses granted by this Agreement shall terminate.

13.1.3 The Agreement may also be terminated if there has been a material breach of this Agreement by either party. If CEPHEID or ETG is in material default of any obligations hereunder, the non-defaulting party may give written notice to the defaulting party of its intention to terminate this Agreement, and this Agreement shall terminate sixty (60) days after the giving of such notice unless during such sixty (60) day period a cure for the default has commenced to the reasonable satisfaction of the non-defaulting party.

2. In the event of a termination by ETG, except if termination is due to a material breach by Cepheid, CEPHEID shall have the option to retain access to the Hand-Held Systems developed under this Agreement, for sale into any markets, under terms and conditions to be reasonably agreed upon by the Parties, but in no event to exceed the costs and Running Royalties established under this Agreement. Should ETG terminate this Agreement due to a material breach by Cepheid, ETG shall have the ability to continue to sell any remaining inventory of Hand-Held Systems and/or components until the inventory is exhausted under the terms and conditions of this Agreement.
3. Rights Upon Termination. Upon termination of this Agreement, all rights and obligations of the Parties shall cease with respect thereto, except (a) for any payments and Running Royalties under Sections 5 and 6 of this Agreement which have accrued to the date of termination, including a pro-rata share of such payments and Running Royalties, if applicable; and (b) any obligations set forth in this Agreement that specifically survive termination.
4. Inventories. After the effective date of termination, Licensed Product that ETG has on hand as of the date of termination may be sold, provided that any applicable payment or royalty under this Agreement is paid to CEPHEID.
5. ASSIGNMENT
1. This Agreement shall not be assigned by either Party without the prior written consent of the other Party, except that either Party may assign this Agreement, in whole or in part, to an Affiliate of such Party or to the successor (including the surviving company in any consolidation, reorganization, or merger) or assignee of all or substantially all of its business ("Successor"). This Agreement will be binding upon any permitted Successor of either Party. No assignment shall have the effect of relieving any Party to this Agreement of any of its obligations hereunder.
6. DISPUTE RESOLUTION
1. Resolution by Party Representatives. In the event of any Dispute, either Party may, by written notice to the other, refer such Dispute to the officers designated below for attempted good faith negotiations within 30 days after such notice is received, as may be extended by mutual written agreement of both officers for up to 90 days:

For CEPHEID: Chris McReynolds, VP of Marketing and Business Development

For ETG: Jill McClune Myrick, Contracts Manager

2. Arbitration. Except as provided in Paragraph 15.1, and except for the right of either Party to apply to a court of competent jurisdiction for a temporary restraining order to preserve the status quo or prevent irreparable harm, any and all Disputes shall be finally determined by arbitration in accordance with then existing commercial rules of the AAA. Title 9, "Arbitration," of the California Code of Civil Procedure (CCP), including without limitation the provisions of CCP Section 1283.05 shall apply. Unless the Parties agree in writing to one arbitrator, the arbitration panel shall be composed of three (3) arbitrators, one of whom will be named by each Party. The third arbitrator, who shall act as chairman, shall be determined by the arbitrators named by each Party or, if they cannot agree in 30 days from date of the later-designated arbitrator's appointment, by the AAA. The arbitrators shall meet and decide in Santa Clara County, California. The arbitrators shall decide each issue presented to them by a majority vote, and their decisions shall be final and conclusive and binding upon the Parties. The amount of the costs of any such arbitration and by whom they shall be paid will be determined as part of the arbitration. The agreement regarding dispute resolution set forth in this Section 16 shall be final and enforceable and judgment upon any award rendered by the arbiters may be entered in any court having jurisdiction.
7. MISCELLANEOUS
1. Applicable Law. This Agreement shall be construed under and governed by the laws of the State of California, regardless of the choice of law principles of that state or any other jurisdiction.
2. Complete Agreement; Modification. This Agreement sets forth the entire agreement and understanding between the Parties as to the subject matter hereof and has priority over all documents, verbal consents or understandings made between CEPHEID and ETG before the conclusion of this Agreement with respect to matters hereof. None of the terms of this Agreement shall be amended or modified except in writing signed by the Parties hereto. Any waiver by any Party hereto of a breach of any provisions of this Agreement shall not be implied and shall not be valid unless such waiver is recited in writing and signed by such Party. Failure of any Party to require, in one or more instances, performance by the other Party in strict accordance with the terms and conditions of this Agreement shall not be deemed a waiver or relinquishment of the future performance of any such terms or conditions or of any other terms and conditions of this Agreement. A waiver by either Party of any term or condition of this Agreement shall not be deemed or construed to be a waiver of such term or condition for any other term. All rights, remedies, undertakings, obligations and agreements contained in this Agreement shall be cumulative and none of them shall be a limitation of any other remedy, right, undertaking, obligation or agreement of either Party.
3. Relationship of the Parties. For all purposes of this Agreement, CEPHEID and ETG shall be deemed to be independent contractors and anything in this Agreement to the contrary notwithstanding, nothing herein shall be deemed to constitute CEPHEID and ETG as partners, joint venturers, co-owners, an association or any entity separate and apart from each Party itself, nor shall this Agreement constitute any Party hereto an employee or agent, legal or otherwise, of the other Party for any purposes whatsoever. Neither Party is authorized to make any statements or representations on behalf of the other Party or in any way obligate the other Party, except as expressly authorized in writing by the other Party. Anything in this Agreement to the contrary notwithstanding, no Party hereto shall assume nor shall be liable for any liabilities or obligations of the other Party, whether past, present or future.
4. Severability. If any provision of this Agreement is held by a court of competent jurisdiction to be invalid or unenforceable, it shall be modified, if possible, to the minimum extent necessary to make it valid and enforceable or, if such modification is not possible, it shall be stricken and the remaining provisions shall remain in full force and effect; provided, however, that if a provision is stricken so as to significantly alter the economic arrangements of this Agreement, the Party adversely affected may terminate this Agreement, as well as any related agreements (including without limitation any agreements concerning the Licensed Products), upon 90 days' prior written notice to the other Party.
5. Publicity. CEPHEID and ETG shall agree to the text of an initial announcement of this Agreement to the public, and shall not publicly disclose any further details of the Agreement without mutual written consent.
6. Notice. Any notice required or provided for by the terms of this Agreement shall be in writing and sent by registered or certified mail, postage prepaid, or by telex or facsimile and confirmed by registered or certified mail addressed to the Parties at the following addresses:

To ETG: Richard R. Thomas, President

ENVIRONMENTAL TECHNOLOGIES

GROUP, INC.
1400 Taylor Avenue
Baltimore, MD 21234

To CEPHEID: Kurt Petersen, President
CEPHEID
1190 Borregas Avenue
Sunnyvale, California 94089

7. Survival. All obligations of Paragraphs 8.1(g) and (h), 8.2 (c) and (d), 9, 10.1 - 10.7, 12.1 - 12.3, 13.2 - 13.3, 15.1 - - 15.2, and 16.1 - 16.7 shall survive the Agreement Term or the termination, for any reason, of this Agreement.

IN WITNESS WHEREOF, the Parties have executed this Agreement as of the day and year written below.

ENVIRONMENTAL TECHNOLOGIES GROUP, INC


BY: Jill Mclune Myrick


TITLE: Senior Contract Manager

CEPHEID

BY: Thomas Gutshall


TITLE: Chief Executive Officer

DATE: August 9, 2001

SCHEDULE A

I. CEPHEID Patent Rights.

1. Amplification/Detection Technology

TITLE US SERIAL# FILED STATUS

[***]

2. Fluidics and/or Lysing Technology

TITLE US SERIAL# FILED STATUS

[***]

SCHEDULE B

MINIMUM DOCUMENTATION SUPPLIED TO ETG BY CEPHEID

1. A copy of all patents and patent applications listed in Schedule A.

2. A copy of all patents resulting from applications listed in Schedule A.

3. All drawings, specifications, and processes related to the following: I-CORE module, other PCR technology applicable to the DP and military markets, and all sample processing technology (including, but not limited [***]

4. Government and Cepheid test reports of relevant Cepheid technology including, but not limited to, [***]

5. Component vendor list.

THE SYMBOL "[***]" IS USED TO INDICATE THAT A PORTION OF THE EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS."

EX-10.2

THE SYMBOL [***] IS USED TO INDICATE THAT A PORTION OF THE EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS.

August 9, 2001

Mr. Thomas L. Gutshall
Chairman and CEO
Cepheid
1190 Borregas Avenue
Sunnyvale, CA 94089-1302

RE: Modification and Restatement of January 10, 2000 Letter Agreement

Dear Mr. Gutshall:

This serves to confirm the mutually agreed modification and restatement of our letter agreement dated January 10, 2000 (the "Distribution Agreement"). The Distribution Agreement between Cepheid ("SUPPLIER") and Fisher Scientific Company L.L.C. ("FISHER") concerns the SmartCycler™ System, accessories and reaction tubes developed by and made by or for SUPPLIER.

1. In Paragraph 1, in the sixth line, the parenthetical "(the `Field')" is deleted.
2. Paragraph 2 of the Distribution Agreement is deleted in its entirety and replaced as follows:

Distribution Rights. SUPPLIER grants to FISHER the right to distribute the Products and designates FISHER as an authorized distributor of the Products as outlined in this Paragraph 2:

1. Geographic Scope. FISHER is hereby designated an authorized distributor of the Products within the United States and the territory of Puerto Rico.
2. Market Scope. FISHER is hereby designated an authorized distributor of the Products in the life science research market (the "Field"). Specifically included within the Field are research activities in the biotech, pharmaceutical, scientific, and university/educational industries. Specifically excluded from the Field are human and veterinary diagnostics (including applications subject to regulatory labeling including "For Investigational Use Only" or "For Research Use Only"), environmental testing, quality assurance and control testing, identity and forensic testing, and testing for biothreat agents.
3. Supplier's Reserved Rights. Notwithstanding any rights granted to FISHER hereunder, including exclusive rights, SUPPLIER reserves the right to: (i) sell directly to the end user customers listed in Exhibit B to the Distribution Agreement; and (ii) make OEM sales of thermal cyclers, accessories and/or reaction tubes similar to Products which SUPPLIER may sell and ship to a firm for resale under that firm's label.
4. Term. The distribution rights granted to FISHER pursuant to Paragraphs 2(a) through 2(c) above shall continue through and including May 31, 2004.
5. Exclusivity. Subject to the provisions of Paragraphs 2(a) through 2(c) above, SUPPLIER hereby designates FISHER as SUPPLIER's exclusive distributor of the Products through and including May 31, 2002. During any period of FISHER's exclusivity hereunder, SUPPLIER shall: (i) refer all inquiries regarding the purchase of Products within the Field to FISHER; and, (ii) not appoint any other person or entity as an authorized distributor of the Products within the Field. Nothing in the prior sentence is in derogation of SUPPLIER's rights under paragraph (c) above.
6. Extension of Exclusivity. In the event that FISHER purchases (deemed to be the issuance of a purchase order for which delivery is completed within 30 days) from SUPPLIER between June 1, 2001 and May 31, 2002 at least [***] (not including the [***] units under purchase order # PR3206412 dated July 12, 2001) SmartCycler™ units (a unit defined as the total number of 16-site SmartCycler™ processing blocks, either as part of a Starter System or as Add-On Blocks), FISHER's exclusive distributor status granted by Paragraph 2(e) above shall continue through and including May 31, 2003. In the event that FISHER purchases from SUPPLIER between June 1, 2002 and May 31, 2003 at least [***] SmartCycler™ units, FISHER's exclusive distributor status granted by Paragraph 2(e) above shall continue through and including May 31, 2004.
7. Exclusive Source. During any period of time that the exclusivity provisions of Paragraph 2(e) and 2(f) are in effect, FISHER will use SUPPLIER as its exclusive supplier of systems capable of performing thermal cycling with real-time optical detection.
8. Sales Reporting. FISHER shall provide SUPPLIER within 30 days after the first day of each March, June, September and December a true and accurate accounting report of Products (including units sold and selling price) sold during the preceding 3 months in sufficient detail, as mutually agreed, for SUPPLIER to use for royalty reporting and sales compensation purposes. In addition, FISHER shall provide to SUPPLIER on a weekly basis an updated customer and contact list solely for SUPPLIER to use in monitoring sales and administering warranty and customer service.
9. Forecasts. Within one week of signing this addendum, FISHER shall provide SUPPLIER with one-year monthly purchase and sales forecasts that will be updated on a monthly basis during the first week of each month. In order to assist Cepheid with manufacturing planning, FISHER shall also within the first week of each month provide SUPPLIER with a purchase projection for the next three (3) month period. While the one year forecast will not be binding in total, the three month projections shall constitute a purchase commitment by FISHER for such period. Such three (3) month purchase projection/commitment shall be updated monthly, taking into account FISHER's sales experience and inventory levels over the previous month.

1. The first two sentences of Paragraph 3 of the Distribution Agreement are deleted in their entirely and replaced as follows:

The Product list prices, discounts and transfer prices to FISHER shall be as listed in Exhibit A. Prices shall be firm through December 31, 2001. Cepheid has the right to change the discount listed in Exhibit A; however, Cepheid's current intention is to maintain the discount for so long as FISHER is performing all of its responsibilities under the Distribution Agreement, including its Marketing Support responsibilities under Exhibit C, to the satisfaction of Cepheid.

2. Paragraph 5 of the Distribution Agreement is deleted in its entirety and replaced as follows:

Shipping. SUPPLIER will ship all SmartCycler™ System Products (systems, accessories and reaction tubes) FOB Sunnyvale, CA to FISHER's distribution center in Santa Clara, CA (freight collect) or to such other address as Fisher may reasonably designate. SUPPLIER shall follow FISHER's routing guide in the shipment of Products, and all products shall be shipped within thirty (30) days of order receipt.

3. Paragraph 7 of the Distribution Agreement is deleted in its entirety and replaced as follows:

Marketing Support. SUPPLIER and FISHER shall each provide Marketing Support, as described in Exhibit C.

4. Paragraph 8 of the Distribution Agreement is deleted in its entirety and replaced as follows:

Term. The term of this Agreement shall be from the date of mutual execution through and including May 31, 2004. Thereafter, the Agreement shall remain in force for successive six month periods, unless either party gives written notice of non-renewal to the other at least sixty (60) days prior to the then current expiration date.

5. Paragraph 12 of the Distribution Agreement is deleted in its entirety and replaced as follows:

Public Announcements. Neither SUPPLIER nor FISHER shall issue or cause to be issued any press release or public announcement or otherwise disclose or discuss the relationship between SUPPLER and FISHER, the existence of this Agreement or the transactions contemplated hereby (a) except as and to the extent that FISHER and SUPPLIER jointly agree in writing and (b) except as may be required by applicable law, court process or Nasdaq/NYSE regulation. Each party shall make reasonable efforts to inform the other prior to any authorized public announcement or disclosure.

6. A new Paragraph 13 is inserted into the Distribution Agreement as follows:

Non-Hire Agreement. Both parties agree that, during the term of this Agreement and for one year after termination for any reason, neither party will hire nor attempt to hire one another's employees (or any person who was employed by the other within the past one year) without the prior written consent of the other party. Notwithstanding the foregoing, in the event that a court of competent jurisdiction shall declare the agreement represented by the foregoing sentence to be unenforceable, and one party employs, directly or indirectly, or retains in a consulting or other capacity, any person employed by the other party within the previous one (1) year, the hiring party shall compensate other party for such employment at a fee of $30,000 per person, which each party acknowledges and agrees is fair and just compensation and does not constitute punitive or liquidated damages.

Except as expressly stated herein, the terms and provisions of the Distribution Agreement remain in full force and effect.

Please signify your acceptance and agreement on behalf of Cepheid to the above-stated modification and restatement of our January 10, 2000 letter agreement by counter-signing this letter on behalf of Cepheid where indicated below.

Very truly yours,

/s/J. Bradley Mahood

J. Bradley Mahood

Vice President Strategic Sourcing

AGREED AND ACCEPTED:

Cepheid

By:_/s/Thomas Gutshall

Name: Thomas Gutshall

Title: Chief Executive Officer

Date: August 9, 2001

THE SYMBOL [***] IS USED TO INDICATE THAT A PORTION OF THE EXHIBIT HAS BEEN OMITTED AND FILED SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE OMITTED PORTIONS.