10-K/A

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-K/A

Amendment No. 1

(Mark One)

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

For the fiscal year ended December 31, 2008

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 000-30755

CEPHEID

(Exact name of Registrant as Specified in its Charter)

California	77-0441625
(State or Other Jurisdiction	(I.R.S. Employer
of Incorporation or Organization)	Identification Number)
904 Caribbean Drive, Sunnyvale, California	94089-1189
(Address of Principal Executive Office)	(Zip Code)

(408) 541-4191

(Registrant’s Telephone Number, Including Area Code)

Securities registered pursuant to Section 12(b) of the Act:

Common Stock, no par value and the associated Stock Purchase Rights

(Title of Class)

Securities registered pursuant to Section 12(g) of the Act: None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes  ¨    No  x

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    Yes  ¨    No  x

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

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

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K, or any amendment to this Form 10-K.  ¨

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

Large Accelerated Filer	x	Accelerated Filer	¨
Non-accelerated Filer	¨  (Do not check if a Smaller Reporting Company)	Smaller Reporting Company	¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x

As of June 30, 2008, the last business day of the Registrant’s most recently completed second fiscal quarter, the aggregate market value of the common stock held by non-affiliates of the registrant was approximately $1,524,421,165 based on the closing sale price for the registrant’s common stock on the NASDAQ Global Market on that date of $28.12 per share. For purposes of determining this number, all executive officers and directors of the registrant are considered to be affiliates of the registrant, as well as individual shareholders holding more than 10% of the registrant’s outstanding common stock. This number is provided only for the purpose of this report on Form 10-K and does not represent an admission by either the registrant or any such person as to the status of such person.

As of February 10, 2009 there were 57,903,048 shares of the registrant’s common stock outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Document Description	10-K Part
Portions of the Proxy Statement for the Annual Meeting of Stockholders (the “Proxy Statement”) to be held on April 29, 2009, and to be filed pursuant to Regulation 14A within 120 days after registrant’s fiscal year ended December 31, 2008 are incorporated by reference into Part III of this Report.	III

EXPLANATORY NOTE

This Amendment No. 1 on Form 10-K/A (the “Amendment”) amends certain items contained in the Annual Report on Form 10-K of Cepheid for the year ended December 31, 2008 as filed with the Securities and Exchange Commission (“SEC” or “Commission”) on February 26, 2009 (the “Original Filing”). We have amended Part I Item 1A, Part II Items 6, 7, 8 and Exhibit 23.1.

Part II Items 6, 7 and 8 were amended to reflect the correction of an error in patent license useful lives discovered during the second quarter of 2009 and the related impact on the Company’s previously filed consolidated financial statements. The discovery of the error was previously disclosed in Cepheid’s Form 10-Q for the quarter ended June 30, 2009. As the effects of the correction were not material to the Company’s previously filed consolidated financial statements when evaluated under the “rollover” approach but would be material to the 2009 consolidated financial statements for the year ended December 31, 2009 under the “iron curtain” method, the Company has, therefore, restated the consolidated statements as of December 31, 2008 and 2007 and for each of the three years in the period ended December 31, 2008.

The changes to Part I Item 1A were solely to change the references to Cepheid’s prior profitability and accumulated deficit in one Risk Factor entitled “We may not achieve profitability.” Item 1A otherwise remained unchanged.

This Amendment contains only the items of the Original Filing which are being amended, and those unaffected items or exhibits are not included herein. This Amendment continues to speak as of the date of the Original Filing (except where noted in the Amendment), and we have not updated the disclosure contained herein to reflect events that have occurred since the filing of the Original Filing. Accordingly, this Amendment should be read in conjunction with our other filings, if any, made with the SEC subsequent to the filing of the Original Filing, including any amendments to those filings, if any.

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2008 ANNUAL REPORT ON FORM 10-K/A

TABLE OF CONTENTS

		Page
Part I.
Item 1A.	Risk Factors	4
Part II.
Item 6.	Selected Consolidated Financial Data	14
Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	15
Item 8.	Consolidated Financial Statements and Supplementary Data	30
Signatures and Exhibit Index		62

Cepheid^®, the Cepheid logo, GeneXpert^®, Xpert^®, SmartCycler^®, SmartCycler II, SmartCap^®, I-CORE^®, SmartMix^®, OmniMix^®, affigene^®, Sangtec^®, and Actigenics are trademarks of Cepheid. All other trademarks, service marks or trade names referred to in this report are the property of their respective owners.

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ITEM 1A. RISK FACTORS

You should carefully consider the risks and uncertainties described below, together with all of the other information included in this Report, in considering our business and prospects. The risks and uncertainties described below are not the only ones facing Cepheid. Additional risks and uncertainties not presently known to us or that we currently deem immaterial also may impair our business operations. The occurrence of any of the following risks could harm our business, financial condition or results of operations.

We may not achieve profitability.

We have incurred operating losses in each period since our inception. We experienced net losses of approximately $26.7 million in 2006, $22.1 million in 2007 and $22.4 million in 2008 and we do not anticipate that we will achieve profitability for 2009. As of December 31, 2008, we had an accumulated deficit of approximately $179.8 million. Our ability to become profitable will depend on our ability to continue to increase our revenues, which is subject to a number of factors including the uncertainty of the impact of the global economic slowdown on our customers, suppliers and partners, our ability to continue to successfully penetrate the Clinical market, our ability to successfully market the GeneXpert system and develop effective GeneXpert tests, continued growth in sales of our healthcare associated infection tests, the extent of our participation in the USPS BDS program and the operating parameters of the USPS BDS program, which will affect the rate of our consumable products sold, the success of our other collaborative programs, our ability to compete effectively against current and future competitors, global economic and political conditions, and including the current significant global economic recession and disruptions in worldwide financial markets. Our ability to become profitable also depends on our expense levels and product gross margin, which are also influenced by a number of factors, including the resources we devote to developing and supporting our products, the continued progress of our research and development of potential products, the ability to gain FDA clearance for our products, our ability to improve manufacturing efficiencies, license fees or royalties we may be required to pay, our ability to integrate acquired businesses and technologies, acquisition-related costs and expenses and the potential need to acquire licenses to new technology or to use our technology in new markets, which could require us to pay unanticipated license fees and royalties in connection with these licenses, and the impact of Statement of Financial Accounting Standards No. 123 (revised 2004), “Share-Based Payment”. Our expansion efforts may prove more expensive than we currently anticipate, and we may not succeed in increasing our revenues to offset higher expenses. These expenses, among other things, may cause our net income and working capital to decrease. If we fail to grow our revenue and manage our expenses and improve our product gross margin, we may never achieve profitability. If we fail to do so, the market price of our common stock will likely decline.

The recent deterioration and current uncertainty in global economic conditions makes it particularly difficult to predict product demand and other related matters, and makes it more likely that our actual results could differ materially from expectations.

Our operations and performance depend on worldwide economic conditions, which have been recently impacted by extreme disruption in the financial markets of the United States and other countries, and may remain depressed for the foreseeable future. These conditions make it difficult for our customers and potential customers to accurately forecast and plan future business activities, and could cause our customers and potential customers to slow or reduce spending on our products. Furthermore, during challenging economic times, our customers may face issues gaining timely access to sufficient credit, which could result in their unwillingness to purchase products or an impairment of their ability to make timely payments to us. If that were to occur, we may experience decreased sales, be required to increase our allowance for doubtful accounts and our days sales outstanding would be negatively impacted. We cannot predict the timing, strength or duration of any economic slowdown or subsequent economic recovery, worldwide, in the United States or in our industry. These and other economic factors could have a material adverse effect on demand for our products and on our financial condition and operating results.

We expect that our operating results may fluctuate significantly, particularly given adverse worldwide economic conditions, and any failure to meet financial expectations may result in a decline in our stock price.

We expect that our quarterly operating results will fluctuate in the future as a result of many factors, such as those described elsewhere in this section, many of which are beyond our control. Because our revenue and operating results are difficult to predict, we believe that period-to-period comparisons of our results of operations are not a good indicator of our future performance. Our operating results may be affected by the inability of some of our customers to consummate anticipated purchases of our products, whether due to the global economic downturn, changes in internal priorities or, in the case of governmental customers, problems with the appropriations process and variability and timing of orders, changes in procedures or protocols with respect to testing or manufacturing inefficiencies. If revenue declines in a quarter, whether due to a delay in recognizing expected revenue, adverse economic conditions, unexpected costs or otherwise, our results of operations will be harmed because many of our expenses are relatively fixed. In particular, research and development, sales and marketing and general and administrative expenses are not significantly affected by variations in revenue. If our quarterly operating results fail to meet or exceed the expectations of securities analysts or investors, our stock price could drop suddenly and significantly.

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Our sales cycle can be lengthy, which can cause variability and unpredictability in our operating results.

The sales cycles for our systems products can be lengthy, which makes it more difficult for us to accurately forecast revenues in a given period, and may cause revenues and operating results to vary significantly from period to period. For example, sales of our products involving our corporate accounts within the Clinical market and those within the Industrial market often involve purchasing decisions by large public and private institutions, and any purchases can require many levels of pre-approval. In addition, certain Industrial sales may depend on these institutions receiving research grants from various federal agencies, which grants vary considerably from year to year in both amount and timing due to the political process. As a result, we may expend considerable resources on unsuccessful sales efforts or we may not be able to complete transactions on the schedule anticipated. In addition, Clinical Partner sales to companies such as BDC and Roche can vary significantly from period to period.

If we cannot successfully commercialize our products, our business could be harmed.

If our tests for use on our systems do not gain continued market acceptance, we will be unable to generate significant sales, which will prevent us from achieving profitability. While we have received FDA clearance for a number of tests, these products may not continue to experience increased sales. Many factors may affect the market acceptance and commercial success of our products, including:

• timely expansion of our menu of tests and reagents;

• the results of clinical trials needed to support any regulatory approvals of our tests;

• our ability to obtain requisite FDA or other regulatory clearances or approvals for our tests under development on a timely basis;

• demand for the tests and reagents we introduce;

• the timing of market entry for various tests for the GeneXpert and the SmartCycler systems;

• our ability to convince our potential customers of the advantages and economic value of our systems and tests over competing technologies and products;

• the breadth of our test menu relative to competitors;

• changes to policies, procedures or what are considered best practices in clinical diagnostics, including practices for detecting and preventing healthcare associated infections;

• the extent and success of our marketing and sales efforts;

• level of reimbursement for our products by third-party payers; and

• publicity concerning our systems and tests.

In particular, we believe that the success of our business will depend in large part on our ability to continue to increase sales of our Xpert tests and our ability to introduce additional tests for the Clinical market. We believe that successfully expanding our business in the Clinical market is critical to our long-term goals and success. We have limited ability to forecast future demand for our products in this market. In addition, we have committed substantial funds to licenses that are required for us to compete in the Clinical market. If we cannot successfully penetrate the Clinical market to fully exploit these licenses, these investments may not yield significant returns, which could harm our business.

The regulatory approval process is expensive, time-consuming, and uncertain and may prevent us from obtaining required approvals for the commercialization of some of our products.

In the Clinical market, our products are regulated as medical device products by the FDA and comparable agencies of other countries. In particular, FDA regulations govern activities such as product development, product testing, product labeling, product storage, premarket clearance or approval, manufacturing, advertising, promotion, product sales, reporting of certain product failures and distribution. Some of our products, depending on their intended use, will require premarket approval (“PMA”) or 510(k) clearance from the FDA prior to marketing. The 510(k) clearance process usually takes from three to four months from submission but can take longer. The PMA process is much more costly, lengthy and uncertain and generally takes from six months to one year or longer from submission. Clinical trials are generally required to support both PMA and 510(k) submissions. Certain of our products for use on our

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GeneXpert and SmartCycler systems, when used for clinical purposes, may require PMA, and all such tests will most likely, at a minimum, require 510(k) clearance. We are planning clinical trials for other proposed products. Clinical trials are expensive and time-consuming. In addition, the commencement or completion of any clinical trials may be delayed or halted for any number of reasons, including product performance, changes in intended use, changes in medical practice and the opinion of evaluator Institutional Review Boards.

Failure to comply with the applicable requirements can result in, among other things, warning letters, administrative or judicially imposed sanctions such as injunctions, civil penalties, recall or seizure of products, total or partial suspension of production, refusal to grant premarket clearance or PMA for devices, withdrawal of marketing clearances or approvals, or criminal prosecution. With regard to future products for which we seek 510(k) clearance or PMA from the FDA, any failure or material delay to obtain such clearance or approval could harm our business. If the FDA were to disagree with our regulatory assessment and conclude that approval or clearance is necessary to market the products, we could be forced to cease marketing the products and seek approval or clearance. With regard to those future products for which we will seek 510(k) clearance or PMA from the FDA, any failure or material delay to obtain such clearance or approval could harm our business. In addition, it is possible that the current regulatory framework could change or additional regulations could arise at any stage during our product development or marketing, which may adversely affect our ability to obtain or maintain approval of our products and could harm our business.

Our manufacturing facilities located in Sunnyvale, California, Bothell, Washington and Bromma, Sweden, where we assemble and produce the GeneXpert and SmartCycler systems, cartridges and other molecular diagnostic kits and reagents, are subject to periodic regulatory inspections by the FDA and other federal and state and foreign regulatory agencies. For example, these facilities are subject to Quality System Regulations (“QSR”) of the FDA and are subject to annual inspection and licensing by the States of California and Washington and European regulatory agencies. If we fail to maintain these facilities in accordance with the QSR requirements, international quality standards or other regulatory requirements, our manufacturing process could be suspended or terminated, which would prevent us from being able to provide products to our customers in a timely fashion and therefore harm our business.

We rely on licenses of key technology from third parties and may require additional licenses for many of our new product candidates.

We rely on third-party licenses to be able to sell many of our products, and we could lose these third-party licenses for a number of reasons, including, for example, early terminations of such agreements due to breaches or alleged breaches by either party to the agreement. If we are unable to enter into a new agreement for licensed technologies, either on terms that are acceptable to us or at all, we may be unable to sell some of our products or access some geographic or industry markets. We also need to introduce new products and product features in order to market our products to a broader customer base and grow our revenues, and many new products and product features could require us to obtain additional licenses and pay additional license fees and royalties. Furthermore, for some markets, we intend to manufacture reagents and tests for use on our systems. We believe that manufacturing reagents and developing tests for our systems is important to our business and growth prospects but may require additional licenses, which may not be available on commercially reasonable terms or at all. Our ability to develop, manufacture and sell products, and our strategic plans and growth, could be impaired if we are unable to obtain these licenses or if these licenses are terminated or expire and cannot be renewed. We may not be able to obtain or renew licenses for a given product or product feature or for some reagents on commercially reasonable terms, if at all. Furthermore, some of our competitors have rights to technologies and reagents that we do not have which may put us at a competitive disadvantage in certain circumstances and could adversely affect our performance.

Our participation in the USPS BDS program may not result in predictable revenues in the future.

Our participation in the USPS BDS program involves significant uncertainties related to governmental decision-making and timing of deployment and is highly sensitive to changes in national priorities and budgets. Budgetary pressures may result in reduced allocations to projects such as the BDS program, sometimes without advance notice. We cannot be certain that actual funding and operating parameters, or product purchases, will occur at currently expected levels or in the currently expected timeframe.

We may face risks associated with acquisitions of companies, products and technologies, and our business could be harmed if we are unable to address these risks.

If we are presented with appropriate opportunities, we intend to acquire or make other investments in complementary companies, products or technologies. We may not realize the anticipated benefit of any acquisition or investment. We will likely face risks, uncertainties and disruptions associated with the integration process, including difficulties in the integration of the operations and services of an acquired company, integration of acquired technology with our products, diversion of our management’s attention from other business concerns, the potential loss of key employees or customers of the acquired businesses and impairment charges if future

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acquisitions are not as successful as we originally anticipate. If we fail to successfully integrate other companies, products or technologies that we acquire, our business could be harmed. Furthermore, we may have to incur debt or issue equity securities to pay for any additional future acquisitions or investments, the issuance of which could be dilutive to our existing shareholders. In addition, our operating results may suffer because of acquisition-related costs or amortization expenses or charges relating to acquired intangible assets.

If we are unable to manufacture our products in sufficient quantities and in a timely manner, our operating results will be harmed and our ability to generate revenue could be diminished.

Our revenues and other operating results will depend in large part on our ability to manufacture and assemble our products in sufficient quantities and in a timely manner. Any interruptions we experience in the manufacturing or shipping of our products could delay our ability to recognize revenues in a particular quarter. Manufacturing problems can and do arise, and as demand for our products increases, any such problems could have an increasingly significant impact on our operating results. For example, during the second quarter of 2008, we experienced a manufacturing issue with respect to our cartridges, which caused us to experience increased costs and negatively affected our gross margin for that period. In the past, we have experienced problems and delays in production that have impacted our product yield and caused delays in our ability to ship finished products, and we may experience such delays in the future. We may not be able to react quickly enough to ship products and recognize anticipated revenues for a given period if we experience significant delays in the manufacturing process. In addition, we must maintain sufficient production capacity in order to minimize such delays, which carries fixed costs that we may not be able to offset if orders slow, which would adversely affect our operating margins. If we are unable to manufacture our products consistently, in sufficient quantities, and on a timely basis, our revenues from product sales, gross margins and our other operating results will be materially and adversely affected.

If certain single source suppliers fail to deliver key product components in a timely manner, our manufacturing ability would be impaired and our product sales could suffer.

We depend on certain single source suppliers that supply some of the components used in the manufacture of our systems and our disposable reaction tubes and cartridges. If we need alternative sources for key component parts for any reason, these component parts may not be immediately available to us. If alternative suppliers are not immediately available, we will have to identify and qualify alternative suppliers, and production of these components may be delayed. We may not be able to find an adequate alternative supplier in a reasonable time period or on commercially acceptable terms, if at all. Shipments of affected products have been limited or delayed as a result of such problems in the past, and similar problems could occur in the future. In addition, many companies are experiencing financial difficulties as a result of the global economic slowdown. We cannot assure you that our suppliers will not be adversely affected by these conditions or that they will be able to continue to provide us with the components we need. Our inability to obtain our key source supplies for the manufacture of our products may require us to delay shipments of products, harm customer relationships or force us to curtail or cease operations.

If certain of our products fail to obtain an adequate level of reimbursement from third-party payers, our ability to sell products in the Clinical market would be harmed.

Our ability to sell our products in the Clinical market will depend in part on the extent to which reimbursement for tests using our products will be available from government health administration authorities, private health coverage insurers, managed care organizations, and other organizations. There are efforts by governmental and third-party payers to contain or reduce the costs of health care through various means, and the continuous growth of managed care, together with efforts to reform the health care delivery system in the United States and Europe, has increased pressure on health care providers and participants in the health care industry to reduce costs. Consolidation among health care providers and other participants in the healthcare industry has resulted in fewer, more powerful groups, whose purchasing power gives them cost containment leverage. Additionally, third-party payers are increasingly challenging the price of medical products and services. If purchasers or users of our products are not able to obtain adequate reimbursement for the cost of using our products, they may forego or reduce their use. Significant uncertainty exists as to the reimbursement status of newly approved health care products and whether adequate third-party coverage will be available.

If our competitors and potential competitors develop superior products and technologies, our competitive position and results of operations would suffer.

We face intense competition from a number of companies that offer products in our target markets, some of which have substantially greater financial resources and larger, more established marketing, sales and service organizations than we do. These competitors include:

• companies developing and marketing sequence detection systems for industrial research products;

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• diagnostic and pharmaceutical companies;

• companies developing drug discovery technologies; and

• companies developing or offering biothreat detection technologies.

Several companies provide systems and reagents for DNA amplification or detection. ABI (now Life Technologies Corporation) and Roche sell systems integrating DNA amplification and detection (sequence detection systems) to the commercial market. Roche, Abbott Laboratories, Becton, Dickinson and Company, Qiagen, Celera and GenProbe sell sequence detection systems, some with separate robotic batch DNA purification systems and sell reagents to the Clinical market. Other companies, including Siemens, Hologic, and bioMerieux, offer molecular tests.

If our products do not perform as expected or the reliability of the technology on which our products are based is questioned, we could experience lost revenue, delayed or reduced market acceptance of our products, increased costs and damage to our reputation.

Our success depends on the market’s confidence that we can provide reliable, high-quality molecular test systems. We believe that customers in our target markets are likely to be particularly sensitive to product defects and errors. Our reputation and the public image of our products or technologies may be impaired if our products fail to perform as expected or our products are perceived as difficult to use. Despite testing, defects or errors could occur in our products or technologies. Furthermore, with respect to the BDS program, our products are incorporated into larger systems that are built and delivered by others; we cannot control many aspects of the final system.

In the future, if our products experience a material defect or error, this could result in loss or delay of revenues, delayed market acceptance, damaged reputation, diversion of development resources, legal claims, increased insurance costs or increased service and warranty costs, any of which could harm our business. Furthermore, any failure in the overall BDS, even if it is unrelated to our products, could harm our business. Even after any underlying concerns or problems are resolved, any widespread concerns regarding our technology or any manufacturing defects or performance errors in our products could result in lost revenue, delayed market acceptance, damaged reputation, increased service and warranty costs, and claims against us.

If product liability lawsuits are successfully brought against us, we may face reduced demand for our products and incur significant liabilities.

We face an inherent risk of exposure to product liability claims if our technologies or systems are alleged to have caused harm or do not perform in accordance with specifications, in part because our products are used for sensitive applications. We cannot be certain that we would be able to successfully defend any product liability lawsuit brought against us. Regardless of merit or eventual outcome, product liability claims may result in:

• decreased demand for our products;

• injury to our reputation;

• costs of related litigation; and

• substantial monetary awards to plaintiffs.

Although we carry product liability insurance, if we become the subject of a successful product liability lawsuit, our insurance may not cover all substantial liabilities, which could harm our business.

If our direct selling efforts for our products fail, our business expansion plans could suffer, and our ability to generate revenue will be diminished.

We have a relatively small sales force compared to our competitors. If our direct sales force is not successful, or new additions to our sales team fail to gain traction among our customers, we may not be able to increase market awareness and sales of our products. If we fail to establish our systems in the marketplace, it could have a negative effect on our ability to sell subsequent systems and hinder the planned expansion of our business.

If our distributor relationships are not successful, our ability to market and sell our products would be harmed and our financial performance will be adversely affected.

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We depend on relationships with distributors for the marketing and sales of our products in the Industrial and Clinical markets in various geographic regions, and we have a limited ability to influence their efforts. We expect to continue to rely substantially on our distributor relationships for sales into other markets or geographic regions, which is key to our long-term growth potential. Relying on distributors for our sales and marketing could harm our business for various reasons, including:

• agreements with distributors may terminate prematurely due to disagreements or may result in litigation between the partners;

• we may not be able to renew existing distributor agreements on acceptable terms;

• our distributors may not devote sufficient resources to the sale of products;

• our distributors may be unsuccessful in marketing our products;

• our existing relationships with distributors may preclude us from entering into additional future arrangements with other distributors; and

• we may not be able to negotiate future distributor agreements on acceptable terms.

We may be subject to third-party claims that require additional licenses for our products and we could face costly litigation, which could cause us to pay substantial damages and limit our ability to sell some or all of our products.

Our industry is characterized by a large number of patents, claims of which appear to overlap in many cases. As a result, there is a significant amount of uncertainty regarding the extent of patent protection and infringement. Companies may have pending patent applications, which are typically confidential for the first eighteen months following filing, that cover technologies we incorporate in our products. Accordingly, we may be subjected to substantial damages for past infringement or be required to modify our products or stop selling them if it is ultimately determined that our products infringe a third party’s proprietary rights. Moreover, from time to time, we receive correspondence and other communications from companies that ask us to evaluate the need for a license of patents they hold, and indicating or suggesting that we need a license to their patents in order to offer our products and services or to conduct our business operations. Even if we are successful in defending against claims, we could incur substantial costs in doing so. Any litigation related to claims of patent infringement could consume our resources and lead to significant damages, royalty payments or an injunction on the sale of certain products. Any additional licenses to patented technology could obligate us to pay substantial additional royalties, which could adversely impact our product costs and harm our business.

If we fail to maintain and protect our intellectual property rights, our competitors could use our technology to develop competing products and our business will suffer.

Our competitive success will be affected in part by our continued ability to obtain and maintain patent protection for our inventions, technologies and discoveries, including our intellectual property that includes technologies that we license. Our ability to do so will depend on, among other things, complex legal and factual questions. We have patents related to some of our technology and have licensed some of our technology under patents of others. Our patents and licenses may not successfully preclude others from using our technology. Our pending patent applications may lack priority over applications submitted by third parties or may not result in the issuance of patents. Even if issued, our patents may not be sufficiently broad to provide protection against competitors with similar technologies and may be challenged, invalidated or circumvented.

In addition to patents, we rely on a combination of trade secrets, copyright and trademark laws, nondisclosure agreements, licenses and other contractual provisions and technical measures to maintain and develop our competitive position with respect to intellectual property. Nevertheless, these measures may not be adequate to safeguard the technology underlying our products. For example, employees, consultants and others who participate in the development of our products may breach their agreements with us regarding our intellectual property, and we may not have adequate remedies for the breach. We also may not be able to effectively protect our intellectual property rights in some foreign countries, as many countries do not offer the same level of legal protection for intellectual property as the United States. Furthermore, for a variety of reasons, we may decide not to file for patent, copyright or trademark protection outside of the United States. Our trade secrets could become known through other unforeseen means. Notwithstanding our efforts to protect our intellectual property, our competitors may independently develop similar or alternative technologies or products that are equal or superior to our technology. Our competitors may also develop similar products without infringing on any of our intellectual property rights or design around our proprietary technologies. Furthermore, any efforts to enforce our proprietary rights could result in disputes and legal proceedings that could be costly and divert attention from our business.

The United States Government has certain rights to use and disclose some of the intellectual property that we license and could exclusively license it to a third party if we fail to achieve practical application of the intellectual property.

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Aspects of the technology licensed by us under agreements with third party licensors may be subject to certain government rights. Government rights in inventions conceived or reduced to practice under a government-funded program may include a non-exclusive, royalty-free worldwide license to practice or have practiced such inventions for any governmental purpose. In addition, the U.S. government has the right to require us or our licensors (as applicable) to grant licenses which would be exclusive under any of such inventions to a third party if they determine that: (1) adequate steps have not been taken to commercialize such inventions in a particular field of use; (2) such action is necessary to meet public health or safety needs; or (3) such action is necessary to meet requirements for public use under federal regulations. Further, the government rights include the right to use and disclose, without limitation, technical data relating to licensed technology that was developed in whole or in part at government expense. At least one of our technology license agreements contains a provision recognizing these government rights.

We may need to initiate lawsuits to protect or enforce our patents, which would be expensive and, if we lose, may cause us to lose some, if not all, of our intellectual property rights, and thereby impair our ability to compete.

We rely on patents to protect a large part of our intellectual property. To protect or enforce our patent rights, we may initiate patent litigation against third parties, such as infringement suits or interference proceedings. These lawsuits could be expensive, take significant time and divert management’s attention from other business concerns. They would also put our patents at risk of being invalidated or interpreted narrowly, and our patent applications at risk of not issuing. We may also provoke these third parties to assert claims against us. Patent law relating to the scope of claims in the technology fields in which we operate is still evolving and, consequently, patent positions in our industry are generally uncertain. We cannot assure you that we would prevail in any of these suits or that the damages or other remedies awarded, if any, would be commercially valuable. During the course of these suits, there may be public announcements of the results of hearings, motions and other interim proceedings or developments in the litigation. Any public announcements related to these suits could cause our stock price to decline.

Our international operations subject us to additional risks and costs.

Our international operations have expanded recently. These operations are subject to a number of difficulties and special costs, including:

• compliance with multiple, conflicting and changing governmental laws and regulations;

• laws and business practices favoring local competitors;

• foreign exchange and currency risks;

• difficulty in collecting accounts receivable or longer payment cycles;

• import and export restrictions and tariffs;

• difficulties staffing and managing foreign operations;

• difficulties and expense in enforcing intellectual property rights;

• business risks, including fluctuations in demand for our products and the cost and effort to conduct international operations and travel abroad to promote international distribution and overall global economic conditions;

• multiple conflicting tax laws and regulations; and

• political and economic instability.

We intend to expand our international sales and marketing activities, including through our subsidiary in France and our direct sales force in the United Kingdom, and enter into relationships with additional international distribution partners. We may not be able to attract international distribution partners that will be able to market our products effectively.

Our international operations could also increase our exposure to international laws and regulations. If we cannot comply with foreign laws and regulations, which are often complex and subject to variation and unexpected changes, we could incur unexpected costs and potential litigation. For example, the governments of foreign countries might attempt to regulate our products and services or levy sales or other taxes relating to our activities. In addition, foreign countries may impose tariffs, duties, price controls or other restrictions on foreign currencies or trade barriers, any of which could make it more difficult for us to conduct our business.

We have reformatted certain of our products affected by the U.S. Food and Drug Administration final guidance governing the sale of Analyte Specific Reagent (“ASR”) products, which could negatively impact our sales of these products.

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In September 2007, the FDA published final guidance clarifying the FDA’s regulations governing the sale of ASR products, which became effective on September 15, 2008. ASRs are a class of products that do not require regulatory clearance or approval but do require compliance with the FDA’s Good Manufacturing Practice Regulations. The final guidance contains more specific ASR regulations with regard to which products may be characterized as ASRs. The final ASR guidance has caused us to implement modifications of some of our ASR products in order for us to continue selling them. We have no assurances that the reformatted products will achieve market acceptance. The final guidance has curtailed our interest in developing any new products that would previously have qualified as ASRs.

The nature of some of our products may also subject us to export control regulation by the US Department of State and the Department of Commerce. Violations of these regulations can result in monetary penalties and denial of export privileges.

Our sales to customers outside the United States are subject to government export regulations that require us to obtain licenses to export such products internationally. In particular, we are required to obtain a new license for each purchase order of our biothreat products that are exported outside the United States. Delays or denial of the grant of any required license, or changes to the regulations that make such delays or denials more likely or frequent, could make it difficult to make sales to foreign customers and could adversely affect our revenue. In addition, we could be subject to fines and penalties for violation of these export regulations if we were found in violation. Such violation could result in penalties, including prohibiting us from exporting our products to one or more countries, and could materially and adversely affect our business.

If we fail to retain key members of our staff, our ability to conduct and expand our business would be impaired.

We are highly dependent on the principal members of our management and scientific staff. The loss of services of any of these persons could seriously harm our product development and commercialization efforts. In addition, we require skilled personnel in areas such as microbiology, clinical and sales, marketing and finance. We generally do not enter into employment agreements requiring these employees to continue in our employment for any period of time. Attracting, retaining and training personnel with the requisite skills remains challenging, particularly in the Silicon Valley area of California, where our main office is located. If at any point we are unable to hire, train and retain a sufficient number of qualified employees to match our growth, our ability to conduct and expand our business could be seriously reduced.

If we become subject to claims relating to improper handling, storage or disposal of hazardous materials, we could incur significant cost and time to comply.

Our research and development processes involve the controlled storage, use and disposal of hazardous materials, including biological hazardous materials. We are subject to foreign, federal, state and local regulations governing the use, manufacture, storage, handling and disposal of materials and waste products. We may incur significant costs complying with both existing and future environmental laws and regulations. In particular, we are subject to regulation by the Occupational Safety and Health Administration (“OSHA”) and the Environmental Protection Agency (“EPA”), and to regulation under the Toxic Substances Control Act and the Resource Conservation and Recovery Act in the United States. OSHA or the EPA may adopt regulations that may affect our research and development programs. We are unable to predict whether any agency will adopt any regulations that would have a material adverse effect on our operations.

The risk of accidental contamination or injury from hazardous materials cannot be eliminated completely. In the event of an accident, we could be held liable for any damages that result, and any liability could exceed the limits or fall outside the coverage of our workers’ compensation insurance. We may not be able to maintain insurance on acceptable terms, if at all.

If a catastrophe strikes our manufacturing facilities, we may be unable to manufacture our products for a substantial amount of time and we would experience lost revenue.

Our manufacturing facilities are located in Sunnyvale, California, Bromma, Sweden, and Bothell, Washington. Although we have business interruption insurance, our facilities and some pieces of manufacturing equipment are difficult to replace and could require substantial replacement lead-time. Various types of disasters, including earthquakes, fires, floods and acts of terrorism, may affect our manufacturing facilities. Earthquakes are of particular significance since our primary manufacturing facilities in California are located in an earthquake-prone area. In the event our existing manufacturing facilities or equipment are affected by man-made or natural disasters, we may be unable to manufacture products for sale or meet customer demands or sales projections. If our manufacturing operations were curtailed or ceased, it would seriously harm our business.

Our investments in marketable debt securities are subject to risks which may cause losses and affect the liquidity of these investments.

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Our investments of $25.0 million, with a fair value of $15.1 million, at December 31, 2008 consisted of auction rate securities. Auction rate securities are securities that are structured with short-term interest rate reset dates of generally less than 90 days, but with contractual maturities that can be well in excess of ten years. Since March 2008, all of our auction rate securities failed at auction. Our auction rate securities consist of investments that are backed by pools of student loans, which are principally guaranteed by the Federal Family Educational Loan Program (“FFELP”), or insured.

On November 10, 2008, we accepted the offer from UBS to sell the auction rate securities held by us back to UBS at par value beginning June 30, 2010 until July 2, 2012 and the offer to provide “no net cost” loans to us up to 75% of the fair value of the auction rate securities. In accepting the settlement arrangement, we also granted UBS the right to sell our auction rate securities at par at any time up until the expiration date of the rights and released UBS from any claims related to the marketing and sale of auction rate securities, other than claims for consequential damages. We intend to exercise our option and sell the auction rate securities back at par beginning June 30, 2010 through July 2, 2012, depending on market conditions. In the meantime, we entered into a “no net cost” secured line of credit with UBS for $14.7 million, which provides cash liquidity to us until June 30, 2010. Given the substantial disruption in the financial markets and among financial services companies, we cannot assure you that UBS will ultimately have the ability to repurchase our auction rate securities at par, or at any other price, as these rights will be an unsecured contractual obligation of UBS. In addition, subsequent changes in fair value of both our auction rate securities and the put option will be recognized in respective period financial results, which could cause fluctuations in the values of these items from period to period.

We might require additional capital to support business growth, and such capital might not be available.

We may need to engage in additional equity or debt financing to support business growth and respond to business challenges, which include the need to develop new products or enhance existing products, conduct clinical trials, enhance our operating infrastructure and acquire complementary businesses and technologies. Equity and debt financing, however, might not be available when needed or, if available, might not be available on terms satisfactory to us. In addition, to the extent that additional capital is raised through the sale of equity or convertible debt securities, the issuance of these securities could result in dilution to our shareholders. In addition, these securities may be sold at a discount from the market price of our common stock and may include rights, preferences or privileges senior to those of our common stock. If we are unable to obtain adequate financing or financing on terms satisfactory to us, our ability to continue to support our business growth and to respond to business challenges could be significantly limited.

We rely on relationships with collaborative partners and other third parties for development, supply and marketing of certain products and potential products, and such collaborative partners or other third parties could fail to perform sufficiently.

We believe that our success in penetrating our target markets depends in part on our ability to develop and maintain collaborative relationships with other companies. Relying on collaborative relationships is risky to our future success for these products because, among other things:

• our collaborative partners may not devote sufficient resources to the success of our collaboration;

• our collaborative partners may not obtain regulatory approvals necessary to continue the collaborations in a timely manner;

• our collaborative partners may be acquired by another company and decide to terminate our collaborative partnership or become insolvent;

• our collaborative partners may develop technologies or components competitive with our products;

• components developed by collaborators could fail to meet specifications, possibly causing us to lose potential projects and subjecting us to liability;

• disagreements with collaborators could result in the termination of the relationship or litigation;

• collaborators may not have sufficient capital resources;

• collaborators may pursue tests or other products that will not generate significant volume for us, but may consume significant research and development and manufacturing resources; and

• we may not be able to negotiate future collaborative arrangements, or renewals of existing collaborative agreements, on acceptable terms.

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Because these and other factors may be beyond our control, the development or commercialization of these products may be delayed or otherwise adversely affected.

If we or any of our collaborative partners terminate a collaborative arrangement, we may be required to devote additional resources to product development and commercialization or we may need to cancel some development programs, which could adversely affect our product pipeline and business.

We enter into collaborations with third parties that may not result in the development of commercially viable products or the generation of significant future revenues.

In the ordinary course of our business, we enter into collaborative arrangements to develop new products or to pursue new markets. These collaborations may not result in the development of products that achieve commercial success, and these collaborations could be terminated prior to developing any products. In addition, our collaboration partners may not necessarily purchase the volume of products that we expect. Accordingly, we cannot be assured that any of our collaborations will result in the successful development of a commercially viable product or result in significant additional future revenues in the future.

Compliance with regulations governing public company corporate governance and reporting is complex and expensive.

Many laws and regulations, notably those adopted in connection with the Sarbanes-Oxley Act of 2002 by the SEC and the NASDAQ Global Market, impose obligations on public companies, such as ours, which have increased the scope, complexity, and cost of corporate governance, reporting, and disclosure practices. Our implementation of these reforms and enhanced new disclosures has required and will continue to require substantial management time and oversight and requires us to incur significant additional accounting and legal costs.

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ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA

The following selected consolidated financial data have been derived from our audited consolidated financial statements. The information below is not necessarily indicative of the results of future operations, and should be read in conjunction with Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of this Form 10-K and the consolidated financial statements and related notes thereto included in Item 8 of this Form 10-K in order to fully understand factors that may affect the comparability of the information presented below.

	Years Ended December 31,
	2008			2007			2006			2005			2004
	(In thousands, except per share data)
	As Restated (1)
Consolidated Statements of Operations Data:
Revenues:
Product sales	$	159,383		$	116,532		$	82,403		$	80,440		$	49,967
Other revenues		10,244			12,941			4,949			4,570			3,001
Total revenues		169,627			129,473			87,352			85,010			52,968
Loss from operations		(23,650	)		(25,164	)		(30,986	)		(14,281	)		(14,327	)
Net loss		(22,387	)		(22,100	)		(26,704	)		(14,308	)		(14,157	)
Basic and diluted net loss per common share	$	(0.39	)	$	(0.40	)	$	(0.51	)	$	(0.34	)	$	(0.34	)
Shares used in computing basic and diluted net loss per share		57,101			55,263			52,325			42,494			41,083

	December 31,
	2008			2007			2006			2005			2004
	(In thousands)
	As Restated (1)
Consolidated Balance Sheet Data:
Cash and cash equivalents and investments	$	48,017		$	44,026		$	94,936		$	37,222		$	57,439
Working capital		32,211			56,109			90,362			19,561			45,217
Total assets		183,979			162,778			165,871			102,117			119,958
Bank borrowing		14,639			—			—			—			—
Long-term obligations		—			2			44			2,439			14,165
Accumulated deficit		(179,763	)		(157,376	)		(135,276	)		(108,572	)		(94,264	)
Total shareholders’ equity		128,824			124,468			130,916			54,332			65,252

(1) See Note 13, “Restatement of Consolidated Financial Statements” in Notes to Consolidated Financial Statements and Supplemental Data.

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

The following Management’s Discussion and Analysis of Financial Condition and Results of Operations contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934 that relate to future events or our future financial performance. In some cases, you can identify forward-looking statements by terminology such as “may”, “will”, “should”, “expect”, “plan”, “anticipate”, “believe”, “estimate”, “intend”, “potential” or “continue” or the negative of these terms or other comparable terminology. Forward-looking statements are based upon current expectations that involve risks and uncertainties. Our actual results and the timing of events could differ materially from those anticipated in our forward-looking statements as a result of many factors, including, but not limited to, the following: the uncertain impact of the significant global economic downturn on our target markets and our business; continued market acceptance of our healthcare associated infection products; changes in the protocols, best practices or level of testing for healthcare associated infections; development and manufacturing problems; the need for additional intellectual property licenses for new tests and other products and the terms of such licenses; our ability to successfully sell additional products in the Clinical market; lengthy sales cycles in certain markets; the performance and market acceptance of our new products; our ability to obtain regulatory approvals and introduce new products into the Clinical market; the level of testing at existing clinical customer sites; the mix of products sold, which can affect gross margins; our reliance on distributors to market, sell and support our products; the occurrence of unforeseen expenditures, asset impairments, acquisitions or other transactions; our ability to integrate the businesses, technologies, operations and personnel of acquired companies; the scope and timing of actual United States Postal Service (“USPS”) funding of the Biohazard Detection System (“BDS”) in its current configuration; the rate of environmental testing using the BDS conducted by the USPS, which will affect the amount of consumable products sold; our success in increasing our direct sales and the effectiveness of our sales personnel; the impact of competitive products and pricing; our ability to manage geographically-dispersed operations; our ability to continue to realize manufacturing efficiencies, which are an important factor in improving gross margins; underlying market conditions worldwide; and the other risks set forth under “Risk Factors” and elsewhere in this report. 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.

STRATEGY

We are a broad-based molecular diagnostics company that develops, manufactures, and markets fully-integrated systems for testing in the Clinical market, as well as for application in our legacy Biothreat and Industrial markets. Our systems enable rapid, sophisticated molecular testing for organisms and genetic-based diseases by automating otherwise complex manual laboratory procedures. Our strategy is to become the leading supplier of integrated systems and tests for molecular diagnostics. Key elements of our strategy to achieve this objective include:

• Provide a fully-integrated molecular testing solution to the Clinical market. We believe our GeneXpert system will continue to significantly expand our presence in the Clinical market with its ease of use, flexibility, and rapid and accurate results. We believe this system is currently the only closed, self-contained, fully-integrated and automated system for molecular testing commercially available. The system is currently commercially available in a variety of configurations ranging from 1 to 16 individual test modules, while our GeneXpert Infinity System, which will house up to 48 individual modules and offer both on-demand and batch test capability, is currently in the beta testing phase. To our knowledge, the system is also the only currently available system to offer true random access and on demand test capability for molecular testing.

• Continue to develop and market new tests. We plan to capitalize on our strengths in nucleic acid chemistry and molecular biology to continue to internally develop new tests for our systems. In addition, in order to more rapidly expand our test pipeline, we work with strategic partners and major academic institutions and commercial organizations to develop and validate additional tests.

• Obtain additional target rights. We expect to continue to expand our collaborations with academic institutions and commercial organizations to develop and obtain target rights to various infectious disease and cancer targets. In addition, we will be focusing key business development activities on identifying infectious disease and cancer targets held by academic institutions or commercial organizations for potential license or acquisition.

• Enhance international platform. Internationally, our primary focus is the European Clinical market. However, we also have and will continue to develop programs for other international markets. Our European sales and marketing operations are headquartered in France. In 2008, we implemented a direct sales force in the United Kingdom (“UK”) and we sold through distributors in other international markets. We will continue to expand our distribution capability in Europe on both a direct and distributor basis.

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• Continue to maintain applications in the Industrial and Biothreat markets. We currently sell products into the Industrial and Biothreat markets and expect to continue our offerings in these markets.

CRITICAL ACCOUNTING POLICIES, ESTIMATES AND ASSUMPTIONS

We consider our accounting policies related to revenue recognition, fair value of financial instruments, impairment of intangible assets and goodwill, inventory valuation, warranty accrual and stock-based compensation to be critical accounting policies. A number of significant estimates, assumptions, and judgments are inherent in our determination of when to recognize revenue, in valuing financial instruments, how to evaluate our intangible assets and goodwill, the calculation of our inventory valuation adjustments, warranty accrual, and stock-based compensation expense and how to account for our derivative instruments. These estimates, assumptions and judgments include deciding whether the elements required to recognize revenue from a particular arrangement are present, estimating the fair value of an intangible asset, which represents the future undiscounted cash flows to be derived from the intangible asset, estimating the amount of inventory obsolescence, warranty costs associated with shipped products, estimating the useful life and volatility of stock awards granted and determining whether our derivative instruments meet the criteria for designation as hedging transactions. We base our estimates and judgments on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. Actual results could differ materially from these estimates.

Revenue Recognition

We recognize revenue from the sale of our products and contract arrangements. Our revenue arrangements with multiple elements are divided into separate units of accounting if certain criteria are met, including whether the delivered element has stand-alone value to the customer and whether there is objective and reliable evidence of the fair value of the undelivered items. The consideration we receive is allocated among the separate units based on their respective fair values, and the applicable revenue recognition criteria are applied to each of the separate units. Advance payments received in excess of amounts earned are classified as deferred revenue until earned.

Determining whether the criteria for recognizing revenue have been met, including, for example, determining whether there is sufficient evidence that an arrangement exists, the collectibility of billings are reasonably assured and whether contractual performance obligations and milestones have been satisfied, requires us to make estimates, assumptions and judgments that affect our operating results. For example, our determination of the probability of collection is based upon assessment of the customer’s financial condition through review of their current financial statements or publicly-available credit reports, as well as approvals from government agencies and availability of budgets. For sales to existing customers, prior payment history is also considered in assessing probability of collection. We are required to exercise significant judgment in deciding whether collectibility is reasonably assured, and such judgments may materially affect the timing of our revenues and our results of operations.

Product sales. We recognize revenue from product sales when goods are shipped, there is persuasive evidence that an arrangement exists, delivery has occurred, the price is fixed or determinable and collectibility is reasonably assured. No right of return exists for our products except in the case of damaged goods. We have not experienced any significant returns of our products.

Contract revenues. Contract revenues consist of fees earned under technology license arrangements, services rendered under research and development arrangements, grants and government sponsored research agreements, and milestone payments and royalties received under license and collaboration agreements. Deferred revenue is recorded when funds are received in advance of technologies to be delivered or services to be performed.

License revenue is generally recognized only after both the license period has commenced and the technology has been delivered. However, in multiple-element revenue arrangements, if the delivered technology does not have stand-alone value or if we do not have objective and reliable evidence of the fair value of the undelivered products or services, the amount of revenue allocable to the delivered technology is deferred and amortized over the related involvement period in which the remaining products or services are provided to the customer.

Research and development and government sponsored research contract revenues are recognized as the related services are performed based on the performance requirements of the relevant contract. Under the agreements, we are required to perform specific research and development activities and are compensated either based on the costs or costs plus a mark-up associated with each specific contract over the term of the agreement.

Incentive milestone payments are recognized as revenue upon the achievement of the specified milestone, assuming there are no continuing performance obligations related to that milestone. Incentive milestone payments are substantially at risk at the inception of the arrangement and are normally triggered by events external to Cepheid.

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Royalties are typically based on licensees’ net sales of products that utilize our technology and are recognized as earned in accordance with the contract terms when royalties from licensees can be reliably measured and collectibility is reasonably assured, such as upon the receipt of a royalty statement from the customer.

Service revenue is recognized when the services have been provided.

Fair Value of Financial Instruments

SFAS 157 defines fair value, establishes a framework for measuring fair value under generally accepted accounting principles (“GAAP”) and requires enhanced disclosures about fair value measurements. Fair value is defined under SFAS 157 as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value under SFAS 157 must maximize the use of observable inputs and minimize the use of unobservable inputs. The standard describes a fair value hierarchy based on three levels of inputs, of which the first two are considered observable and the third unobservable that may be used to measure fair value. The three levels of inputs are the following:

• Level 1 — Quoted prices in active markets for identical assets or liabilities.

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

• Level 3 — Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

Level 3 assets consist of auction rate securities whose underlying assets are student loans, most of which are guaranteed by the federal government and the put option. In February 2008, auctions began to fail for these securities, and each auction since then has failed. The auction rate securities were recorded at fair value as of December 31, 2008.

Our investment portfolio of auction rate securities is structured with short-term interest rate reset dates of generally less than 30 days, but with contractual maturities that are well in excess of ten years. Our auction rate securities consist of investments that are backed by pools of student loans, which are principally guaranteed by the Federal Family Educational Loan Program (“FFELP”), or insured. We believe that the credit quality of these securities is high based on these guarantees. We determined the fair market values of our financial instruments based on the fair value hierarchy established in SFAS 157, which requires an entity to maximize the use of observable inputs (Level 1 and Level 2 inputs) and minimize the use of unobservable inputs (Level 3 inputs) when measuring fair value. Until the first quarter of 2008, the fair values of our auction rate securities were determinable by reference to frequent successful Dutch auctions of such securities, which settled at par. Therefore, at the adoption date, we had categorized our investments in auction rate securities as Level 1. Given the current failures in the auction markets to provide quoted market prices of the securities, as well as the lack of any correlation of these instruments to other observable market data, we valued these securities using a discounted cash flow methodology with the most significant input categorized as Level 3. Significant inputs that went into the model were the credit quality of the issuer, the percentage and the types of guarantees, contractual maturity, the timing and probability of the auction succeeding or the security being called and discount factors.

On November 10, 2008, we accepted a comprehensive settlement arrangement offered by UBS, the fund manager with which we hold our auction rate securities. Under the settlement, we will have the option (“the put option”) to sell the auction rate securities held in our accounts with UBS to UBS at par value during the period beginning June 30, 2010 and ending July 2, 2012. In accepting the settlement arrangement, we also granted UBS the right to sell our auction rate securities at par at any time up until the expiration date of the rights and released UBS from any claims related to the marketing and sale of auction rate securities, other than claims for consequential damages. Since the settlement agreement is a legally enforceable firm commitment, the put option is recognized as a financial asset at fair value in our financial statements at December 31, 2008, and accounted for separately from the associated securities. The fair value of the put option is based on the difference in value between the par value and the fair value of the associated auction rate securities. We have elected to measure the put option at its fair value pursuant to SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities Including an amendment of Financial Accounting Standards Board (“FASB”) Statement No. 115” (SFAS 159), and subsequent changes in fair value will also be recognized in current period earnings. Since we intend to exercise the put option during the period beginning June 30, 2010 and ending July 2, 2012, we do not have the intent to hold the associated auction rate securities until recovery or maturity. We have classified these securities as trading pursuant to SFAS No. 115, “Accounting for Certain Investments in Debt and Equity Securities” (SFAS 115), which requires changes in the fair value of these securities to be recorded in current period earnings, which we believe will substantially offset changes in the fair value of the put option. In addition, the rights permitted us to establish a demand revolving credit line in an amount equal to the par value of the securities at a net no cost.

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In the fourth quarter of 2008, we recorded a charge to operations of $9.9 million to reduce the value of our auction rate securities investments classified as trading securities, offset by a gain of $9.4 million upon the initial recognition of the estimated fair value of the put option.

Realizability of Long-Lived Assets

Our intangible assets consist primarily of rights to certain patented technologies that we purchased. Intangible assets are recorded at cost, less accumulated amortization. Intangible assets are amortized over their estimated useful lives, ranging from 5 to 20 years, on a straight-line basis except for intangible assets acquired in the acquisition of Actigenics, Sangtec and Stretton which are amortized on the basis of economic useful life. Amortization of intangible assets is primarily included in cost of product sales in the consolidated statements of operations.

We review our intangible assets for impairment under SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets”. We conduct an impairment review when events or circumstances indicate the carrying value of a long-lived asset may be impaired, by estimating the future undiscounted cash flows to be derived from an asset to assess whether or not a potential impairment exists. If the carrying value exceeds our estimate of future undiscounted cash flows, we then calculate the impairment as the excess of the carrying value of the asset over our estimate of its fair market value. Events or circumstances which could trigger an impairment review include a significant adverse change in business climate, an adverse action or assessment by a regulator, unanticipated competition, significant changes in the manner of our use of acquired assets, the strategy for our overall business, or significant negative industry or economic trends. There is significant judgment in estimating future cash flows and fair value. In 2008 we recorded an impairment charge of $0.4 million related to certain licenses with no future use. No impairment charge was recorded in 2007 and 2006.

We annually review our goodwill for impairment under SFAS No. 142, “Goodwill and Other Intangible Assets”. If our fair value exceeds our net book value including goodwill, then goodwill is not considered impaired. The initial step is to compare our fair value as determined by our market capitalization to our net book value. If the market capitalization exceeds the net book value, goodwill is presumed to be unimpaired. Otherwise, we would estimate expected future cash flows of our business, which operates in a number of markets and geographical regions. We would then determine the carrying value of our business and compare the carrying value including goodwill and other intangibles to the discounted future cash flows. If the total of future cash flows is less than the carrying amount of the assets, we would recognize an impairment loss based on the excess of the carrying amount over the fair value of the assets. Estimates of the future cash flows associated with the assets are critical to these assessments. Changes in these estimates based on changed economic conditions or business strategies could result in material impairment charges in future periods. At December 31, 2008, we determined that goodwill was not impaired.

Inventory and Warranty Provisions

We maintain provisions for inventory obsolescence and warranty costs that we believe are reasonable and that are based on our historical experience and current expectations for future performance. The inventory provision is established using management’s estimate of the potential future obsolescence or excess inventory. A substantial decrease in demand for our products or the introduction of new products could lead to excess inventories and could require us to increase our provision for inventory obsolescence. Our current estimates and assumptions are consistent with prior periods. In the past, there have not been significant adjustments of the actual results to our estimates.

We warrant our systems to be free from defects for a period of 12 to 15 months from the date of sale and our disposable products to be free from defects, when handled according to product specifications, for the stated life of such products. Accordingly, a provision for the estimated cost of warranty repair or replacement is recorded at the time revenue is recognized. Our warranty provision is established using management’s estimate of future failure rates and of the future costs of repairing any system failures during the warranty period or replacing any disposable products with defects. Significant increases in the failure rates of our products could lead to increased warranty costs and require us to increase our warranty provision. As of December 31, 2008 and 2007, the accrued warranty liability was $0.7 million and $0.5 million, respectively.

Stock-Based Compensation

Effective January 1, 2006, we adopted the fair value recognition provisions of SFAS No. 123 (revised 2004), “Share-Based Payment” (“SFAS 123(R)”) using the modified prospective transition method. Under the modified prospective transition method, prior periods are not restated for the effect of SFAS 123(R). Commencing with the first quarter of 2006, compensation cost includes

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all share-based payments granted prior to, but not yet vested as of January 1, 2006, based on the grant date fair value estimated in accordance with the original provisions of SFAS No. 123, “Accounting for Stock-Based Compensation” (“SFAS 123”), and compensation for all share-based payments granted subsequent to January 1, 2006, based on the grant date fair value estimated in accordance with the provisions of SFAS 123(R). We recognize the fair value of our stock option awards as compensation expense over the requisite service period of each award, which is generally four years.

Prior to the adoption of SFAS 123(R), we applied SFAS 123, amended by SFAS No. 148, “Accounting for Stock-Based Compensation — Transition and Disclosure” (“SFAS 148”), which allowed companies to apply the existing accounting rules under APB 25 and related interpretations. In general, as the exercise price of options granted under our plans was equal to the market price of the underlying common stock on the grant date, no stock-based employee compensation cost was recognized in the consolidated financial statements for periods prior to the adoption of SFAS 123(R).

In determining fair value, we use the Black–Scholes model and a single option award approach, which requires the input of subjective assumptions. These assumptions include: estimating the length of time employees will retain their vested stock options before exercising them (expected term), the estimated volatility of our common stock price over the expected term (volatility), risk-free interest rate and the number of shares subject to options that will ultimately not complete their vesting requirements (forfeitures). Changes in the following assumptions can materially affect the estimate of fair value of stock-based compensation.

• Expected term is determined based on historical experience, giving consideration to the contractual terms of the stock-based awards, vesting schedules and expectations of future employee behavior as influenced by changes to the terms of its stock-based awards.

• Expected volatility is based on the historical volatility for the past 5 years, which approximates the expected term of the option grant.

• Risk-free interest rate is based on the implied yield currently available on U.S. Treasury zero-coupon issues with a remaining term equivalent to the expected term of a stock award.

• Estimated forfeitures are based on voluntary termination behavior as well as analysis of actual option forfeitures.

Income Taxes

The Company accounts for income taxes using an asset and liability approach, which requires recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been recognized in the Company’s Consolidated Financial Statements, but have not been reflected in the Company’s taxable income. A valuation allowance is established to reduce deferred tax assets to their estimated realizable value. Therefore, the Company provides a valuation allowance to the extent that the Company does not believe it is more likely than not that it will generate sufficient taxable income in future periods to realize the benefit of its deferred tax assets.

In June 2006, the FASB issued Interpretation No. 48, “Accounting for Uncertainty in Income Taxes — an interpretation of FASB Statement No. 109” (“FIN 48”). FIN 48 clarifies the recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. FIN 48 also provides guidance on de-recognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. As a result of the implementation of FIN 48 on January 1, 2007, the Company recognized no material adjustment in the liability for unrecognized income tax benefits.

The Company recognizes interest and penalties related to uncertain tax positions in income tax expense. For the year ended December 31, 2008, the Company did not recognize any interest or penalties related to uncertain tax positions in the consolidated statements of operations, and at December 31, 2008, the Company had no accrued interest or penalties.

Recent Accounting Pronouncements

For recent accounting pronouncements, see Note 1 — Organization and Summary of Significant Accounting Policies to the consolidated financial statements appearing in Item 8 to this annual report, which are incorporated by reference into this Item 7.

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Results of Operations

Comparison of Years Ended December 31, 2008 and 2007

Revenues

	Years Ended December 31,
	2008		2007		% Change
	(Amounts in thousands)
Revenues:
System sales	$	51,766	$	47,739	8	%
Reagent and disposable sales		107,617		68,793	56	%
Total product sales		159,383		116,532	37	%
Other revenues		10,244		12,941	(21	)%
Total Revenues	$	169,627	$	129,473	31	%

Product Sales

We operate in three market areas: Clinical, Industrial and Biothreat markets. Within the Clinical market, we have Core Clinical sales to laboratories and hospitals and Non-core Clinical sales to partners. Non-core Clinical partner sales include sales of our SmartCycler system to BDC as well as OEM sales of selected tests to Roche.

	Years Ended December 31,
	2008		2007		% Change
	(Amounts in thousands)
	As Restated (2)		As Restated (2)
Product sales by market:
Core Clinical	$	90,251	$	42,779	111	%
Clinical Partner		17,898		18,182	(2	)%
Total Clinical		108,149		60,961	77	%
Industrial		15,437		14,768	5	%
Biothreat		35,797		40,803	(12	)%
Total Product Sales	$	159,383	$	116,532	37	%

(2) We reclassified $1.5 million and $0.6 million of product sales from Core Clinical to Clinical Partner for the years ended December 31, 2008 and 2007, respectively, due to a classification error.

Total product sales increased 37% to $159.4 million in 2008 from $116.5 million in 2007, primarily due to an increase in overall GeneXpert system sales in the Core Clinical market and Xpert MRSA disposal test sales offset by the decline in product sales in the Biothreat market. Core Clinical product sales increased $47.5 million, or 111%, in 2008 compared to 2007 due primarily to continued adoption of our GeneXpert systems and Xpert tests. Sales of Xpert MRSA disposable tests increased to $47.4 million in 2008 as compared to $8.7 million in 2007 while GeneXpert system sales increased $5.8 million. Product sales from the Clinical Partner market in 2008 declined by $0.3 million, or 2%, as compared to 2007. The decrease in Clinical Partner product sales was due to the expiration of our contract with BDC in 2008 and the cancellation of certain contracted purchases by Roche during 2008. In the Biothreat market, product sales decreased by $5.0 million or 12% from $40.8 million in 2007 to $35.8 million in 2008. This decrease was primarily due to reduced anthrax test cartridge sales to Northrop Grumman/USPS. Product sales to Northrop Grumman/USPS represented 23% and 36% of our total product sales in 2008 and 2007, respectively. Industrial sales were approximately flat in 2008 as compared to 2007.

We expect our Core Clinical product sales to continue to grow in 2009 as we continue our expansion of products for the healthcare associated infections market. We expect that our Non-core Clinical sales to partners will continue to decrease in 2009 due to the previously mentioned expiration of our contract with BDC and product cancellations by Roche during 2008. We also expect our Biothreat sales to decrease in 2009 as we expect the USPS to purchase contractual minimum levels of product.

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The following table provides a breakdown of our product sales by geographic regions:

	Years Ended December 31,
	2008		2007		% Change
	(Amounts in thousands)
	As Restated (3)
Product Sales by Geographic Regions:
North America	$	125,327	$	92,927	35	%
International		34,056		23,605	44	%
Total Product Sales	$	159,383	$	116,532	37	%

(3) We reclassified $0.1 million of product sales from International to North America for the year ended December 31, 2007 due to a classification error.

Product sales in North America increased $32.4 million, or 35%, from $92.9 million in 2007 to $125.3 million in 2008. The increase in North American product sales were primarily driven by the growth in the Core Clinical market from the continued adoption of our GeneXpert system sales and Xpert MRSA disposable tests, offset by the decrease in product sales in the Biothreat market, for which our sales are primarily in North America. Excluding Biothreat, North America product sales grew 71% in 2008 as compared to 2007 Internationally, which primarily represents sales in Europe, product sales increased to $34.1 million in 2008, a 44% increase. This increase was primarily due to our focus on the European Clinical market and increasing our distribution capability in Europe on both a direct and distributor basis, resulting in the continued growth in sales of our GeneXpert systems and Xpert MRSA disposable tests.

No single country outside of the United States represented more than 10% of our total revenues in any period presented.

Other Revenue

Other revenue of $10.2 million in 2008 decreased 21% from $12.9 million in 2007, primarily due to the termination of the Centers for Disease Control program in the third quarter of 2007, which had $2.5 million higher program revenues in 2007 than 2008. We expect that other revenue will continue to decrease during 2009 as certain of our collaboration projects reach transition levels in their lifecycles.

Costs and Operating Expenses

	Years Ended December 31,
	2008			2007		% Change
	(Amounts in thousands)
	As Restated (1)
Costs and operating expenses:
Cost of product sales	$	89,714		$	69,851	28	%
Collaboration profit sharing		11,089			12,256	(10	)%
Research and development		43,310			31,449	38	%
Sales and marketing		29,757			22,812	30	%
General and administrative		20,861			18,269	14	%
Gain from legal settlement		(1,454	)		—	100	%
Total costs and operating expenses	$	193,277		$	154,637	25	%

(1) See Note 13, “Restatement of Consolidated Financial Statements” in Notes to Consolidated Financial Statements and Supplemental Data.

Cost of Product Sales

Cost of product sales consists of raw materials, direct labor and stock-based compensation expense, manufacturing overhead, facility costs and warranty costs. Cost of product sales also includes royalties on product sales and amortization of intangible assets related to technology licenses and intangibles acquired in the purchases of Sangtec and Stretton. As a result of the increased product sales discussed above, cost of product sales increased 28% to $89.7 million in 2008 compared to $69.9 million in 2007. Our product gross margin percentage was 44% and 40% in 2008 and 2007, respectively. The increase in product gross margin percentage was primarily due to a shift in product mix to higher margin products, such as clinical reagents, most notably growth in our Xpert MRSA test revenue, and increased manufacturing efficiencies resulting from automation of our manufacturing processes and increased volumes.

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Collaboration Profit Sharing

Collaboration profit sharing represents the amount that we pay to ABI (now Life Technologies Corporation) under our collaboration agreement to develop reagents for use in the USPS BDS program. Under the agreement, computed gross margin on anthrax cartridge sales are shared equally between the two parties. The collaboration profit sharing expense was $11.1 million and $12.3 million in 2008 and 2007, respectively. The decrease in collaboration profit sharing was the result of decreased anthrax cartridge sales under the USPS BDS program. This expense will fluctuate relatively proportionally to the sales of anthrax cartridges under the USPS BDS program, which we expect will decrease in 2009.

Research and Development Expenses

Research and development expenses consist of salaries and employee-related expenses, which include stock-based compensation, clinical trials, research and development materials, facility costs and depreciation. Research and development expenses increased 38% to $43.3 million in 2008 compared to $31.4 million in 2007. The increase in research and development expenses of $11.9 million is primarily due to a $3.9 million increase in salaries and employee-related expenses, inclusive of a $1.3 million increase in stock-based compensation. Other increases included a $2.3 million increase in clinical trial costs, a $0.9 million increase in supplies used in research activities, a $0.9 million increase in contractor costs and a $0.4 million increase in lab supplies and freight expenses. The increase in 2008 reflects expansion in our test pipeline development activities which in 2008 resulted in the FDA clearance and U.S. release of our Xpert MRSA/SA-SSTI and Xpert MRSA/SA-BC products and CE IVD-marked products released for sale in Europe, including Xpert C. difficile and Xpert vanA/vanB. We expect that our research and development expenses will decrease as a percentage of total revenues in 2009 as we implemented headcount and cost savings initiatives in early 2009 without impacting the development of our nearer term, more significant projects.

Sales and Marketing Expenses

Sales and marketing expenses increased 30% to $29.8 million in 2008 compared to $22.8 million in 2007. The increase of $7.0 million included a $4.4 million increase in salaries and employee-related expenses, inclusive of a $1.2 million increase in stock-based compensation. Additionally contributing to the increase was a $1.8 million increase in trade-show and travel-related expenses and a $0.3 million increase in depreciation and amortization primarily related to demo equipment. These increases reflect the increase in sales and marketing headcount and expanded efforts in the Clinical market. We expect our sales and marketing expenses will increase in 2009 as we continue to expand our efforts in the Clinical market, with particular emphasis on pursuing the market opportunities for our healthcare associated infection products.

General and Administrative Expenses

General and administrative expenses consist primarily of salaries and employee-related expenses, which include stock-based compensation, travel, facility, legal, accounting and other professional fees. General and administrative expenses increased 14% from $18.3 million for the year ended December 31, 2007 to $20.9 million for the year ended December 31, 2008. The increase of $2.6 million was primarily due to a $1.5 million increase in salaries and employee-related expenses, inclusive of a $0.4 million increase in stock-based compensation expense, which reflects an increase in headcount to support our overall corporate growth. In addition legal and other professional expenses increased by $0.3 million, primarily to support intellectual property-related activities. In addition, facilities costs increased by $0.2 million. We expect our general and administrative expenses to remain relatively flat as a percentage of total revenues in 2009.

Gain from Legal Settlement

On December 25, 2008 we entered into a Settlement Agreement and Mutual Release (“Roche Settlement Agreement”) with Roche Molecular Systems, Inc. (“RMS”) regarding the cancellation by RMS of outstanding purchase orders as well as future purchasing requirements under a previously negotiated supply agreement with us. Pursuant to the agreement, RMS agreed to pay us $2.1 million as full and complete consideration for all cancelled orders and failure to meet purchasing requirements under the supply agreement. Approximately $0.7 million of the consideration was applied against certain inventory purchases that we had made in anticipation of building product to ship to Roche. The remaining $1.4 million was recorded as a gain. We received the payment in January 2009.

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Other Income (Expense), Net

	Years Ended December 31,
	2008			2007			% Change
	(Amounts in thousands)
Other income (expenses), net:
Interest income	$	1,225		$	2,731		(55	)%
Interest expense		(13	)		(22	)	(41	)%
Foreign currency gain (loss) and other		(860	)		568		(251	)%
Total other income (expenses), net	$	352		$	3,277		(89	)%

Other income (expense) decreased to a $0.3 million gain in 2008 from a $3.3 million gain in 2007, primarily due to a loss of $9.9 million to reduce the value of our auction rate securities investments classified as trading securities, offset by a gain of $9.4 million upon the initial recognition of the estimated fair value of the put option. Additionally contributing to the decrease was foreign currency losses reflecting strengthening of the U.S. Dollar during the second half of year in 2008 and a decrease in interest income with lower average cash balances and lower interest rates in 2008.

Income Taxes

Income tax benefit of $0.9 million in 2008 represents current U.S. federal income tax benefit of $0.2 million related to a refundable research and development (“R&D”) credit as provided by the Housing and Economic Recovery Act of 2008 (“Act”). The Act, signed into law in July 2008, allows taxpayers to claim refundable alternative minimum tax or R&D credit carryovers if they forego bonus depreciation on certain qualified property and equipment placed in service from the period between April and December 2008. The Company estimated and recognized the credit based on property and equipment placed into service through the year ended December 31, 2008. The income tax benefit in 2008 also represents $0.8 million of income tax benefit mainly related to the amortization of acquired intangibles in Sweden and refundable R&D credit in France, offset by $0.1 million of state income tax expense. As of December 31, 2008 and 2007, we had deferred tax assets of approximately $73.0 million and $64.1 million, respectively, which were offset by a valuation allowances of $72.5 million and $60.8 million, respectively. We also had a deferred tax liability of $2.6 million as of December 31, 2008 in connection with the acquisition of the assets and licensed intellectual properties of Sangtec and Stretton, which we acquired in February 2007 and November 2008, respectively. As of December 31, 2008, we had net operating loss carryforwards for federal income tax purposes of approximately $164.8 million, which expire in the years 2011 through 2028, and federal research and development tax credits of approximately $4.2 million, which expire in the years 2013 through 2027. As of December 31, 2008, we had net operating loss carryforwards for state income tax purposes of approximately $61.3 million, which expire in the years 2012 through 2018, and state research and development tax credits of approximately $5.2 million, which have no expiration date.

Utilization of our net operating loss may be subject to a substantial annual limitation due to ownership change limitations provided by the Internal Revenue Code and similar state provisions. Such annual limitation may result in the expiration of net operating losses before utilization.

Undistributed earnings of our foreign subsidiaries of approximately $1.9 million and $1.4 million at December 31, 2008 and 2007, respectively, are considered to be indefinitely reinvested, and, accordingly, no provisions for federal and state income taxes have been provided thereon. Upon distribution of those earnings in the form of dividends or otherwise, we would be subject to both federal income taxes, subject to an adjustment for foreign income tax credit, and withholding taxes payable to various foreign countries. The distribution of such foreign earnings to the U.S. parent would have no U.S. tax impact as the net operating loss carryforwards exceed the undistributed earnings.

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Comparison of Years Ended December 31, 2007 and 2006

Revenues

	Years Ended December 31,
	2007		2006		% Change
	(Amounts in thousands)
Revenues:
Systems sales	$	47,739	$	22,737	110	%
Reagent and disposable sales		68,793		59,666	15	%
Total product sales		116,532		82,403	41	%
Contract revenues		8,554		3,913	119	%
Grant and government sponsored research revenue		4,387		1,036	323	%
Total Revenues	$	129,473	$	87,352	48	%

Product Sales

We operate in three market areas: Clinical, Industrial and Biothreat markets.

	Years Ended December 31,
	2007		2006		% Change
	(Amounts in thousands)
	As Restated (2)
Product sales by market:
Core Clinical	$	42,779	$	15,626	174	%
Clinical Partner		18,182		3,995	355	%
Total Clinical		60,961		19,621	211	%
Industrial		14,768		14,784	(0	)%
Biothreat		40,803		47,998	(15	)%
Total Product Sales	$	116,532	$	82,403	41	%

(2) We reclassified $0.6 million of product sales from Core Clinical to Clinical Partner for the year ended December 31, 2007 due to a classification error.

Total product sales increased 41% to $116.5 million in 2007 from $82.4 million in 2006. The increase in product sales was primarily due to growth of $27.2 million in the Core Clinical market, which included an increase of $18.6 million related to GeneXpert systems sales and $5.3 million for SmartCycler system sales as well as an increase in reagent and disposable sales primarily due to sales of $10.6 million of GeneXpert tests including $8.7 million of Xpert MRSA disposable tests. Such increases were partially offset by a decrease of $7.2 million in product sales in the Biothreat market for 2007 as compared to 2006 due to reduced anthrax test cartridge sales of $7.5 million to Northrop Grumman/USPS in the Biothreat market. Product sales to Northrop Grumman/USPS represented 36% and 59% of our total product sales in 2007 and 2006, respectively.

The following table provides a breakdown of our product sales by geographic regions:

	Years Ended December 31,
	2007		2006		% Change
	(Amounts in thousands)
	As Restated (3)
Product Sales by Geographic Regions:
North America	$	92,927	$	72,932	27	%
International		23,605		9,471	149	%
Total Product Sales	$	116,532	$	82,403	41	%

(3) We reclassified $0.1 million of product sales from International to North America for the year ended December 31, 2007 due to a classification error.

Product sales in North America increased $20.0 million or 27% from $72.9 million in 2006 to $92.9 million in 2007. The increase in North American product sales was primarily driven by the growth in the Core Clinical market related to increased GeneXpert systems sales as well as an increase in reagent and disposable sales, primarily due to sales of $10.6 million of GeneXpert tests including $8.7 million of Xpert MRSA disposable tests. Increased GeneXpert system sales and sales of Xpert MRSA disposable

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tests were offset by decreased product sales in the Biothreat market, for which our sales are primarily in North America. Internationally, which primarily represents sales in Europe, product sales increased from $9.5 million in 2006 to $23.7 million in 2007, representing a 151% increase. This increase was primarily due to our focus on the European Clinical market resulting in the growth in sales of our GeneXpert systems and Xpert MRSA disposable tests, as the European Clinical market began to adopt the GeneXpert system and Xpert MRSA disposable tests.

No single country outside of the United States represented more than 10% of our total revenues in any period presented.

Contract Revenues

Contract revenues were $8.6 million in 2007 and $3.9 million in 2006 and include $1.9 million related to the amortization of license fees in conjunction with our collaboration agreement with bioMerieux, Inc., which are being recognized ratably over the period of approximately five years, which represents the estimated period of our continuing involvement under this agreement. The increase in revenues was primarily due to collaboration agreements which began in the second half of 2006.

Grants and Government Sponsored Research Revenue

Grants and government sponsored research revenue increased to $4.4 million in 2007 from $1.0 million in 2006. The revenue in 2007 was derived from programs with the Centers for Disease Control and Prevention (“CDC”) and National Institutes of Health, revenues from which started in the first quarter of 2007. Such revenue increase was partially offset by decreased revenue from the completion of the National Cancer Institute program in 2006. Revenue derived from the program with the CDC, which terminated in September 2007, was $2.9 million in 2007 and $0.1 million in 2006.

Costs and Operating Expenses

	Years Ended December 31,
	2007		2006		% Change
	(Amounts in thousands)
	As Restated (1)
Costs and operating expenses:
Cost of product sales	$	69,851	$	49,519	41	%
Collaboration profit sharing		12,256		14,974	(18	)%
Research and development		31,449		23,886	32	%
In-process research and development		—		139	(100	)%
Sales and marketing		22,812		14,116	62	%
General and administrative		18,269		12,354	48	%
Expense for patent related matter		—		3,350	(100	)%
Total costs and operating expenses	$	154,637	$	118,338	31	%

(1) See Note 13, “Restatement of Consolidated Financial Statements” in Notes to Consolidated Financial Statements and Supplemental Data.

Cost of Product Sales

As a result of the increased product sales discussed above, cost of product sales increased 41% to $69.9 million in 2007 compared to $49.5 million in 2006. Our product gross margin was 40% in 2007 and 2006. The manufacturing efficiencies achieved in 2007 were offset primarily by increased expense related to amortization of intangible assets associated with the acquisition of Sangtec in 2007 and by stock-based compensation expense.

Collaboration Profit Sharing

The collaboration profit sharing was $12.3 million and $15.0 million in 2007 and 2006, respectively. The decrease in collaboration profit sharing was the result of decreased anthrax cartridge sales under the USPS BDS program.

Research and Development Expenses

Research and development expenses increased 32% to $31.4 million in 2007 from $23.9 million in 2006. The increase in research and development expenses of $7.6 million was primarily due to a $4.5 million increase in salaries and employee-related expenses,

25

including an increase of $1.3 million in stock-based compensation, resulting from our operational expansion in Europe and the United States, a $1.3 million increase in facility related costs and depreciation expense, a $0.6 million increase in direct material related costs, a $0.3 million increase in consulting costs, and a $0.3 million increase in travel related expenses. The increase in 2007 also reflects expansion in our contract, grants and government sponsored research activities and the impact of the Sangtec acquisition in 2007.

In-process Research and Development

In-process research and development of $0.1 million in 2006 represents the write-off of research and development intangible assets acquired in the acquisition of Actigenics in August 2006 that had no alternative future uses. No related expense was incurred in 2007.

Sales and Marketing Expenses

Sales and marketing expenses increased 62% to $22.8 million in 2007 compared to $14.1 million in 2006. The increase of $8.7 million included a $6.1 million increase in salaries and employee-related expenses, inclusive of both a $0.7 million increase in stock-based compensation and a $2.6 million increase in sales commissions due to greater commission-based sales. Other increases included a $0.6 million increase in consulting and other professional fees, a $0.5 million increase in travel related expenses, a $0.4 million increase in depreciation expense, $0.2 million in facilities and information technology related costs, and a $0.2 million increase in marketing and demo related costs.

General and Administrative Expenses

General and administrative expenses increased 48% from $12.4 million for the year ended December 31, 2006 to $18.3 million for the year ended December 31, 2007. The increase of $5.9 million was primarily due to a $3.8 million increase in salaries and employee-related expenses, inclusive of a $1.3 million increase in stock-based compensation expense, which reflects an increase in headcount, partially from the acquisition of Sangtec, as well as costs associated with a separation and consulting agreement we entered into in December 2007 with our former Chief Financial Officer, pursuant to which we recorded salary and employee related expenses of $0.3 million and stock-based compensation of $0.8 million,. Other increases included $1.8 million in legal and other professional consulting expenses, and $0.1 million in travel related expenses.

Expense for Patent-related Matter

On January 2, 2007, we entered into a Settlement and Cross-License Agreement (the “Settlement Agreement”) with Idaho Technology regarding certain Cepheid and Idaho Technology intellectual property (the “Intellectual Property”). The Settlement Agreement provides each of the parties with a non-exclusive, worldwide, fully paid, non-terminable, irrevocable license to certain of the other’s patents for use in their respective product lines and contains certain covenants by each of the parties not to sue the other. Pursuant to the Settlement Agreement, we made a payment of $3.35 million to Idaho Technology in January 2007. As of December 31, 2006, the settlement amount was accrued and recorded as an expense in the consolidated statement of operations. Although we believed we would not be held liable for infringement had the issue ultimately gone to litigation, we came to the conclusion to settle the litigation. We made the Settlement Agreement and payment to avoid incurring significant legal costs to defend our case. Our belief that we did not infringe Idaho Technology’s patents was based on our detailed legal analysis by outside counsel that the patents referenced in the litigation were either not being infringed and/or that the patents referenced were potentially invalid, due to prior art not specified or referenced in the patents. Due to the fact that we did not believe there to be any validity to the patent infringement case, we did not ascribe any value to future product sales and recorded the whole amount as fiscal 2006 expense.

Other Income (Expense), Net

	Years Ended December 31,
	2007			2006			% Change
	(Amounts in thousands)
Other income (expenses), net:
Interest income	$	2,731		$	4,402		(38	)%
Interest expense		(22	)		(367	)	(94	)%
Foreign currency gain and other		568			247		130	%
Total other income (expenses), net	$	3,277		$	4,282		(23	)%

Interest income decreased to $2.7 million in 2007 from $4.4 million in 2006. The decrease was primarily due to the redemption of marketable securities in the first quarter of 2007, the proceeds from which were used to acquire Sangtec. The decrease in interest expense of $0.3 million was primarily due to repayment of the line of credit during the first quarter of 2006. Foreign currency gain and other increased by $0.3 million primarily as a result of the weakening of the U.S. Dollar during 2007.

26

Income Taxes

Income tax expense of $0.2 million in 2007 represents current foreign income taxes related to our French subsidiary. As of December 31, 2007 and 2006, we had deferred tax assets of approximately $64.1 million and $59.3 million, respectively, which were offset by a valuation allowance of $60.8 million and $59.3 million, respectively. We also had a deferred tax liability of $3.3 million as of December 31, 2007. As of December 31, 2007, we had net operating loss carryforwards for federal income tax purposes of approximately $124.8 million, which expire in the years 2011 through 2027, and federal research and development tax credits of approximately $4.1 million, which expire in the years 2012 through 2026. As of December 31, 2007, we had net operating loss carryforwards for state income tax purposes of approximately $47.2 million, which expire in the years 2011 through 2017, and state research and development tax credits of approximately $2.9 million, which have no expiration date.

Undistributed earnings of our foreign subsidiaries of approximately $1.4 million and $0.5 million at December 31, 2007 and 2006, respectively, are considered to be indefinitely reinvested, and, accordingly, no provisions for federal and state income taxes have been provided thereon. Upon distribution of those earnings in the form of dividends or otherwise, we would be subject to both federal income taxes, subject to an adjustment for foreign income tax credit, and withholding taxes payable to various foreign countries. The distribution of such foreign earnings to the U.S. parent would have no U.S. tax impact as the net operating loss carryforwards exceed the undistributed earnings.

LIQUIDITY AND CAPITAL RESOURCES

Cash and Cash Flow

As of December 31, 2008, we had $23.5 million in cash and cash equivalents. Our total cash and cash equivalents increased in the year ended December 31, 2008 by $7.0 million, which consisted primarily of $4.6 million used for operating activities and $15.2 million used for investing activities, offset by $26.8 million provided by financing activities. We maintain our portfolio of cash equivalents in money market funds in order to minimize market risk and preserve principal.

Net cash used in operating activities was $4.6 million, $14.7 million and $11.7 million in 2008, 2007 and 2006, respectively. In 2008, net cash used in operating activities primarily consisted of a $22.4 million net loss, which was offset by $13.4 million of depreciation expense and amortization of intangible assets and $14.1 million of stock-based compensation. In addition, the decrease of $10.6 million attributable to changes in operating assets and liabilities consisted primarily of a decrease in deferred revenue of $1.5 million, increases in inventory of $8.6 million and prepaid expenses of $2.5 million, which were partially offset by a decrease in accounts receivable of $2.5 million and an increase of $0.8 million in accounts payable and other current liabilities. In 2007, net cash used in operating activities primarily consisted of a $22.1 million net loss, which was partially offset by $10.4 million of depreciation expense and amortization of intangible assets and $11.1 million of stock-based compensation. In addition, the decrease of $14.4 million attributable to changes in operating assets and liabilities consisted primarily of increases in receivables of $4.6 million, inventory of $11.3 million, prepaid expenses of $0.9 million, payments of $3.4 million for patent-related matters and $0.8 million of deferred revenue, which were partially offset by increases of $6.1 million in accounts payable, other current liabilities and accrued compensation, $0.2 million in income taxes payable and a decrease of $0.2 million in other non-current assets. In 2006, net cash used in operating activities primarily consisted of a $26.7 million net loss, which was partially offset by $8.3 million of depreciation expense and amortization of intangible assets and $7.3 million of stock-based compensation. In addition, the decrease in operating assets and liabilities of $1.1 million consisted primarily of a $3.4 million increase in accrued expense for a patent-related matter, which was offset by $4.4 million principally related to inventory, accounts receivable, deferred revenue and accounts payable and other accrued liabilities.

Net cash provided by (used in) investing activities was ($15.2) million, $10.5 million and ($74.9) million in 2008, 2007 and 2006, respectively. In 2008, net cash used in investing activities consisted of $14.9 million in capital expenditures and $1.9 million used to acquire Stretton, which was partially offset by $2.6 million net marketable securities sold and $0.1 million in sales of fixed assets. In 2007, net cash provided by investing activities consisted of $50.2 million net marketable securities sold, which was partially offset by $27.6 million used to acquire Sangtec and Actigenics, $4.9 million used for technology licenses and $7.1 million in capital expenditures. In 2006, net cash used in investing activities consisted of $56.6 million net purchases of marketable securities, $1.0 million to acquire Actigenics, $5.9 million in capital expenditures, and $11.3 million for technology licenses.

Net cash provided by financing activities was $26.8 million, $3.3 million and $87.7 million in 2008, 2007 and 2006, respectively. In 2008, cash provided by financing activities consisted of $14.7 million in borrowings from lines of credit and $12.1 million in net proceeds from the sale of common stock under our employee equity incentive plans. In 2007, cash provided by financing activities

27

consisted of $3.7 million in net proceeds from the sale of common stock under our employee equity incentive plans that was partially offset by repayments of $0.4 million on our equipment and other loans. In 2006, cash provided by financing activities consisted of $95.8 million in net proceeds from the sale of common stock. This was partially offset by repayments of $8.1 million on our equipment loans and line of credit.

At December 31, 2008, we had $25.0 million invested in auction rate securities at cost and $15.1 million of fair value, all of which have failed to settle at auction since March 2008. At December 31, 2008, all but two of our auction rate securities continue to carry at least an AAA rating by at least one of the rating agencies with those two carrying an AA rating. Our auction rate securities consist of investments that are backed by pools of student loans, which are principally guaranteed by the Federal Family Educational Loan Program (“FFELP”), or insured.

In October 2008, UBS offered us an option to sell the auction rate securities held by us back to UBS at par value beginning June 30, 2010 until July 2, 2012 and with an offer to provide “no net cost” loans to us up to 75% of the fair value of the auction rate securities. On November 10, 2008, we accepted this offer. In accepting the settlement arrangement, we also granted UBS the right to sell our auction rate securities at par at any time up until the expiration date of the rights and released UBS from any claims related to the marketing and sale of auction rate securities, other than claims for consequential damages. The put option with fair value of $9.4 million is a separate freestanding instrument and will be accounted for separately from our auction rate securities investment. We intend to exercise our option and sell the auction rate securities back at par beginning June 30, 2010 through July 2, 2012, depending on market conditions. In the meantime, we entered into a “no net cost” secured line of credit with UBS for $14.7 million, which provides cash liquidity to us until June 30, 2010.

In the fourth quarter of 2008, we recorded a charge to earnings of $9.9 million to reduce the value of our auction rate securities investments classified as trading securities, offset by a gain of $9.4 million on the put option. We do not believe that the recent auction failures and our inability to liquidate these investments for some period of time will have any material impact on our ability to fund our operating requirements, capital expenditures, acquisitions, if any, or other business requirements.

Contractual Obligations

As of December 31, 2008, our contractual obligations were as follows (in thousands):

	Payments Due by Period
	Total		Less Than 1 Year		1-3 Years		3-5 Years		More Than 5 Years
Operating leases	$	9,908	$	3,612	$	5,426	$	870		—
Bank borrowing		14,639		14,639		—		—		—
Purchase obligations		20,396		6,567		8,929		4,900		—
Minimum royalties		8,835		904		1,843		1,911		4,177
	$	53,778	$	25,722	$	16,198	$	7,681	$	4,177

Purchase obligations include purchase orders or contracts for the purchase of raw materials and other goods and services. We do not have significant agreements for the purchase of raw materials or other goods specifying minimum quantities or set prices that exceed our expected requirements. Minimum royalty payments represent licensed royalties we are obligated to pay under our license agreements.

The expected timing of payment of the obligations discussed above is estimated based on current information. Timing of payments and actual amounts paid could vary in some circumstances depending on the time of receipt of goods or services or changes to agreed-upon amounts for some obligations.

Off-Balance-Sheet Arrangements

As of December 31, 2008, we did not have any off-balance-sheet arrangements, as defined in Item 303(a)(4)(ii) of Regulation S-K promulgated under the Securities Act of 1933.

28

Financial Condition Outlook

We plan to continue to make expenditures to expand our manufacturing capacity, to support our activities in sales and marketing and research and development, and to support our working capital needs.

In the future, we may seek additional funds to support our strategic business needs and may seek to raise such additional funds through private or public sales of equity, debt or convertible securities, strategic relationships, bank debt, lease financing arrangements, or other available means. If additional funds are raised through the issuance of equity or equity-related securities, stockholders may experience additional dilution, or such equity securities may have rights, preferences, or privileges senior to those of the holders of our common stock. If adequate funds are not available or are not available on acceptable terms to meet our business needs, our business may be harmed.

29

ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The following consolidated financial statements and the related notes thereto, of Cepheid and the Reports of Independent Registered Public Accounting Firm, Ernst and Young LLP, are filed as a part of this Form 10-K.

	Page
Management’s Report on Internal Control Over Financial Reporting	31
Reports of Independent Registered Public Accounting Firm	32
Consolidated Balance Sheets	34
Consolidated Statements of Operations	35
Consolidated Statements of Shareholders’ Equity	36
Consolidated Statements of Cash Flows	37
Notes to Consolidated Financial Statements	38
Supplementary Data: Quarterly Financial Information	61

30

MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING

The Company’s management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rules 13a-15(f). Under the supervision and with the participation of management, including the principal executive officer and principal financial officer, management conducted an evaluation of the effectiveness of our internal control over financial reporting based on the criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Management’s assessment of and conclusion on the effectiveness of internal control over financial reporting did not include the internal controls of Cepheid UK, which was acquired on November 1, 2008 and at the date of acquisition was named Stretton Scientific Limited, which is included in the Company’s 2008 consolidated financial statements and constituted 1.2% and 1.5% of total and net assets, respectively, as of December 31, 2008 and 0.2% and 0.1% of revenue and net loss, respectively, for the year then ended.

Based on management’s evaluation under the framework in Internal Control — Integrated Framework, management has concluded that the Company’s internal control over financial reporting was effective as of December 31, 2008. Ernst & Young LLP, an independent registered public accounting firm, has audited the consolidated financial statements included in this Annual Report on Form 10-K and, as part of its audit, has issued an attestation report, included herein, on the effectiveness of the Company’s internal control over financial reporting.

February 26, 2009
/S/    JOHN L. BISHOP	/S/    ANDREW D. MILLER
John L. Bishop	Andrew D. Miller
Chief Executive Officer	Senior Vice President and Chief Financial Officer

31

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors and Shareholders

Cepheid

We have audited Cepheid’s internal control over financial reporting as of December 31, 2008 based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the “COSO criteria”). Cepheid’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Report on Management’s Assessment of Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.

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

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

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

As indicated in the accompanying Management’s Report on Internal Control over Financial Reporting, management’s assessment of and conclusion on the effectiveness of internal control over financial reporting did not include the internal controls of Cepheid UK, which was acquired on November 1, 2008 and at the date of acquisition was named Stretton Scientific Limited, which is included in the 2008 consolidated financial statements of Cepheid and constituted 1.2% and 1.5% of total and net assets, respectively, as of December 31, 2008 and 0.2% and 0.1% of revenue and net loss, respectively, for the year then ended. Our audit of internal control over financial reporting of Cepheid also did not include an evaluation of the internal control over financial reporting of Cepheid UK.

In our opinion, Cepheid maintained, in all material respects, effective internal control over financial reporting as of December 31, 2008, based on the COSO criteria.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Cepheid as of December 31, 2008 and 2007, and the related consolidated statements of operations, shareholders’ equity and cash flows for each of the three years in the period ended December 31, 2008 and our report dated February 25, 2009, except for Note 13, as to which the date is October 1, 2009 expressed an unqualified opinion thereon.

/s/    ERNST & YOUNG LLP

San Jose, California

February 25, 2009

32

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors and Shareholders

Cepheid

We have audited the accompanying consolidated balance sheets of Cepheid as of December 31, 2008 and 2007, and the related consolidated statements of operations, shareholders’ equity and cash flows for each of the three years in the period ended December 31, 2008. Our audits also included the financial statement schedule listed in the index at Item 15(b). These financial statements and schedule are the responsibility of Cepheid’s management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.

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

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Cepheid at December 31, 2008 and 2007, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2008, in conformity with U.S. generally accepted accounting principles. Also in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects, the information set forth therein.

As described in Note 13, “Restatement of Consolidated Financial Statements — Patent License Amortization”, Cepheid has restated previously issued financial statements as of December 31, 2008 and 2007 and for each of the three years in the period ended December 31, 2008 to correct its accounting for certain patents that were being amortized over incorrect lives.

As discussed in Note 1 to the consolidated financial statements, Cepheid changed its method of accounting for uncertain tax positions as of January 1, 2007.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of Cepheid’s internal control over financial reporting as of December 31, 2008, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 25, 2009 expressed an unqualified opinion thereon.

/s/    ERNST & YOUNG LLP

San Jose, California

February 25, 2009

except for Note 13, as to which the date is

October 1, 2009

33

CEPHEID

CONSOLIDATED BALANCE SHEETS

	December 31,
	2008			2007
	(In thousands, except share data)
	As Restated (1)
ASSETS
Current assets:
Cash and cash equivalents	$	23,478		$	16,476
Restricted cash		1,500			—
Marketable securities		—			27,550
Accounts receivable, less allowance for doubtful accounts of $20 and $37 as of December 31, 2008 and 2007, respectively		18,952			21,263
Inventory		33,498			23,821
Prepaid expenses and other current assets		4,636			2,565
Total current assets		82,064			91,675
Property and equipment, net		24,109			17,174
Investments		15,101			—
Put option		9,438			—
Other non-current assets		920			923
Intangible assets, net		33,791			38,162
Goodwill		18,556			14,844
Total assets	$	183,979		$	162,778
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	9,669		$	10,587
Accrued compensation		7,919			8,573
Accrued royalties		5,953			6,913
Accrued collaboration profit sharing		2,023			522
Accrued other liabilities		6,816			4,742
Income tax payable		—			213
Current portion of deferred revenue		2,834			4,016
Bank borrowing		14,639			—
Total current liabilities		49,853			35,566
Long-term portion of deferred revenue		1,753			2,054
Other liabilities		3,549			690
Total liabilities		55,155			38,310
Commitments and contingencies (Note 9)
Shareholders’ equity:
Preferred stock, no par value; 5,000,000 shares authorized, none issued or outstanding		—			—
Common stock, no par value; 100,000,000 shares authorized, 57,663,859 and 55,611,398 shares issued and outstanding at December 31, 2008 and 2007, respectively		266,991			254,807
Additional paid-in capital		41,619			26,697
Accumulated other comprehensive income (loss)		(23	)		340
Accumulated deficit		(179,763	)		(157,376	)
Total shareholders’ equity		128,824			124,468
Total liabilities and shareholders’ equity	$	183,979		$	162,778

(1) See Note 13, “Restatement of Consolidated Financial Statements” in Notes to Consolidated Financial Statements and Supplemental Data.

The accompany notes are an integral part of these consolidated financial statements.

34

CEPHEID

CONSOLIDATED STATEMENTS OF OPERATIONS

	Years Ended December 31,
	2008			2007			2006
	(In thousands, except per share data)
	As Restated (1)
Revenues:
System sales	$	51,766		$	47,739		$	22,737
Reagent and disposable sales		107,617			68,793			59,666
Total product sales		159,383			116,532			82,403
Other revenues		10,244			12,941			4,949
Total revenues		169,627			129,473			87,352
Costs and operating expenses:
Cost of product sales		89,714			69,851			49,519
Collaboration profit sharing		11,089			12,256			14,974
Research and development		43,310			31,449			23,886
In-process research and development		—			—			139
Sales and marketing		29,757			22,812			14,116
General and administrative		20,861			18,269			12,354
Gain from legal settlement		(1,454	)		—			—
Expense for patent related matter		—			—			3,350
Total costs and operating expenses		193,277			154,637			118,338
Loss from operations		(23,650	)		(25,164	)		(30,986	)
Other income (expense):
Interest and other income, net		1,225			2,731			4,402
Interest expense		(13	)		(22	)		(367	)
Foreign currency exchange gain (loss) and other		(860	)		568			247
Other income, net		352			3,277			4,282
Net loss before benefit (provision) for income taxes		(23,298	)		(21,887	)		(26,704	)
Benefit (provision) for income taxes		911			(213	)		—
Net loss	$	(22,387	)	$	(22,100	)	$	(26,704	)
Basic and diluted net loss per share	$	(0.39	)	$	(0.40	)	$	(0.51	)
Shares used in computing basic and diluted net loss per share		57,101			55,263			52,325

(1) See Note 13, “Restatement of Consolidated Financial Statements” in Notes to Consolidated Financial Statements and Supplemental Data.

The accompany notes are an integral part of these consolidated financial statements.

35

CEPHEID

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

	Common Stock
(In thousands)	Shares	Amount		Additional Paid-In Capital		Accumulated Other Comprehensive Income (Loss)			Accumulated Deficit			Total Shareholders’ Equity
									As Restated (1)			As Restated (1)
Balance at December 31, 2005 as previously reported	42,755	$	155,347	$	7,518	$	39		$	(107,501	)	$	55,403
Effect of restatement on periods prior to 2006										(1,071	)		(1,071	)
Balance at December 31, 2005 as restated	42,755	$	155,347		7,518		39			(108,572	)		54,332
Components of comprehensive loss:
Net loss	—		—		—		—			(26,704	)		(26,704	)
Foreign currency translation adjustment	—		—		—		(49	)		—			(49	)
Net unrealized gain on available-for-sale securities	—		—		—		5			—			5
Total comprehensive loss													(26,748	)
Issuance of common shares under a follow on offering (net of issuance costs of $6,312)	11,420		91,899		—		—			—			91,899
Issuance of shares of common stock under employee and director option plans	652		2,993		—		—			—			2,993
Stock-based compensation related to stock options and awards and employee stock purchase plan	—		—		7,547		—			—			7,547
Issuance of shares of common stock under employee stock purchase plan	123		893		—		—			—			893
Balance at December 31, 2006	54,950		251,132		15,065		(5	)		(135,276	)		130,916
Components of comprehensive loss:
Net loss	—		—		—		—			(22,100	)		(22,100	)
Foreign currency translation adjustment	—		—		—		345			—			345
Total comprehensive loss													(21,755	)
Issuance of shares of common stock under employee and director option plans	512		2,620		—		—			—			2,620
Stock-based compensation related to stock options and awards and employee stock purchase plan	—		—		11,632		—			—			11,632
Issuance of shares of common stock under employee stock purchase plan	149		1,055		—		—			—			1,055
Balance at December 31, 2007	55,611		254,807		26,697		340			(157,376	)		124,468
Components of comprehensive loss:
Net loss	—		—		—		—			(22,387	)		(22,387	)
Foreign currency translation adjustment	—		—		—		(363	)		—			(363	)
Total comprehensive loss													(22,750	)
Issuance of shares of common stock under employee and director option plans	1,772		9,849		—		—			—			9,849
Stock-based compensation related to stock options and awards and employee stock purchase plan	—		—		14,922		—			—			14,922
Issuance of shares of common stock under employee stock purchase plan	281		2,335		—		—			—			2,335
Balance at December 31, 2008	57,664	$	266,991	$	41,619	$	(23	)	$	(179,763	)	$	128,824

(1) See Note 13, “Restatement of Consolidated Financial Statements” in Notes to Consolidated Financial Statements and Supplemental Data.

The accompany notes are an integral part of these consolidated financial statements.

36

CEPHEID

CONSOLIDATED STATEMENTS OF CASH FLOWS

	Years Ended December 31,
	2008			2007			2006
	(In thousands)
	As Restated (1)
Cash flows from operating activities:
Net loss	$	(22,387	)	$	(22,100	)	$	(26,704	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization		7,632			5,506			4,824
Amortization of intangible assets		5,343			4,940			3,465
Amortization of imputed interest		—			—			222
In-process research and development		—			—			139
Amortization of prepaid compensation		252			302			105
Stock-based compensation related to employees and consulting services rendered		14,064			11,120			7,330
Write-off of patented technologies licenses		406			—			—
Unrealized loss on auction rate securities		9,899			—			—
Unrealized gain on put option		(9,438	)		—			—
Deferred rent		231			(110	)		63
Changes in operating assets and liabilities:
Accounts receivable		2,495			(4,555	)		(1,237	)
Inventory		(8,580	)		(11,279	)		(2,034	)
Prepaid expenses and other current assets		(2,520	)		(880	)		(439	)
Other non-current assets		(676	)		169			(284	)
Accounts payable and other current liabilities		811			2,313			555
Accrued expense for patent-related matter		—			(3,350	)		3,350
Accrued compensation		(663	)		3,967			86
Deferred revenue		(1,476	)		(748	)		(1,082	)
Net cash used in operating activities		(4,607	)		(14,705	)		(11,641	)
Cash flows from investing activities:
Capital expenditures		(14,936	)		(7,098	)		(5,917	)
Acquisition of leasehold improvements		327			—			—
Payments for technology licenses		(418	)		(4,945	)		(11,325	)
Cost of acquisitions, net of cash acquired		(1,884	)		(27,637	)		(1,037	)
Proceeds from the sale of fixed assets		125			23			—
Proceeds from maturities of marketable securities		2,550			55,000			47,850
Purchases of marketable securities		—			(4,800	)		(104,450	)
Transfer from (to) restricted cash		(983	)		—			—
Net cash provided by (used in) investing activities		(15,219	)		10,543			(74,879	)
Cash flows from financing activities:
Net proceeds from the sale of common shares and exercise of stock options and awards		12,183			3,675			95,785
Proceeds from bank borrowing		14,700			—			—
Principal payment of line of credit		—			—			(4,000	)
Principal payments under equipment financing		—			(316	)		(4,044	)
Principal payments of bank borrowing		(65	)		—			—
Principal payments of notes payable		—			(48	)		(63	)
Net cash provided by financing activities		26,818			3,311			87,678
Effect of exchange rate change on cash		10			141			(44	)
Net increase (decrease) in cash and cash equivalents		7,002			(710	)		1,114
Cash and cash equivalents at beginning of year		16,476			17,186			16,072
Cash and cash equivalents at end of year	$	23,478		$	16,476		$	17,186
Supplemental Cash Flow Information:
Cash paid for interest	$	11		$	22		$	367

(1) See Note 13, “Restatement of Consolidated Financial Statements” in Notes to Consolidated Financial Statements and Supplemental Data.

See accompanying notes.

37

CEPHEID

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2008

1. Organization and Summary of Significant Accounting Policies

Organization and Business

Cepheid (the “Company”) was incorporated in the State of California on March 4, 1996. The Company is a broad-based molecular diagnostics company that develops, manufactures, and markets fully-integrated systems for testing in the Clinical market, as well as for application in the Company’s legacy Biothreat and Industrial markets. The Company’s systems enable rapid, sophisticated molecular testing for organisms and genetic-based diseases by automating otherwise complex manual laboratory procedures.

Principles of Consolidation

The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries after elimination of intercompany transactions and balances. The assets and liabilities of the Company’s foreign subsidiaries are translated from their respective functional currencies into United States (“U.S.”) dollars at the rates in effect at the balance sheet date, and revenue and expense amounts are translated at weighted average rates during the period. Gains and losses realized from foreign currency transactions, those transactions denominated in currencies other than the foreign subsidiary’s functional currency are included in interest and other income, net.

Use of Estimates

The preparation of consolidated financial statements in conformity with U.S. generally accepted accounting principles (“GAAP”) requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ from these estimates.

Fair Value of Financial Instruments

In September 2006, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards No. 157 (“SFAS 157”), “Fair Value Measurements” (“SFAS 157”), which establishes guidelines for measuring fair value and expands disclosures regarding fair value measurements. SFAS 157 does not require any new fair value measurements but rather eliminates inconsistencies in guidance found in various prior accounting pronouncements and is effective for fiscal years beginning after November 15, 2007. In February 2008, the FASB issued FASB Staff Position No. FAS 157-2, “Effective Date of FASB Statement No. 157”, which provides a one year deferral of the effective date of SFAS 157 for non-financial assets and non-financial liabilities, except those that are recognized or disclosed in the financial statements at fair value at least annually, until fiscal years beginning after November 15, 2008, and interim periods within those fiscal years. Therefore, we adopted the provisions of SFAS 157 with respect to our financial assets and liabilities only. The partial adoption of SFAS 157 for financial assets and liabilities did not have a material impact on our consolidated financial position, results of operations, or cash flows. See Note 2 for information and related disclosures regarding our fair value measurements.

In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities — Including an Amendment of FASB Statement No. 115” (“SFAS 159”). The fair value option established by SFAS 159 permits all entities to choose to measure eligible items at fair value at specified election dates. A business entity will report unrealized gains and losses on items for which the fair value option has been elected in earnings (or another performance indicator if the business entity does not report earnings) at each subsequent reporting date. The fair value option: (a) may be applied instrument by instrument, with a few exceptions, such as investments otherwise accounted for by the equity method; (b) is irrevocable (unless a new election date occurs); and (c) is applied only to entire instruments and not to portions of instruments. We adopted SFAS 159 effective January 1, 2008. See Note 2 for information regarding our fair value measurements on financial assets. The adoption of SFAS 159 did not have a material impact on our financial condition, results of operations or cash flows since the Company did not elect to apply the fair value option for any of its eligible financial instruments or other items on the January 1, 2008 effective date.

Cash, Cash Equivalents, Marketable Securities and Investments

Cash and cash equivalents consist of cash on deposit with banks, money market instruments, commercial paper and debt securities with maturities from the date of purchase of 90 days or less. Interest income includes interest, dividends, amortization of purchase premiums and discounts and realized gains and losses on sales of securities.

38

The Company designates marketable securities as either trading or available-for-sale and records them at fair value. Realized and unrealized gains and losses on investments are determined on the specific identification method. If designated as a trading security, unrealized gains and losses are recorded to current period operating results. If designated as an available-for-sale security, unrealized holding gains or losses are reported as a component of accumulated other comprehensive income (loss). Marketable securities with maturities greater than 90 days and less than one year are classified as short-term; otherwise they are classified as long-term. When an investment is sold, we report the difference between the sales proceeds and its carrying value (determined based on specific identification) as a capital gain or loss. An impairment charge is recognized when the decline in the fair value of a security below the amortized cost basis is determined to be other-than-temporary. The Company considers various factors in determining whether to recognize an impairment charge, including the duration of time and the severity to which the fair value has been less than our amortized cost basis, any adverse changes in the investees’ financial condition and the Company’s intent and ability to hold the investment for a period of time sufficient to allow for any anticipated recovery in market value.

The following is a summary of the Company’s cash, cash equivalents and investments (in thousands):

	December 31,
	2008		2007
Cash and cash equivalents:
Cash	$	18,252	$	12,207
Money market funds		5,226		4,269
	$	23,478	$	16,476
Marketable securities:
Taxable auction rate securities	$	—	$	27,550
Investments:
Put option	$	9,438	$	—
Taxable auction rate securities		15,101		—
	$	24,539	$	—

Auction Rate Securities

At December 31, 2008, our investments consisted of a portfolio of auction rate securities with a cost basis of $25.0 million is classified as trading securities and recorded at fair value in accordance with SFAS No. 115, “Accounting for Certain Investments in Debt and Equity Securities.” See discussion below for the change in classification from available-for-sale to trading securities The historical cost basis of this portfolio has been reduced by net losses on these securities of $9.9 million, which has been charged to earnings in 2008. We valued these securities using a discounted cash flow methodology with significant inputs that included credit quality of the issuer, the percentage and the types of guarantees, contractual maturity, the timing and probability of the auction succeeding or security being called and discount factors. Our auction rate securities have failed to settle at auction since March 2008. We continue to collect interest on the investments that failed to settle at auction at the maximum contractual rate. At December 31, 2008, all but two of our auction rate securities continue to carry at least an AAA rating by at least one of the rating agencies with those two carrying an AA rating. Our auction rate securities consist of investments that are backed by pools of student loans, which are principally guaranteed by the Federal Family Educational Loan Program (“FFELP”), or insured.

On November 10, 2008, we accepted a comprehensive settlement arrangement offered by UBS, the fund manager with which we hold our auction rate securities. Under the settlement, we will have the option (“the put option”) to sell the auction rate securities held in our accounts with UBS to UBS at par value during the period beginning June 30, 2010 and ending July 2, 2012 (put option exercise period). In accepting the settlement arrangement, we also granted UBS the right to sell our auction rate securities at par at any time up until the expiration date of the rights and released UBS from any claims related to the marketing and sale of auction rate securities, other than claims for consequential damages. Since the settlement agreement is a legally enforceable firm commitment, the put option is recognized as a financial asset at fair value in our financial statements at December 31, 2008, and accounted for separately from the associated securities. The fair value of the put option is based on the difference in value between the par value and the fair value of the associated auction rate securities. We have elected to measure the put option at its fair value pursuant to SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities Including an amendment of FASB Statement No. 115” (SFAS 159), and subsequent changes in fair value will also be recognized in respective period financial results. Since we intend to exercise the put option during the put option exercise period, we do not have the intent to hold the associated auction rate securities until recovery or maturity. We have classified these securities as trading pursuant to SFAS No. 115, “Accounting for Certain Investments in Debt and

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Equity Securities” (SFAS 115), which requires changes in the fair value of these securities to be recorded in respective period financial results, which we believe will substantially offset changes in the fair value of the put option. In addition, the rights permitted us to establish a demand revolving credit line, payable on demand, in an amount equal to a specified percentage of fair value of the securities at a net no cost, meaning that the interest we pay on the credit line will not exceed the interest that we receive on the auction rate securities that we have pledged as security for the credit line. Additionally, under the terms of the settlement agreement, if UBS is able to sell our auction rate securities at par, proceeds would be utilized to first repay any outstanding balance under the demand revolving credit line. We are still able to sell the auction rate securities, but in such a circumstance, if we sold at less than par, we would not be entitled to recover the par value support from UBS.

In the fourth quarter of 2008, we recorded a charge to earnings of $9.9 million to reduce the value of our auction rate securities investments classified as trading securities, offset by a gain of $9.4 million on the put option.

Restricted Cash

Restricted cash consists of a $1.5 million certificate of deposit with a maturity less than 90 days held by a banking institution as collateral for our hedging program.

Inventory

Inventory is stated at the lower of standard cost (which approximates actual cost) or market, with cost determined on the first-in-first-out method. Accordingly, allocation of fixed production overheads to conversion costs is based on normal capacity of the production. Abnormal amounts of idle facility expense, freight, handling costs and spoilage are expensed as incurred and not included in overhead.

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

	December 31,
	2008		2007
Raw Materials	$	12,328	$	9,956
Work in Process		8,629		7,550
Finished Goods		12,541		6,315
	$	33,498	$	23,821

Property and Equipment

Property and equipment are stated at cost. Depreciation is calculated using the straight-line method, and the cost is amortized over the estimated useful lives of the assets, which range from 3 to 10 years. Leasehold improvements are amortized using the straight-line method over the estimated useful lives of the assets or the term of the lease, whichever is shorter.

Property and equipment consisted of the following (in thousands):

	December 31,
	2008			2007
Land	$	21		$	21
Building		2,049			1,312
Scientific equipment		16,668			11,897
Manufacturing equipment		15,797			11,768
Office furniture, computers and equipment		9,030			7,920
Leasehold improvements		10,487			7,461
		54,052			40,379
Less accumulated depreciation and amortization		(29,943	)		(23,205	)
	$	24,109		$	17,174

Intangible Assets and Goodwill

As of December 31, 2008, intangible assets consisted primarily of rights to certain patented technologies licensed from F. Hoffmann-La Roche Ltd. (“Roche”) and Applera Corporation (“Applera’), (see Note 5, “Patent License Agreements and Note 7, “Collaborative Agreements and Contracts”) and intangible assets acquired in the acquisition of Actigenics, Sangtec and Stretton (see Note 8, “Acquisitions”).

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Intangible assets related to licenses are recorded at cost, less accumulated amortization. Intangible assets related to technology and other intangible assets acquired in acquisitions are recorded at fair value at the date of acquisition, less accumulated amortization. Intangible assets are amortized over their estimated useful lives, ranging from 3 to 20 years, on a straight-line basis, except for intangible assets acquired in the acquisitions of Actigenics, Sangtec and Stretton, which are amortized on the basis of economic useful life. Amortization of intangible assets is included in the accompanying consolidated statements of operations.

The Company reviews its intangible assets for impairment under Statement of Financial Accounting Standards (“SFAS”) No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets”. The Company conducts the impairment review when events or circumstances indicate the carrying value of a long-lived asset may be impaired by estimating the future undiscounted cash flows to be derived from an asset to assess whether or not a potential impairment exists. If the carrying value exceeds the Company’s estimate of future undiscounted cash flows, an impairment value is calculated as the excess of the carrying value of the asset over the Company’s estimate of its fair market value. Events or circumstances which could trigger an impairment review include a significant adverse change in the business climate, an adverse action or assessment by a regulator, unanticipated competition, significant changes in the Company’s use of acquired assets, the Company’s overall business strategy, or significant negative industry or economic trends. In 2008 we recorded an impairment charge of $0.4 million. No impairment charge was recorded in 2007 and 2006.

The Company annually reviews its goodwill for impairment under SFAS No. 142, “Goodwill and Other Intangible Assets”. If the fair value of the Company exceeds its net book value including goodwill, then goodwill is not considered impaired. The initial step is to compare Company’s fair value as determined by its market capitalization to its net book value. If the market capitalization exceeds the net book value, goodwill is presumed to be unimpaired. Otherwise, the Company would estimate expected future cash flows of its business, which operates in a number of markets and geographical regions. The Company would then determine the carrying value of its business and compare its carrying value including goodwill and other intangibles to the discounted future cash flows. If the total of future cash flows is less than the carrying amount of the assets, the Company would recognize an impairment loss based on the excess of the carrying amount over the fair value of the assets. At December 31, 2008, the Company compared its market capitalization to its net book value and determined that goodwill was not impaired.

Warranty Reserve

The Company warrants its systems to be free from defects for a period of 12 to 15 months from the date of sale and its disposable products to be free from defects, when handled according to product specifications, for the stated life of such products. Accordingly, a provision for the estimated cost of warranty repair or replacement is recorded at the time revenue is recognized. The Company’s warranty provision is established using management’s estimate of future failure rates and of the future costs of repairing any system failures during the warranty period or replacing any disposable products with defects. The activities in the warranty provision for each of the three years ended December 31, 2008 consisted of the following (in thousands):

	2008			2007			2006
Balance at beginning of year	$	549		$	256		$	470
Costs incurred and charged against reserve		(210	)		(210	)		(451	)
Accrual related to current year product sales		819			546			651
Adjustment to pre-existing warranties		(503	)		(43	)		(414	)
Balance at end of year	$	655		$	549		$	256

Revenue Recognition

In accordance with Staff Accounting Bulletin (“SAB”) No. 104, “Revenue Recognition”, the Company recognizes revenue from product sales when there is persuasive evidence that an arrangement exists, delivery has occurred, the price is fixed or determinable and collectibility is reasonably assured. No right of return exists for the Company’s products except in the case of damaged goods. The Company has not experienced any significant returns of its products. Contract revenues include fees for technology licenses and research and development services, royalties under license and collaboration agreements. Contract revenue related to technology licenses is generally fully recognized only after the license period has commenced, the technology has been delivered and no further involvement of the Company is required. When the Company has continuing involvement related to a technology license, revenue is recognized over the license term. Royalties are typically based on licensees’ net sales of products that utilize the Company’s technology, and royalty revenues are recognized as earned in accordance with the contract terms when the royalties can be reliably measured and their collectibility is reasonably assured, such as upon the receipt of a royalty statement from the customer. Service revenue is recognized when the services have been provided. Shipping and handling costs are expensed as incurred and included in cost of product sales.

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The Company recognizes revenue from product sales and contract arrangements. From time to time, the Company enters into revenue arrangements with multiple deliverables. Multiple element revenue agreements are evaluated under Emerging Issues Task Force (“EITF”) Issue No. 00-21, “Revenue Arrangements with Multiple Deliverables” (“EITF 00-21”), to determine whether the delivered item has value to the customer on a stand-alone basis and whether objective and reliable evidence of the fair value of the undelivered item exists. Deliverables in an arrangement that do not meet the separation criteria in EITF 00-21 must be treated as one unit of accounting for purposes of revenue recognition. Advance payments received in excess of amounts earned, such as funds received in advance of products to be delivered or services to be performed, are classified as deferred revenue until earned.

Grants and government sponsored research revenue and contract revenue related to research and development services are recognized as the related services are performed based on the performance requirements of the relevant contract. Under such agreements, the Company is required to perform specific research and development activities and is compensated either based on the costs or costs plus a mark-up associated with each specific contract over the term of the agreement or when certain milestones are achieved and recoverability is reasonably assured.

Research and Development

Research and development expenses consist of costs incurred for company-sponsored and collaborative research and development activities. These costs include direct and research-related overhead expenses. The Company expenses research and development costs, including the expenses for research under collaborative agreements, as such costs are incurred.

Stock-Based Compensation

Effective January 1, 2006, the Company adopted the fair value recognition provisions of SFAS No. 123 (revised 2004), “Share-Based Payment” (“SFAS 123(R)”), using the modified prospective transition method. Under the modified prospective transition method, prior periods are not restated for the effect of SFAS 123(R). Commencing with the first quarter of 2006, compensation cost includes all share-based awards granted to employees and directors, including employee stock option awards, restricted stock and employee stock purchases made under our Employee Stock Purchase Plan (“ESPP”), options and awards issued prior to but not yet vested as of January 1, 2006, based on the grant date fair value estimated in accordance with the original provisions of SFAS No. 123, “Accounting for Stock-Based Compensation” (“SFAS 123”), and compensation for all share-based awards granted to employees and directors subsequent to January 1, 2006, based on the grant date fair value estimated in accordance with the provisions of SFAS 123(R). The Company recognizes the fair value of its stock option awards as compensation expense on a straight-line basis over the requisite service period of each award, which is generally four years. Stock-based compensation to other than employees was not impacted by the adoption of SFAS 123(R) and is determined in accordance with SFAS 123 and EITF Issue No. 96-18, “Accounting for Equity Instruments That Are Issued to Other than Employees for Acquiring, or in Conjunction with Selling, Goods, or Services”.

Determining Fair Value Under SFAS 123(R)

Valuation and amortization method — The Company estimates the fair value of share-based payments, other than restricted stock awards granted, using the Black-Scholes option-pricing formula and a single option award approach. The fair value of restricted stock awards is measured at the market price of non-restricted stock at the date of grant. This fair value is then amortized on a straight-line basis over the requisite service periods of the awards, which is generally the vesting period.

Expected Term — The expected term of the award represents the period that the Company’s stock-based awards are expected to be outstanding and was determined based on historical experience, giving consideration to the contractual terms of the stock-based awards, vesting schedules and expectations of future employee behavior as influenced by changes to the terms of its stock-based awards.

Expected Volatility — Volatility is a measure of the amounts by which a financial variable such as stock price has fluctuated (historical volatility) or is expected to fluctuate (expected volatility) during a period. The Company uses the historical volatility for the past 5 years to estimate expected volatility, which matches the expected term of the option grant.

Risk-Free Interest Rate — The Company bases the risk-free interest rate used in the Black-Scholes valuation method on the implied yield currently available on U.S. Treasury zero-coupon issues with a remaining term equivalent to the expected term of a stock award.

Estimated Forfeitures — When estimating forfeitures, the Company considers voluntary termination behavior as well as analysis of actual option forfeitures.

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The adoption of SFAS 123(R) also requires additional accounting related to income taxes. Due to the full valuation allowance provided on its net deferred tax assets, the Company has not recorded any tax benefit attributable to stock-based compensation expense.

Foreign Currency Hedging

The Company accounts for derivative instruments in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 133, “Accounting for Derivative Instruments and Hedging Activities”, SFAS No. 138, “Accounting for Certain Derivative Instruments and Certain Hedging Activities”, an amendment of SFAS No. 133 and SFAS No. 149, “Amendment of Statement 133 on Derivative Instruments and Hedging Activities”. SFAS No. 133, 138, and 149 require that all derivatives, including foreign exchange contracts, be recognized in the balance sheet in other assets or liabilities at their fair value. The Company utilizes forward contracts in order to reduce financial market risks. These instruments are used to hedge foreign currency exposures of underlying assets or liabilities. The Company’s accounting policies for these instruments are based on whether they meet the criteria for designation as hedging transactions. Changes in fair value of derivatives that are designated as cash flow hedges, are highly effective and qualify as hedging instruments, are recorded in other comprehensive income until the underlying hedged item is recognized in earnings. Any ineffective portion of a derivative’s change in fair value is immediately recognized in earnings. Changes in fair value of derivatives that do not qualify as hedging instruments are recorded in earnings. The fair value of foreign currency contracts is estimated based on the spot rate of the various hedged currencies as of the end of the period. As of December 31, 2008, we had two outstanding foreign exchange forward contracts that do not qualify for hedge accounting with approximately $0.1 million of pre-tax gain for the estimated gain on the outstanding foreign currency exchange forward contracts.

Comprehensive Income (Loss)

Comprehensive loss includes net loss as well as other comprehensive income or loss. The Company’s other comprehensive income or loss consists of foreign currency translation adjustments and unrealized gains and losses on available-for-sale securities. Total accumulated comprehensive income (loss) in the accompanying consolidated statements of shareholders’ equity at December 31, 2008 and 2007 consisted entirely of cumulative translation adjustments.

Net Loss Per Share

Basic net loss per share has been calculated based on the weighted average number of common shares outstanding during the period. Shares used in diluted net loss per share calculations exclude anti-dilutive common stock equivalent shares, consisting of stock options and restricted awards. These anti-dilutive common stock equivalent shares totaled 5,287,000, 8,905,000 and 7,402,000, at December 31, 2008, 2007 and 2006, respectively.

Income Taxes

In June 2006, the FASB issued Interpretation No. 48, “Accounting for Uncertainty in Income Taxes – an interpretation of FASB Statement No. 109” (“FIN 48”). FIN 48 clarifies the recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. FIN 48 also provides guidance on de-recognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. As a result of the implementation of FIN 48 on January 1, 2007, the Company recognized no material adjustment in the liability for unrecognized income tax benefits.

The Company recognizes interest and penalties related to uncertain tax positions in income tax expense. For the year ended December 31, 2008, the Company did not recognize any interest or penalties related to uncertain tax positions in the consolidated statements of operations, and at December 31, 2008, the Company had no accrued interest or penalties.

Recent Accounting Pronouncements

In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (“SFAS 157”). SFAS 157 defines fair value, establishes a framework for measuring fair value in GAAP, and expands disclosures about fair value measurements. SFAS 157 does not require any new fair value measurements, rather, it applies under existing accounting pronouncements that require or permit fair value measurements. SFAS 157 is effective for fiscal years beginning after November 15, 2007. In February 2008, the FASB issued FASB FSP 157-2 which delays the effective date of SFAS 157 for all nonfinancial assets and nonfinancial liabilities, except those that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually), until fiscal years beginning after November 15, 2008 and interim periods within those fiscal years. Effective January 1, 2008, the Company adopted SFAS 157 for financial assets and liabilities recognized at fair value on a recurring basis. The partial adoption of SFAS 157 for financial assets and

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liabilities did not have a material impact on our consolidated financial position, results of operations or cash flows. Effective January 2009, the Company will adopt SFAS 157 for all nonfinancial assets and nonfinancial liabilities. Since the adoption of SFAS 157 for nonfinancial assets and liabilities will be applied prospectively, there will not be a material impact on our consolidated financial position, results of operations or cash flows upon adoption.

In December 2007, the FASB issued SFAS No. 141(R), “Business Combinations”, and SFAS No. 160, “Accounting and Reporting of Non-Controlling Interest in Consolidated Financial Statements”, an Amendment of ARB No. 51. These new standards will significantly change the financial accounting and reporting of business combination transactions and non-controlling (or minority) interests in consolidated financial statements. We will be required to adopt SFAS No. 141(R) and SFAS No. 160 on or after December 15, 2008. The Company does not currently have any non-controlling interests in its subsidiaries, and accordingly the adoption of SFAS No. 160 is not expected to have a material impact on its financial statements. The Company will adopt SFAS 141(R) for business combinations occurring at or subsequent to January 1, 2009.

In March 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative instruments and Hedging Activities”. The new standard is intended to improve financial reporting about derivative instruments and hedging activities by requiring enhanced disclosures to enable better understanding of the effects on financial position, financial performance, and cash flows. The effective date is for fiscal years and interim periods beginning after November 15, 2008. We do not expect the adoption of this statement to have any impact on our consolidated financial statements.

In April 2008, the FASB issued FSP 142-3, “Determining the Useful Life of Intangible Assets” (“FSP 142-3”). FSP 142-3 amends the factors to be considered in determining the useful life of intangible assets. Its intent is to improve the consistency between the useful life of an intangible asset and the period of expected cash flows used to measure its fair value. FSP 142-3 is effective for fiscal years beginning after December 15, 2008. We are currently assessing the impact of FSP 142-3 on our consolidated financial statements.

In May 2008, FASB issued SFAS No. 162, “The Hierarchy of Generally Accepted Accounting Principles”. This statement identifies the sources of accounting principles and the framework for selecting the principles to be used in the preparation of financial statements of nongovernmental entities that are presented in conformity with GAAP (the GAAP hierarchy). This statement will not result in a change in current practice. This statement is effective 60 days following the Securities and Exchange Commission’s approval of the Public Company Accounting Oversight Board amendments to AU Section 411, “The Meaning of Present Fairly in Conformity With Generally Accepted Accounting Principles”. The adoption of this statement is not expected to have a material effect on our financial position, cash flows or results of operations.

In October 2008, the FASB issued FASB Staff Position No. FAS 157-3, “Determining the Fair Value of a Financial Asset When the Market For That Asset Is Not Active” (“FSP No. FAS 157-3”). FSP No. FAS 157-3 clarifies the application of SFAS No. 157 in a market that is not active. FSP No. FAS 157-3 became effective upon issuance, including prior periods for which financial statements have not been issued. The Company’s adoption of FSP No. FAS 157-3 did not have a material impact on our consolidated financial position or results of operations.

2. Fair Value

SFAS 157 defines fair value, establishes a framework for measuring fair value under GAAP and requires enhanced disclosures about fair value measurements. Fair value is defined under SFAS 157 as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value under SFAS 157 must maximize the use of observable inputs and minimize the use of unobservable inputs. The standard describes a fair value hierarchy based on three levels of inputs, of which the first two are considered observable and the third unobservable that may be used to measure fair value. The three levels of inputs are the following:

• Level 1 — Quoted prices in active markets for identical assets or liabilities.

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

• Level 3 — Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

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In accordance with SFAS 157, the following table represents the fair value hierarchy for our financial assets (cash equivalents, put option and investments) measured at fair value on a recurring basis as of December 31, 2008 (in thousands):

	Level 1		Level 2		Level 3		Total
Cash equivalents - money market funds	$	5,226	$	—	$	—	$	5,226
Put option		—		—		9,438		9,438
Investments - taxable auction rate securities		—		—		15,101		15,101
	$	5,226	$	—	$	24,539	$	29,765

Level 3 assets consist of auction rate securities whose underlying assets are student loans, most of which are guaranteed by the federal government and the put option. In February 2008, auctions began to fail for these securities, and each auction since then has failed. Based on the overall failure rate of these auctions, the frequency of the failures, and the underlying maturities of the securities, a portion of which are greater than 30 years, we have classified auction rate securities as long-term assets on our consolidated balance sheet as of December 31, 2008. These investments were recorded at fair value as of December 31, 2008. The following table provides a summary of changes in fair value of our significant unobservable inputs (Level 3) from January 1, 2008 to December 31, 2008 (in thousands):

	Level 1			Level 3
Balance at January 1, 2008	$	27,550		$	—
Net settlements		(2,550	)		—
Transfer		(25,000	)		25,000
Unrealized loss included in current period earnings		—			(9,899	)
Acquisition of put option		—			9,438
Balance at December 31, 2008	$	—		$	24,539

Our investment portfolio of auction rate securities is structured with short-term interest rate reset dates of generally less than 30 days, but with contractual maturities that are well in excess of ten years. Our auction rate securities consist of investments that are backed by pools of student loans, which are principally guaranteed by the Federal Family Educational Loan Program (“FFELP”), or insured. We believe that the credit quality of these securities is high based on these guarantees. We determined the fair market values of our financial instruments based on the fair value hierarchy established in SFAS 157, which requires an entity to maximize the use of observable inputs (Level 1 and Level 2 inputs) and minimize the use of unobservable inputs (Level 3 inputs) when measuring fair value. Until the first quarter of 2008, the fair values of our auction rate securities were determinable by reference to frequent successful Dutch auctions of such securities, which settled at par. Therefore, at the adoption date, we had categorized our investments in auction rate securities as Level 1. Given the current failures in the auction markets to provide quoted market prices of the securities, as well as the lack of any correlation of these instruments to other observable market data, we valued these securities using a discounted cash flow methodology with the most significant input categorized as Level 3. Significant inputs that went into the model were the credit quality of the issuer, the percentage and the types of guarantees, contractual maturity, the timing and probability of the auction succeeding or the security being called and discount factors.

On November 10, 2008, we accepted a comprehensive settlement arrangement offered by UBS, the fund manager with which we hold our auction rate securities. Under the settlement, we will have the option (“the put option”) to sell the auction rate securities held in our accounts with UBS to UBS at par value during the period beginning June 30, 2010 and ending July 2, 2012. In accepting the settlement arrangement, we also granted UBS the right to sell our auction rate securities at par at any time up until the expiration date of the rights and released UBS from any claims related to the marketing and sale of auction rate securities, other than claims for consequential damages. Since the settlement agreement is a legally enforceable firm commitment, the put option is recognized as a financial asset at fair value in our financial statements at December 31, 2008, and accounted for separately from the associated securities. The fair value of the put option is based on the difference in value between the par value and the fair value of the associated auction rate securities. We have elected to measure the put option at its fair value pursuant to SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities Including an amendment of FASB Statement No. 115” (SFAS 159), and subsequent changes in fair value will also be recognized in current period earnings. Since we intend to exercise the put option during the period beginning June 30, 2010 and ending July 2, 2012, we do not have the intent to hold the associated auction rate securities until recovery or maturity. We have classified these securities as trading pursuant to SFAS No. 115, “Accounting for Certain Investments in Debt and Equity Securities” (SFAS 115), which requires changes in the fair value of these securities to be recorded in current period earnings, which we believe will substantially offset changes in the fair value of the put option. In addition, the rights permitted us to establish a demand revolving credit line in an amount equal to the par value of the securities at a net no cost. We are still able to sell the auction rate securities on our own, but in such a circumstance, we would lose the par value support from UBS.

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In the fourth quarter of 2008, we recorded a charge to other income (expense) of $9.9 million to reduce the value of our auction rate securities investments classified as trading securities, offset by a gain of $9.4 million upon the initial recognition of the estimated fair value of the put option.

3. Intangible Assets

Intangible assets related to licenses are recorded at cost, less accumulated amortization. Intangible assets related to technology and other intangible assets acquired in acquisitions are recorded at fair value at the date of acquisition, less accumulated amortization. Intangible assets are amortized over their estimated useful lives, ranging from 3 to 20 years, on a straight-line basis, except for intangible assets acquired in the acquisitions of Actigenics, Sangtec and Stretton, which are amortized on the basis of economic useful life. Amortization of intangible assets is primarily included in cost of product sales in the accompanying consolidated statements of operations.

The recorded value and accumulated amortization of major classes of intangible assets were as follows (in thousands):

	Recorded Value		Accumulated Amortization		Net Book Value
			As Restated (1)		As Restated (1)
Balance, December 31, 2008
Licenses	$	40,710	$	16,597	$	24,113
Technology acquired in acquisitions		8,613		905		7,708
Other intangible assets acquired in acquisitions		3,130		1,160		1,970
	$	52,453	$	18,662	$	33,791
Balance, December 31, 2007
Licenses	$	40,885	$	12,626	$	28,259
Technology acquired in acquisitions		8,613		306		8,307
Other intangible assets acquired in acquisitions		2,170		574		1,596
	$	51,668	$	13,506	$	38,162
Balance, December 31, 2006
Licenses	$	36,388	$	8,527	$	27,861
Technology acquired in acquisitions		813		39		774
	$	37,201	$	8,566	$	28,635

(1) See Note 13, “Restatement of Consolidated Financial Statements” in Notes to Consolidated Financial Statements and Supplemental Data.

In 2008 we recorded an impairment charge of $0.4 million. No impairment charge was recorded in 2007 and 2006. Included in licenses was $19.9 million in connection with a patent license agreement with F. Hoffman-La Roche Ltd., effective July 1, 2004. The net book value of this license was $11.0 million, $13.0 million and $14.9 million at December 31, 2008, 2007 and 2006, respectively.

Amortization expense of intangible assets was $5.3 million, $4.9 million and $3.5 million for the years ended December 31, 2008, 2007 and 2006, respectively. The expected future annual amortization expense of intangible assets recorded on the Company’s consolidated balance sheet as of December 31, 2008 is as follows, assuming no impairment charges (in thousands):

For the Years Ending December 31,	Amortization Expense
	As Restated (1)
2009	$	6,548
2010		6,473
2011		6,375
2012		5,006
2013		4,297
Thereafter		5,092
Total expected future annual amortization	$	33,791

(1) See Note 13, “Restatement of Consolidated Financial Statements” in Notes to Consolidated Financial Statements and Supplemental Data.

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4. Segment and Significant Concentrations

The Company and its wholly owned subsidiaries operate in one business segment.

The Company currently sells its products through its direct sales force and through third-party distributors. For the years ended December 31, 2008, 2007 and 2006, there was one customer that accounted for 23%, 36% and 58% of total products sales, respectively. The Company has distribution agreements with several companies to distribute products in the U.S. and has several regional distribution arrangements throughout Europe, Japan, South Korea, China, Mexico and other parts of the world. The following table provides a breakdown of product sales by geographic region for the three years ended December 31, 2008, 2007 and 2006:

	Years Ended December 31,
	2008		2007		2006
Product Sales Geographic information:
North America	79	%	80	%	88	%
International	21	%	20	%	12	%
Total product sales	100	%	100	%	100	%

No single country outside of the United States represented more than 10% of the Company’s total revenues or total net assets in any period presented.

Concentration of Credit Risk

Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of bank deposits and accounts receivable. The Company maintains its portfolio of cash equivalents in short-term commercial paper, auction rate securities and money market funds. The fair value of the auction rate securities and put option under our investment portfolio are subject to UBS credit risk. The Company’s accounts receivable are derived primarily from sales to customers. The Company performs ongoing credit evaluations of its customers and limits the amount of credit extended when deemed necessary, but generally requires no collateral. In addition, the Company maintains an allowance for potential doubtful accounts.

There was one customer whose accounts receivable balance represented 14% of total receivables as of December 31, 2008 and 22% of total receivables as of December 31, 2007. The Company relies on several companies as its sole source for various materials used in its manufacturing process. Any extended interruption in the supply of these materials could result in the failure to meet customer demand.

5. Patent License Agreements

In April 2004, the Company entered into a patent license agreement with Applera, through its ABI and its Celera Diagnostics joint venture, for a non-exclusive worldwide license to make, use, and sell the Company’s products incorporating technology covered by Applera patents. The Company also entered into a patent license agreement with Roche, effective July 1, 2004, for a non-exclusive worldwide license to make, use, and sell the Company’s products incorporating technology covered by Roche patents. Under the license agreements, the Company agreed to pay aggregate license fees of $32.2 million, of which $23.5 million was paid in 2005 and $8.7 million was paid in 2006. In connection with the license agreements, the Company recorded intangible assets of $31.1 million, representing the present value of license fee obligations which is net of imputed interest of $1.1 million. The effective interest rate used to calculate the present value of the discounted payments was 4.0% for both the Roche and Applera licenses. In June 2006, the Applera patent license agreement was expanded to include additional Company products, for which the Company paid an additional $0.5 million. The intangible assets related to the Applera and Roche licenses are amortized on a straight-line basis over their useful lives of approximately 10 years, with the amortization recorded as part of the cost of product sales. The Company also paid approximately $1.2 million in back royalties related to the Applera license, which was expensed during the quarter ended March 31, 2004.

The Company also agreed to pay Applera and Roche ongoing royalties on sales of any products incorporating the licensed patents. Resulting product royalties are recorded as part of the cost of product sales when the related product sales are recognized.

In September 2005, the Company entered into a license agreement with Abaxis, Inc. (“Abaxis”), pursuant to which Abaxis granted the Company a non-exclusive, worldwide, royalty-bearing license to certain Abaxis patents relating to lyophilization technology in

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accordance with the provisions specified in the agreement. Under the agreement, the Company will be able to make, distribute and sell products for nucleic acid based amplification assays. In exchange for the license rights, the Company agreed to (i) make an upfront license payment of $0.5 million, (ii) pay royalties during the term of the agreement and (iii) pay a yearly license maintenance fee during the term of the agreement, which fee will be creditable against any royalties due during such calendar year.

In November 2005, Cepheid entered into a license agreement with DxS Limited (“DxS”), a private United Kingdom based company, pursuant to which DxS granted Cepheid a non-exclusive, worldwide, royalty-bearing license to the DxS Scorpions patents and other intellectual property rights relating to its Scorpions technology for the real-time PCR detection of nucleic acid amplification. This amends a December 2004 agreement, which provided for license rights to develop and commercialize license technology in the environmental, veterinarian, forensics identity relationship testing, and agricultural fields. Under the Agreement, and subject to certain limitations set forth therein, Cepheid will be able to use the licensed rights to develop and sell assay products incorporating the licensed technology in the human in vitro diagnostics field.

In September 2006, Cepheid entered into a sublicense agreement with Abbott Laboratories (“Abbott”), pursuant to which Abbott granted Cepheid a non-exclusive, world-wide, non-transferable right to Abbott’s exclusive license to certain patents from the Baylor College of Medicine. Under this sublicense agreement, the Company will be able to make, use, distribute and sell products incorporating the patented technology generally characterized as multiple genomic DNA amplification for deletion detection. In September 2006, Cepheid also entered into a license agreement with Abbott, pursuant to which Abbott granted Cepheid a non-exclusive, world-wide, non-transferable right to a certain Abbott patent. Under this license agreement, the Company will be able to make, use, distribute and sell products incorporating the patented technology generally characterized as detection of cervical chlamydia trachomatis infection. License payments for these agreements totaled $2.0 million. The intangible assets related to these sublicenses are amortized on a straight-line basis over their useful lives of approximately 7 and 9 years, respectively, with the amortization recorded as part of the cost of product sales.

In January 2007, Cepheid entered into a sublicense agreement with bioMerieux SA, pursuant to which bioMerieux SA granted Cepheid a non-exclusive, worldwide, irrevocable sublicense to certain patents that relate to the diagnosis of methicillin resistant staphylococcus aureus. The patents are owned by Kainos Laboratories Inc. and Professor Keiichi Hiramatsu and have been exclusively licensed to bioMerieux SA with the right for bioMerieux SA to sub-license. Under the sublicense agreement, and subject to certain limitations set forth therein, Cepheid is able to use the licensed rights to develop and sell products for use in connection with its GeneXpert and SmartCycler platforms. In exchange for such rights, Cepheid agreed to pay an initial license fee of approximately $4.0 million and quarterly royalties based on net product sales during the term of the sublicense agreement, which expires when the last of the patents licensed under the agreement expires. The license fee was paid in the first quarter of 2007 and is being amortized on a straight-line basis over the useful life of approximately 10 years, with the amortization recorded as part of the cost of product sales.

6. Collaboration Profit Sharing

Collaboration profit sharing represents the amount that the Company pays to ABI under our collaboration agreement to develop reagents for use in the Biohazard Detection System (“BDS”) developed for the United States Postal Service (“USPS”). Under the agreement, computed gross margin on anthrax cartridge sales are shared equally between the two parties. As of December 31, 2008 and 2007, the accrued profit sharing liability was $2.0 million and $0.5 million, respectively. Collaboration profit sharing expense was $11.1 million, $12.3 million and $15.0 million for the years ended December 31, 2008, 2007 and 2006. The total revenues and cost of sales related to these cartridge sales are included in the respective balances in the consolidated statement of operations.

7. Collaborative Agreements and Contracts

bioMerieux, Inc.

In December 2003, the Company entered into an agreement with bioMerieux, Inc. for bioMerieux to develop DNA testing products using its proprietary nucleic acid sequence-based amplification technology to be run on systems employing the Company’s GeneXpert systems. Under the agreement, bioMerieux has paid the Company a $10.0 million license fee, and an additional $5.0 million payment will become due when and if bioMerieux commercializes its first product based on our technology. The Company may also receive potential product purchases and royalty payments on end-user GeneXpert test cartridge sales under the agreement. The $10.0 million license fee received from bioMerieux was deferred and is being amortized over the period of approximately five years, which represents the estimated period of our continuing involvement under this agreement.

Infectio Diagnostic, Inc./GeneOhm Sciences, Inc.

In November 2003, the Company entered into a series of agreements with Infectio Diagnostics, Inc. (“IDI”). IDI merged with GeneOhm Sciences, Inc. in 2004. GeneOhm Sciences, Inc. was acquired by Becton, Dickson and Company (“BDC”) in February

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2006. Under these agreements, the Company received non-exclusive worldwide, excluding Canada, distribution rights to IDI tests for GBS, MRSA and VRE that have been configured for use with the SmartCycler system. The distribution rights relating to tests for MRSA were terminated in November 2006, and the distribution rights relating to GBS terminated in April 2007. In the event that BDC introduces a VRE product for the SmartCycler system, our distribution rights relating to VRE tests will terminate two years from the date of such introduction. IDI received non-exclusive worldwide rights to distribute the Company’s SmartCycler system for use with IDI tests. Such IDI distribution rights, now owned by BDC, had an initial term that expired in November 2008.

ABI and Northrop Grumman Corporation

In October 2002, the Company entered into a collaboration agreement with ABI to develop reagents for use in the USPS BDS program, which was developed by the consortium led by Northrop Grumman Corporation. Under the agreement, reagents will be manufactured by ABI for packaging by the Company into its GeneXpert test cartridges and sold by the Company for use in the BDS. This agreement calls for the computed gross margin on sales of anthrax cartridges for the USPS BDS program to be equally shared between the two parties.

In August 2007, the Company entered into a five-year master purchase order with Northrop Grumman for the purchase of up to $200 million in anthrax test cartridges and associated materials. The agreement covers the USPS fiscal years of 2007 through 2011. Under the terms of the agreement, the purchase quantity of anthrax tests will be determined on an annual basis, based on the USPS fiscal year of October 1 through September 30. We have received notice that expected test purchases for fiscal 2009 will be approximately one million cartridges.

Lawrence Livermore National Laboratory

The Company has a worldwide exclusive license with Lawrence Livermore National Laboratory (“LLNL”) to use or sublicense certain patent rights and to make, have made, import, and use certain licensed products relating to the patent rights for the use of rapid thermal cycling technology with real time optical detection for nucleic acid amplification. The Company paid LLNL an issuance fee for this technology in 1997. In addition, for any product containing the licensed technology, the Company is required to pay royalties to LLNL based on net sales.

Foundation for Innovative New Diagnostics

In May 2006, Cepheid entered into an agreement with the Foundation for Innovative New Diagnostics (“FIND”) to develop a simple, rapid test that can detect mycobactrium tuberculosis and associated rifampin resistance from human sputum samples. Under the agreement, Cepheid is responsible for the development of a 6-color GeneXpert system to accomplish such test and the development of an enhanced manufacturing line for the manufacture of test cartridges used in the test. FIND will reimburse Cepheid at agreed upon amounts. The term of the development portion of the agreement was 30 months, which was subsequently extended an additional five months. The supply term of the agreement is for twelve years, unless terminated by either party in accordance with relevant provisions of the agreement.

bioMerieux SA

In January 2007, the Company entered into a collaboration agreement with bioMerieux SA for the development, production and marketing of a line of sepsis products, based upon the Company’s real-time polymerase chain reaction (“PCR”) technologies. Both companies will jointly develop the products, with the initial development program relating to sepsis products for bacterial and fungal identification assays, as well a series of genetic markers for antibiotic resistance. Cepheid will exclusively manufacture these Cepheid products. bioMerieux SA will market and distribute these test products on an exclusive worldwide basis. Each party will bear its own costs of joint development. Cepheid will sell the products to bioMerieux SA at an agreed upon price. The term of the collaboration agreement is 15 years following the latest date that a sepsis product or HAP product is successfully launched and may be terminated earlier under certain circumstances.

8. Acquisitions

Stretton

In November 2008, the Company purchased 100% of the stock of Stretton Scientific Limited (“Stretton”), a United Kingdom privately held distributor of scientific diagnostic, measuring and monitoring equipment based in Stretton, United Kingdom. The acquisition is expected to augment the Company’s newly established UK-based direct sales team as Stretton has relationships with a broad group of medical customers including the National Health Service, medical universities and commercial customers.

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The results of operations of Stretton and the estimated fair market values of the acquired assets and liabilities have been included in the Consolidated Financial Statements since the date of acquisition. Pro forma consolidated statements of operations for this acquisition are not shown, as they would not differ materially from reported results. The acquired finite-lived intangible assets are being amortized over the estimated useful life in proportion to the economic benefits consumed, which for some intangible assets are approximated by using the straight-line method.

Purchase Price Allocation

The acquisition was accounted for as a purchase transaction in accordance with SFAS No. 141, “Business Combinations”; accordingly, the tangible and intangible assets acquired and liabilities assumed were recorded at their estimated fair value at the date of the acquisition. The aggregate purchase price of the acquisition was approximately $2.3 million, including $2.2 million cash (net of $0.1 million cash acquired) and $0.1 million of direct acquisition costs. The purchase agreement provides for cash holdbacks from the purchase price of $0.3 million and $0.2 million to be paid one and two years, respectively, from the acquisition date as security for the seller’s indemnification of obligations. The purchase did not include any in-process research and development intangible assets, technology assets or patent assets.

The following table summarizes the allocation of the purchase price based on the estimated fair values of the assets acquired and liabilities assumed at the date of acquisition (in thousands).

Current assets	$	558
Property, plant and equipment		103
Intangible assets - customer relationships, trade name, and non-compete agreements		960
Current liabilities		(376	)
Goodwill		1,042
Total consideration	$	2,287

Purchased Intangible Assets

The following table presents details of the purchased finite-lived intangible assets acquired in the Stretton acquisition (in thousands):

	Fair Value (in thousands)		Useful Life (in years)
Customer relationships	$	860	7
Trade name		30	1
Non-compete agreements		70	3
	$	960

The following tables present details of our total purchased finite-lived intangible assets as of December 31, 2008 (in thousands):

	Gross		Accumulated Amortization			Net
Customer relationships	$	860	$	(38	)	$	822
Trade name		30		(3	)		27
Non-compete agreements		70		(2	)		68
Total	$	960	$	(43	)	$	917

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The estimated future amortization expense of purchased finite-lived intangible assets as of December 31, 2008 is as follows (in thousands):

Year ending December 31,	Amount
2009	$	245
2010		196
2011		143
2012		101
2013		68
Thereafter		164
Total	$	917

In performing the purchase price allocation, the Company considered, among other factors, its intention for future use of the acquired assets, analyses of historical financial performance and estimates of future performance of Stretton’s sales team. The fair value of intangible assets was based in part on a valuation completed by a third-party valuation firm using discounted cash flow and income approaches and other valuation techniques, as well as estimates and assumptions provided by the Company.

Sangtec

On February 14, 2007, Cepheid completed the purchase of 100% of the outstanding stock of Sangtec, a company located in Bromma, Sweden. Sangtec was a broad-based PCR molecular diagnostics company that developed and manufactured products for standardized nucleic acid testing of infectious diseases. The acquisition brought Cepheid a line of products for potential use in managing infections of immuno-compromised patients, a reagent manufacturing base in Europe and a research and development operation to develop and expand its clinical test products.

The acquisition was accounted for as a purchase transaction in accordance with SFAS No. 141, “Business Combinations”, and accordingly, the tangible and intangible assets acquired and liabilities assumed were recorded at their estimated fair value at the date of the acquisition. The aggregate purchase price of the acquisition was approximately $30.2 million, including $29.4 million cash (net of $0.6 million cash acquired) and $0.8 million direct acquisition costs, including an increase in goodwill of $2.7 million and long-term liabilities by the same amount during the third quarter of 2008 associated with the establishment of a deferred tax liability. The following table summarizes the preliminary allocation of the purchase price based on the estimated fair values of the assets acquired and liabilities assumed at the date of acquisition (in thousands):

Current assets	$	3,571
Property, plant and equipment		1,337
Intangible assets		9,970
Current liabilities		(2,197	)
Goodwill		17,514
Total consideration	$	30,195

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In performing the purchase price allocation, the Company considered, among other factors, its intention for future use of the acquired assets, analyses of historical financial performance and estimates of future performance of Sangtec’s products. The fair value of intangible assets was based in part on a valuation completed by a third-party valuation firm using a discounted cash flow and income approaches and other valuation techniques, as well as estimates and assumptions provided by he Company. The acquired intangible assets consisted of the following:

	Fair Value (in thousands)		Useful Life (in years)
Existing technology	$	7,800	9
Contract manufacturing agreement		1,700	5
Distributor relationships		400	9
Trademark		70	3
	$	9,970

Existing technology is comprised of a proprietary diagnostic product line, affigene, The affigene product is a CE-labeled, standardized assay designed to provide diagnostic guidance in the infectious disease and oncology fields. Existing technology also includes a combination of processes and patents related to the design and development of Sangtec’s products. The contract manufacturing agreement relates to the revenue generated from two contracts which expire in 2010 and 2011 and have minimum commitments.

The amortization expense related to the existing technology and contract manufacturing was recorded as cost of product sales, and the amortization expense related to distributor relationships and trademark was recorded as selling, general and administrative expense. Total amortization expense recorded for the years ended December 31, 2008 and 2007 was $1.0 and $0.7 million respectively.

The following table provides pro forma financial information assuming the acquisition of Sangtec had occurred at the beginning of each period presented (in thousands, except per share data):

	Years Ended December 31,
	2007			2006
	As Restated (1)			As Restated (1)
Total revenues	$	130,671		$	95,829
Net loss		(22,703	)		(29,756	)
Basic and diluted net loss per share		(0.41	)		(0.57	)

(1) See Note 13, “Restatement of Consolidated Financial Statements” in Notes to Consolidated Financial Statements and Supplemental Data.

Actigenics

In August 2006, the Company purchased 100% of the stock of Actigenics, a French micro RNA research and services company. The acquisition gave Cepheid direct access to micro RNA markers used in diagnostic and therapeutic products and the related discovery, validation and development processes. Cepheid paid $1.2 million in cash. In addition, Cepheid assumed approximately $0.7 million of liabilities, and acquired $0.2 million of tangible assets.

Of the $1.2 million paid, $0.7 million represented deferred prepaid compensation expense to be recognized over a service period of three years from the August 2006 acquisition date. This deferred compensation expense is being amortized on a straight line basis.

The acquisition was accounted for as a purchase transaction in accordance with SFAS 141, and accordingly, the tangible and intangible assets acquired and liabilities assumed were recorded at their estimated fair value at the date of the acquisition. The results of Actigenics operations have been included in the Company’s consolidated results of operations from the acquisition date. Pro forma results of operations have not been presented because the effect of the acquisition was not material.

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The purchase price was allocated as follows (in thousands):

Deferred compensation expense	$	730
Marker technology		591
Discovery and validation technology		197
In-process research and development		139
Liabilities assumed, net of assets acquired		(505	)
Total allocation of purchase price	$	1,152

The marker technology and discovery and validation technology will be amortized on a straight-line basis over ten and six year periods, respectively. Immediately subsequent to the acquisition date, in accordance with FASB Interpretation No. 4, “Applicability of FASB Statement No. 2 to Business Combinations Accounted for by the Purchase Method — an interpretation of FASB Statement No. 2”, $0.1 million of in-process research and development intangible assets with no alternative future use was written off.

9. Commitments, Contingencies and Legal Matters

Facility Leases

The Company leases its Sunnyvale, California headquarters under several operating leases. The primary lease expires in March 2012 and provides for a three percent annual base rent increase. In April 2007, the Company entered into a sublease of additional office and manufacturing space that expires in September 2009. In December 2005, the Company also entered into a lease for additional warehouse space that expires in September 2010. In May 2005, the Company entered into a facility lease for a research and development center in Bothell, Washington that expires in August 2011. In Bromma, Sweden, the Company leases office and manufacturing space pursuant to a lease that expires in December 2009. Minimum annual rental commitments under facility operating leases at December 31, 2008 are as follows (in thousands):

Years Ending December 31,
2009	$	3,612
2010		2,772
2111		2,654
2112		839
2113		31
Total minimum payments	$	9,908

Rent expense for the years ended December 31, 2008, 2007 and 2006 was $3.4 million, $2.6 million and $1.9 million, respectively.

Contingencies

The Company responds to claims arising in the ordinary course of business. In certain cases, management has accrued estimates of the amounts it expects to pay upon resolution of such matters, and such amounts are included in other accrued liabilities. Should the Company not be able to secure the terms it expects, these estimates may change and will be recognized in the period in which they are identified. Although the ultimate outcome of such claims is not presently determinable, management believes that the resolution of these matters will not have a material adverse effect on the Company’s financial position, results of operations and cash flows.

Legal Matters

A complaint filed on December 22, 2005, in the United States District Court for the District of Utah by Idaho Technology, Inc. (“Idaho Technology”) and University of Utah Research Foundation was served on the Company in March 2006. The complaint alleged that the Company infringed certain patents licensed by the University of Utah Research Foundation to Idaho Technology.

On January 2, 2007, the Company entered into a Settlement and Cross-License Agreement (the “Settlement Agreement”) with Idaho Technology regarding certain Company and Idaho Technology intellectual property (the “Intellectual Property”). The Settlement Agreement provided that the parties dismiss with prejudice litigation related to the Intellectual Property. In addition, the Settlement Agreement provides each of the parties with a non-exclusive, worldwide, fully paid, non-terminable, irrevocable license to certain of the other’s patents for use in their respective lines of products and contains certain covenants by each of the parties not to sue the other. Pursuant to the Settlement Agreement, the Company made a payment of $3.35 million to Idaho Technology in January 2007. As of December 31, 2006, the settlement amount was accrued and recorded as an expense in the consolidated statement of

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operations. Although the Company believed it would not be held liable for infringement had the issue ultimately gone to litigation, it came to the conclusion to settle the litigation. The Company made the Settlement Agreement and payment to avoid incurring significant legal costs to defend its case. The Company’s belief that it did not infringe Idaho Technology’s patents was based on the Company’s detailed legal analysis that the patents referenced in the litigation were either not being infringed and/or that the patents referenced were potentially invalid, due to prior art not specified or referenced in the patents. Due to the fact that the Company did not believe there to be any validity to the patent infringement case, it did not ascribe any value to future product sales and recorded the whole amount as a fiscal 2006 expense.

On December 25, 2008 we entered into a Settlement Agreement and Mutual Release (“Roche Settlement Agreement”) with Roche Molecular Systems, Inc. (“RMS”) regarding the cancellation by RMS of outstanding purchase orders as well as future purchasing requirements under a previously negotiated supply agreement with us. Pursuant to the agreement, RMS agreed to pay us $2.1 million as full and complete consideration for all cancelled orders and failure to meet purchasing requirements under the supply agreement. Approximately $0.7 million of the consideration was applied against certain inventory purchases that we had made in anticipation of building product to ship to Roche. The remaining $1.4 million was recorded as a gain. We received the payment in January 2009.

10. Shareholders’ Equity

Common Stock

On March 13, 2006, the Company completed an underwritten public offering of 10,000,000 shares of common stock at a price of $8.60 per share and received proceeds of approximately $80.6 million, net of $5.4 million expenses. On April 5, 2006, the underwriters exercised their over allotment option and purchased an additional 1,419,910 shares of common stock at a price of $8.60 per share, and the Company received additional proceeds of $11.3 million, net of $0.9 million expenses.

Stock Option Plans

On April 27, 2006, the Company’s shareholders approved the 2006 Equity Incentive Plan (“2006 Plan”), which was approved by the Board in February 2006. On April 27, 2006, the Board also terminated the Company’s 1997 Stock Option Plan (“1997 Plan”). No new grants will be made under the 1997 Plan, and options granted or shares issued under the 1997 Plan that were outstanding on the date the 1997 Plan was terminated will remain subject to the terms of the 1997 Plan. Shares of common stock reserved for issuance under the 2006 Plan include (i) an initial authorization of 3,800,000 shares of common stock, (ii) shares reserved but unissued under the 1997 Plan as of the date the 1997 Plan was terminated and (iii) shares subject to awards granted under the 1997 Plan that are cancelled, forfeited or repurchased by the Company or expire after the 1997 Plan termination. On April 24, 2008, shareholders approved the increased the number of shares of common stock reserved for issuance under the 2006 Plan by 1,800,000.

Under the 2006 Plan, the Company may grant incentive stock options (“ISOs”) and non-qualified stock options (“NQSOs”), restricted stock awards (“RSAs”), stock bonus awards (“SBAs”), stock appreciation rights (“SARs”), restricted stock units (“RSUs”) and performance share awards (“PSAs”). ISOs may be granted only to employees and directors of the Board, and all other awards may be granted to Company employees and directors and to consultants, independent contractors and advisors of the Company for services rendered. Any award, other than a stock option or a SAR, shall reduce the number of shares available for issuance by 1.75 shares for each share subject to such award (for a stock option or a SAR this ratio shall remain 1:1). The 2006 Plan is administered by the Compensation Committee of the Board (“Committee”). The following provides a general description of each type of award under the 2006 Plan. As of December 31, 2008, we had 1,381,917 shares of our common stock reserved for future issuance under the 2006 Plan. Shares issued in connection with awards made under the 2007 Plan are generally issued as new stock issuances.

Stock options may be granted at no less than the fair market value per share of common stock on the date of the grant (at 110% of fair market value for ISOs granted to 10% shareholders), expire not later than 7 years from the date of grant (5 years from the date of grant for ISOs granted to 10% shareholders) and generally vest 25% one year after the date of grant and then on a pro rata basis over the following 36 months.

RSAs may be granted at a purchase price that is less than fair market value on the date of grant, and the restrictions are determined by the Committee and may be based on years of service with the Company or completion of performance goals during a period. The Committee will determine the extent that the RSA is earned prior to the payment for the shares awarded.

SBAs may be granted for past or future services and may contain restrictions based on years of service with the Company or completion of performance goals during a period. No payment will be required for shares awarded under an SBA. Payments to recipients of an SBA may be in the form of cash, shares of common stock, or a combination thereof, based on the fair market value of shares earned under the SBA. The Committee will determine the number of shares to be awarded under the SBA and the extent that the SBA is earned prior to the payment for the shares awarded.

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SARs are awards for past or future services that may be settled in cash or shares of common stock, including restricted stock, having a value equal to the number of shares subject to the SAR multiplied by the difference between the fair market value on the date of grant and the exercise price. The Committee determines the terms of each SAR, including the number of shares of common stock subject to the SAR, the exercise price and the times during which the SAR may be settled, consideration to be made on settlement, and effect of the participant’s termination. If SARs are awarded based on performance goals, the Committee will determine the extent that the SAR is earned. SARs may be granted at an exercise price that may be less than fair market value per share of common stock on the date of grant, may be exercisable at one time or from time to time, and have a term not to exceed seven years.

RSUs are awards for past or future services that may be settled in cash or shares of common stock, including restricted stock. The Committee determines the terms of each RSU, including the number of shares of common stock subject to the RSU, the times during which the RSU may be settled, consideration to be made on settlement, and effect of the participant’s termination. If RSUs are awarded based on performance goals, the Committee will determine the extent that the RSU is earned. The number of shares subject to the RSU may be fixed or may vary depending on in accordance with performance goals as determined by the Committee. While the RSU shall be paid currently, under certain circumstances the Committee may permit the participant to defer settlement of the RSU.

PSAs are awards denominated in shares of common stock that may be settled in cash or issuance of such shares (which may consist of restricted stock). The Committee will determine the terms of each PSA, including the number of shares of common stock subject to the PSA, the performance factors and period that shall determine the time and extent to which each PSA shall be settled, consideration to be made on settlement, and effect of the participant’s termination. The Committee will determine the extent that the PSA is earned. The number of shares subject to the PSA may be fixed or may vary in accordance with performance goals as determined by the Committee.

A summary of option activity under all plans is as follows:

	Shares		Weighted Average Exercise Price		Weighted Average Remaining Contractual Term	Aggregate Intrinsic Value
Outstanding, December 31, 2005	6,643,899		$	6.53
Granted	2,127,575		$	8.68
Exercised	(641,920	)	$	4.59
Forfeited	(737,548	)	$	8.62
Outstanding, December 31, 2006	7,392,006		$	6.53
Granted	2,091,867		$	12.36
Exercised	(410,644	)	$	6.38
Forfeited	(168,567	)	$	9.66
Outstanding, December 31, 2007	8,904,662		$	8.48
Granted	2,108,875		$	20.94
Exercised	(1,749,590	)	$	5.63
Forfeited	(257,661	)	$	16.47
Outstanding, December 31, 2008	9,006,286		$	11.72	5.31	$	14,523,458
Exercisable, December 31, 2008	4,993,738		$	8.22	4.91	$	12,861,376
Vested and expected to vest, December 31, 2008	8,256,029		$	11.42	5.27	$	14,125,091

The aggregate intrinsic value in the table above represents the total pretax intrinsic value (i.e., the difference between our closing stock price of $10.38 on the last trading day of 2008 and the exercise price, times the number of shares for options where the exercise price is below the closing stock price) that would have been received by the option holders had all option holders exercised their options on that date. This amount changes based on the fair market value of our stock. The total intrinsic value of options actually exercised was $37.0 million, $4.6 million, and $2.7 million for the years ended December 31, 2008, 2007, and 2006, respectively.

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The following table summarizes information about options outstanding and exercisable at December 31, 2008:

	Options Outstanding			Options Exercisable
Exercise Price	Number of Shares (in 000s)	Weighted Average Exercise Price		Number of Shares (in 000s)	Weighted Average Exercise Price
$1.50 to $4.33	1,015	$	3.41	1,015	$	3.41
$4.75 to $7.38	925	$	7.11	836	$	7.08
$7.39 to $8.88	1,190	$	8.49	790	$	8.50
$8.93 to $9.11	1,065	$	9.07	681	$	9.06
$9.13 to $10.74	921	$	9.60	788	$	9.63
$10.79 to $11.85	361	$	11.26	277	$	11.23
$11.86 to $11.94	1,078	$	11.94	434	$	11.94
$11.95 to $19.66	457	$	15.27	130	$	15.02
$19.85 to $19.85	1,219	$	19.85	—	$	—
$20.01 to $32.05	775	$	24.25	43	$	22.03
	9,006	$	11.72	4,994	$	8.22

A summary of all award activity, which consists of RSAs, is as follows:

	Shares		Weighted Average Grant Date Fair Value
Outstanding, December 31, 2005	—		$	—
Granted	20,000		$	8.00
Vested	—		$	—
Outstanding, December 31, 2006	20,000		$	8.00
Granted	96,000		$	14.73
Vested	(25,250	)	$	13.64
Outstanding, December 31, 2007	90,750		$	13.55
Granted	27,000		$	24.76
Vested	(41,499	)	$	14.80
Cancelled	(10,334	)	$	21.73
Outstanding, December 31, 2008	65,917		$	16.07

In accordance with the 2006 Plan, RSAs granted in 2008 and 2007 reduced the number of shares available for future grant by a factor of 1.75 in 2008 and 1.6 in 2007 for each share subject to such award, or 47,250 and 153,600 shares, respectively.

Employee Stock Purchase Plan

The 2000 Employee Stock Purchase Plan (“ESPP”) was adopted in April 2000 and amended in June 2003. The ESPP permits eligible employees of the Company and its participating subsidiaries to purchase common stock at a discount up to a maximum of 15% of compensation through payroll deductions during defined offering periods. The price at which stock is purchased under the ESPP is equal to 85% of the fair market value of the common stock on the first or last day of the offering period, whichever is lower. The number of shares available for future issuance increase annually equal to the lesser of 200,000 shares, 0.75% of the outstanding shares on the date of the annual increase or a lesser amount determined by the Board.

56

Non-Employee Director Stock Options

Under the 2006 Plan, non-employee directors will automatically be granted NQSOs to purchase 25,000 shares of common stock upon initial election or appointment to the Board, which vest and become exercisable in equal amounts on each of three annual anniversary dates of the grant date as long as the director remains on the Board. On the date of the first Board meeting following each annual shareholder meeting each non-employee director then in office for longer than six months will automatically be granted NQSOs to purchase 12,500 shares of common stock, which vest and become exercisable on the one-year anniversary from the grant date as long as the director remains on the Board. The Board may also make discretionary grants to purchase common stock to any non-employee director that vest and become exercisable as determined by the Board. On April 27, 2006, the Board granted an option under the 2006 Plan to purchase 10,000 shares of common stock at $9.18 per share to a non-employee director who became a member of the Board in February 2006. Such option vests and becomes exercisable in equal amounts on each of three annual anniversary dates of the grant date as long as the director remains on the Board. The exercise price of non-employee director options will be equal to the fair market value of the common stock on the date of the grant.

Reserved Shares

As of December 31, 2008, the Company has reserved shares of common stock for future issuance as follows (in thousands):

Stock Options:
Options and awards outstanding for all plans	9,006
Reserved for future grants	1,382
ESPP	274
	10,662

Stock-Based Compensation

Fair Value — The fair value of the Company’s stock options granted to employees and shares purchased by employees under the ESPP for the years ended December 31, 2008 and 2007 was estimated using the following assumptions:

	Years Ended December 31,
	2008			2007			2006
OPTION SHARES:
Expected Term (in years)		4.46			5.00			5.00
Volatility		0.60			0.56			0.96
Expected Dividends		0.00	%		0.00	%		0.00	%
Risk Free Interest Rates		2.38	%		4.49	%		4.87	%
Estimated Forfeitures		7.74	%		10.60	%		13.45	%
Weighted Average Fair Value	$	6.44		$	6.76		$	6.65
ESPP SHARES:
Expected Term (in years)		1.25			1.25			1.25
Volatility		0.70			0.47			0.49
Expected Dividends		0.00	%		0.00	%		0.00	%
Risk Free Interest Rates		2.26	%		4.95	%		5.01	%
Estimated Forfeitures		7.74	%		10.60	%		13.45	%
Weighted Average Fair Value	$	7.60		$	3.94		$	3.42

57

Stock-Based Compensation Cost — Prior to the adoption of SFAS 123(R), the Company recorded stock-based compensation in accordance with APB 25 when the option price was less than the fair market value. As of December 31, 2003, all deferred compensation previously recognized had been amortized to expense. The following table is a summary of the major categories of stock compensation expense recognized in accordance with SFAS 123(R) for the years ended December 31, 2008 and 2007 (in thousands).

	Years Ended December 31,
	2008		2007		2006
Cost of product sales	$	1,016	$	794	$	584
Research and development		5,407		4,294		2,839
Sales and marketing		3,456		2,221		1,444
General and administrative		4,185		3,811		2,463
Total stock-based compensation cost	$	14,064	$	11,120	$	7,330

The impact on 2008, 2007, and 2006 basic and diluted net loss per share resulting from the adoption of SFAS 123(R) was $0.25, $0.20, and $0.14 respectively.

The above stock-based compensation cost includes $1.7 million, $1.5 million, and $1.1 million related to ESPP for 2008, 2007, and 2006, respectively. In addition, stock-based compensation cost of approximately $1.6 million and $0.5 million was included in inventory as of December 31, 2008 and 2007, respectively.

In December 2007, the Company entered into a separation and consulting agreement with John R. Sluis, the Company’s former Senior Vice President and Chief Financial Officer. In compliance with the terms of the agreement, during the twelve months ended December 31, 2008, Mr. Sluis provided consulting services to the Company. During the twelve-month period ending December 31, 2008, unvested options previously granted to Mr. Sluis continued to vest according to the schedules set forth in each such option. At the conclusion of the consulting period on December 31, 2008, as Mr. Sluis completed his duties to the satisfaction of the Company’s Chief Executive Officer, per the agreement an additional 24,000 shares became vested and exercisable. As a result of the modification of Mr. Sluis’ options, the Company incurred stock-based compensation of $0.1 million in 2008 and $0.8 million in 2007. In addition, also as per the agreement, during 2008 Mr. Sluis receive a sum equivalent to his existing salary on the effective date of his retirement of $0.3 million for his consulting services, which was accrued and recorded as an expense in 2007.

As of December 31, 2008, the total compensation cost related to unvested stock-based grants awarded under the Company’s 1997 Plan and 2006 Plan but not yet recognized was approximately $26.5 million, which is net of estimated forfeitures of $6.3 million. This cost will be amortized on a straight line basis over a weighted average period of approximately 2.6 years and will be adjusted for subsequent changes in estimated forfeitures.

As of December 31, 2008, the total compensation cost related to RSAs not yet recognized was approximately $0.7 million, which is net of estimated forfeitures of $0.2 million. This cost will be amortized on a straight line basis over a weighted average period of approximately 2.07 years and will be adjusted for subsequent changes in estimated forfeitures.

At December 31, 2008, the total compensation cost related to options to purchase the Company’s common shares under the ESPP but not yet recognized was approximately $0.8 million. The cost will be amortized on a straight-line basis over the two year offering period, as such term is defined in the ESPP.

11. Employee Benefit Plan

The Company adopted a 401(k) plan that allows eligible employees to contribute a percentage of their qualified compensation subject to IRS limits. The Company has the discretion to make matching contributions each year. Contributions made by the Company for the years ended December 31, 2008, 2007 and 2006 were $0.5 million, $0.2 million, and $0, respectively.

12. Income Taxes

Income tax benefit of $0.9 million in 2008 represents current U.S. federal income tax benefit of $0.2 million related to a refundable R&D credit as provided by the Housing and Economic Recovery Act of 2008 (“Act”). The Act, signed into law in July 2008, allows taxpayers to claim refundable alternative minimum tax or R&D credit carryovers if they forego bonus depreciation on certain qualified property and equipment placed in service from the period between April and December 2008. The Company

58

estimated and recognized the credit based on property and equipment placed into service through the year ended December 31, 2008. The income tax benefit in 2008 also represents $0.8 million of income tax benefit mainly related to the amortization of acquired intangibles in Sweden and refundable R&D credit in France, offset by $0.1 million of state income tax expense. Income tax expense of $0.2 million in 2007 represented foreign income taxes related to our French subsidiary. No income taxes were recorded in 2006.

For federal income tax purposes, the Company has open tax years from 1996 through 2008 due to net operating loss carryforwards relating to these years. Substantially all material state, local and foreign income tax matters have been concluded for years through December 31, 2001. For California state income tax purposes, the open years are from 2000 through 2008 due to either research credit carryovers or net operating loss carryforwards.

Deferred income taxes reflect the net tax effect of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company’s deferred tax assets (liabilities) are as follows (in thousands):

	December 31,
	2008			2007
Net operating loss carryforwards	$	47,110		$	45,272
Capitalized research and development costs		2,104			1,384
Research and other credit carryforwards		8,360			7,105
Accruals and reserves		—			414
Stock option compensation		9,385			5,031
Other		6,068			4,862
Total deferred tax assets		73,027			64,068
Valuation allowance for deferred tax assets		(72,494	)		(60,804	)
Total deferred tax liability		(2,633	)		(3,264	)
Net deferred tax liability	$	(2,100	)	$	—

Realizability of deferred tax assets is dependent upon future earnings, if any, the timing and amount of which are uncertain. Accordingly, the net deferred tax assets have been fully offset by a valuation allowance with the exception of those in France and the UK relating to the amortization of acquired assets and licensed intellectual property of Sangtec and Stretton. The valuation allowance increased by approximately $11.4 million, decreased by $0.1 million and increased by $17.6 million during the years ended December 31, 2008, 2007 and 2006, respectively.

As of December 31, 2008, the Company had net operating loss carryforwards for federal income tax purposes of approximately $164.8 million, which expire in the years 2011 through 2028, and federal research and development tax credits of approximately $4.2 million, which expire in the years 2012 through 2028. As of December 31, 2008, the Company had net operating loss carryforwards for state income tax purposes of approximately $61.3 million, which expire in the years 2010 through 2028, and state research and development tax credits of approximately $5.2 million, which have no expiration date.

Utilization of the Company’s net operating loss may be subject to a substantial annual limitation due to ownership change limitations provided by the Internal Revenue Code and similar state provisions. Such annual limitation may result in the expiration of net operating loss before utilization.

Undistributed earnings of the Company’s foreign subsidiaries of approximately $1.9 million and $1.4 million at December 31, 2008 and 2007, respectively, are considered to be indefinitely reinvested, and, accordingly, no provisions for federal and state income taxes have been provided thereon. Upon distribution of those earnings in the form of dividends or otherwise, the Company would be subject to both federal income taxes, subject to an adjustment for the foreign income tax credit, and withholding taxes payable to various foreign countries. The following table summarizes the activity related to our unrecognized tax benefits (in thousands):

	2008			2007
Balance at beginning of year	$	3,675		$	200
Increase related to current year tax positions		689			673
Increase (decrease) for tax positions of prior years		(34	)		2,802
Balance at end of year	$	4,330		$	3,675

59

All of the unrecognized tax benefits would affect our effective tax rate if recognized, before consideration of certain valuation allowances. The Company anticipates that the total unrecognized tax benefits will not significantly change due to the settlement of audits and the expiration of statutes of limitations prior to December 31, 2009.

13. Restatement of Consolidated Financial Statements — Patent License Amortization

The Company capitalizes patent licenses and amortizes them over their estimated useful lives on a straight-line basis. The Company’s internal periodic review of its patent license useful lives during the second quarter of 2009 identified that the useful lives of certain patents were miscalculated at the time those patents were acquired, thus those patent licenses were being amortized over incorrect useful lives. This error resulted in the understatement of amortization expense over several reporting periods, starting in 2004. In accordance with SAB No. 108, “Financial Statements — Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements” (“SAB 108”), in assessing the identified error, the Company considered both the “rollover” approach, which quantifies misstatements originating in the current year statement of operations and the “iron curtain” approach, which quantifies misstatements based on the effects of correcting the misstatements existing in the balance sheet at the end of the reporting period. The Company believes the impact of the patent license amortization errors was not material to its statements of operations for the years prior to 2009 under the rollover approach. However, under the iron curtain method, the cumulative patent license amortization errors would be material to the Company’s consolidated financial statements for the year ending December 31, 2009 and it has, therefore, restated the consolidated financial statements as of December 31, 2008 and 2007 and for each of the three years in the period ended December 31, 2008. The Company recognized the following cumulative adjustments to its December 31, 2008 and 2007 consolidated balance sheet (in thousands):

	December 31, 2008			December 31, 2007
Decrease in intangible assets, net	$	(3,141	)	$	(2,467	)
Increase in accumulated deficit		(3,141	)		(2,467	)

The impact on accumulated deficit by quarter which is caused by an increase in cost of product sales and a corresponding increase in loss from operations and net loss, is comprised of the following amounts (in thousands):

	Quarter Ended
	(Unaudited)
	March 31			June 30			Sept 30			Dec 31			Total
Increase in loss from operations, net loss and increase in cost of product sales:
Year Ended 2009	$	(179	)	$	—		$	—		$	—		$	(179	)
Year Ended 2008		(168	)		(169	)		(169	)		(168	)		(674	)
Year Ended 2007		(171	)		(168	)		(169	)		(169	)		(677	)
Year Ended 2006		(180	)		(180	)		(180	)		(179	)		(719	)
Prior to Year Ended 2006														(1,071	)
													$	(3,320	)

Net loss per share did not change for the years ended December 31, 2008, 2007 and 2006 due to the patent license amortization error. In addition, net cash provided by operations in the consolidated statement of cash flows for the years ended December 31, 2008, 2007 and 2006 did not change because the increase in the net loss of $674,000 in 2008, $677,000 in 2007 and $719,000 in 2006 was offset by the increase of $674,000 in 2008, $677,000 in 2007 and $719,000 in 2006 in the amortization of intangible assets.

60

CEPHEID

SUPPLEMENTARY DATA:

QUARTERLY FINANCIAL INFORMATION

	Quarters Ended
	Mar 31			June 30			Sep 30			Dec 31
	(Unaudited)
	(In thousands, except per share data)
	As Restated (1)
2008
Total revenues	$	44,833		$	42,050		$	44,915		$	37,829
Costs and operating expenses:
Cost of product sales		23,154			23,039			23,792			19,729
Collaboration profit sharing		3,733			2,777			2,460			2,119
Research and development		9,898			10,964			11,611			10,837
Sales and marketing		6,941			7,434			7,871			7,511
General and administrative		4,747			5,518			5,517			5,079
Gain from legal settlement		—			—			—			(1,454	)
Total costs and operating expenses		48,473			49,732			51,251			43,821
Loss from operations		(3,640	)		(7,682	)		(6,336	)		(5,992	)
Other income (expenses), net		1,282			191			(906	)		(215	)
Net loss, before income tax expense		(2,358	)		(7,491	)		(7,242	)		(6,207	)
Income tax benefit (expense)		340			(204	)		614			161
Net loss	$	(2,018	)	$	(7,695	)	$	(6,628	)	$	(6,046	)
Basic and diluted net loss per share	$	(0.04	)	$	(0.13	)	$	(0.12	)	$	(0.10	)
Weighted average shares used in computing basic and diluted net loss per share		56,152			57,054			57,538			57,648
	As Restated (1)
2007
Total revenues	$	25,544		$	27,173		$	36,329		$	40,427
Costs and operating expenses:
Cost of product sales		14,048			14,047			20,135			21,621
Collaboration profit sharing		3,497			2,731			2,729			3,299
Research and development		6,922			7,439			8,371			8,717
Sales and marketing		4,493			5,067			6,411			6,841
General and administrative		3,935			4,038			4,445			5,851
Total costs and operating expenses		32,895			33,322			42,091			46,329
Loss from operations		(7,351	)		(6,149	)		(5,762	)		(5,902	)
Other income (expenses), net		1,027			740			852			658
Net loss, before income tax expense		(6,324	)		(5,409	)		(4,910	)		(5,244	)
Income tax expense		—			—			—			(213	)
Net loss	$	(6,324	)	$	(5,409	)	$	(4,910	)	$	(5,457	)
Basic and diluted net loss per share	$	(0.11	)	$	(0.10	)	$	(0.09	)	$	(0.10	)
Weighted average shares used in computing basic and diluted net loss per share		55,012			55,149			55,356			55,529

(1) See Note 13, “Restatement of Consolidated Financial Statements” in Notes to Consolidated Financial Statements and Supplemental Data.

61

SIGNATURES

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

CEPHEID
By:	/S/    ANDREW D. MILLER
	Andrew D. Miller
	Senior Vice President and Chief Financial Officer

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

Signature	Title	Date
/S/    JOHN L. BISHOP*	Chief Executive Officer and Director (Principal Executive Officer)	October 1, 2009
John L. Bishop
/S/    ANDREW D. MILLER	Senior Vice President and Chief Financial Officer (Principal Financial Officer)	October 1, 2009
Andrew D. Miller
/S/    THOMAS L. GUTSHALL*	Director and Chairman of the Board	October 1, 2009
Thomas L. Gutshall
/S/    THOMAS D. BROWN*	Director	October 1, 2009
Thomas D. Brown
/S/    CRISTINA H. KEPNER*	Director	October 1, 2009
Cristina H. Kepner
/S/    ROBERT EASTON*	Director	October 1, 2009
Robert Easton
/S/    DEAN O. MORTON*	Director	October 1, 2009
Dean O. Morton
/S/    MITCHELL D. MROZ*	Director	October 1, 2009
Mitchell D. Mroz
/S/    DAVID H. PERSING, M.D., PH.D.*	Executive Vice President and Chief Medical and Technology Officer and Director	October 1, 2009
David H. Persing
/S/    HOLLINGS C. RENTON*	Director	October 1, 2009
Hollings C. Renton

* Signed by Andrew D. Miller as attorney-in-fact

62

		Incorporated by Reference
Exhibit Number	Description of Exhibit	Form	File No.	Exhibit	Filing Date	Filed Herewith
3.1	Amended and Restated Articles of Incorporation	S-1	333-34340	3.1	4/7/2000
3.2	Amended and Restated Bylaws	8-K		3.01	10/24/2008
3.3	Certificate of Determination specifying the terms of the Series A Junior Participating Preferred Stock of registrant, as filed with the Secretary of State to the State of California on October 2, 2002	8-A		3.02	10/4/2002
4.1	Reference is made to Exhibits 3.1 and 3.2
4.2	Specimen Common Stock Certificate	10-Q		4.01	7/31/2002
4.3	Rights Agreement dated September 26, 2002 between Cepheid and Computershare Trust Company as Rights Agent, which includes as Exhibit A the form of Certificate of Determination of Series A Junior Participating Preferred Stock, as Exhibit B the Summary of Stock Purchase Rights and as Exhibit C the Form of Rights Certificate	8-A		3.02	10/4/2002
10.1*	1997 Stock Option Plan, as amended	S-8	333-106181	4.2	6/17/2003
10.2*	2000 Employee Stock Purchase Plan, as amended	S-8	333-106181	4.1	6/17/2003
10.3*	2006 Equity Incentive Plan and related forms of agreement for stock options, restricted stock, stock bonuses, stock appreciation rights, restricted stock units and other awards	8-K		99.01	4/25/2008
10.4*	Form of Indemnification Agreement between Cepheid and its officers and directors	S-1	333-34340	10.6	4/7/2000
10.5†	License Agreement, dated January 16, 1996, between Cepheid and The Regents of the University of California, Lawrence Livermore National Laboratory	S-1	333-34340	10.9	6/7/2000
10.6†	Thermal Cycler Supplier Agreement, dated April 15, 2000, between Cepheid and PE Biosystems, a division of PE Corporation	S-1	333-34340	10.16	5/18/2000
10.7†	Distribution Agreement dated July 11, 2000 between Cepheid and Takara Shuzo Co., Ltd.	10-Q		10.1	11/14/2000
10.8	Lease Agreement dated October 18, 2001, between Cepheid and Aetna Life Insurance Company	10-K		10.17	3/22/2002
10.9†	Letter Agreement between Takara Biomedical Co, Ltd. and Cepheid dated January 25, 2002	10-Q		10.2	5/15/2002
10.10†	Modification of Distribution Agreement dated July 11, 2000 between Cepheid and Takara Biomedical Co., Ltd. dated February 11, 2002	10-Q		10.4	5/15/2002
10.11†	Collaboration Agreement between Applied Biosystems and Cepheid dated October 11, 2002	10-K		10.28	3/25/2003
10.12†	Letter Agreement between Aridia Corp. and Cepheid and Infectio Diagnostic Inc. dated November 4, 2003	10-K		10.23	3/12/2004
10.13†	License Agreement between Cepheid and Infectio Diagnostic Inc. dated November 4, 2003	10-K		10.24	3/12/2004
10.14†	Distribution Agreement between Cepheid and Infectio Diagnostic Inc. dated November 4, 2003	10-K		10.25	3/12/2004

63

		Incorporated by Reference
Exhibit Number	Description of Exhibit	Form	File No.	Exhibit	Filing Date	Filed Herewith
10.15†	Distribution Agreement between Cepheid and Infectio Diagnostic Inc. dated November 4, 2003	10-K		10.26	3/12/2004
10.16†	License, Development and Supply Agreement between bioMerieux, Inc. and Cepheid dated December 31, 2003	10-K		10.27	3/12/2004
10.17†	IVD Products Patent License Agreement between Cepheid and F. Hoffmann-La Roche Ltd, effective July 1, 2004	10-Q		10.28	8/9/2004
10.18†	Real-Time Instrument Patent License Agreement between Applera Corporation and Cepheid, dated April 5, 2004	10-Q		10.29	8/9/2004
10.19*	Offer letter to Mr. Humberto Reyes from Cepheid dated November 4, 2004	10-K		10.35	2/28/2005
10.20	Facility lease agreement between Cepheid and Teachers Insurance & Annuity Association of America, Inc. dated May 13, 2005	8-K		99.01	5/18/2005
10.21*	Employment offer letter between Cepheid and David H. Persing dated July 21, 2005	8-K		99.01	7/26/2005
10.22†	First amendment to the Distribution Agreement between Cepheid and Infectio Diagnostic (“I.D.I.”) Inc. of November 4, 2003 by and between Cepheid and GeneOhm Sciences, Inc. dated April 6, 2005	10-Q		10.2	8/4/2005
10.23*	Form of Stock Option Grant Agreement with certain executive officers of Cepheid approved by Cepheid’s Compensation Committee of the Board of Directors on April 27, 2005	10-Q		10.3	8/4/2005
10.24†	Advanced Authorization Letter Agreement between Cepheid and Northrop Grumman Security Systems dated July 20, 2005	10-Q		10.1	11/3/2005
10.25†	First amendment to the Distribution Agreement between Cepheid and Infectio Diagnostic (“I.D.I.”) Inc. of November 4, 2003 by and between Cepheid and GeneOhm Sciences Canada, Inc. dated September 30, 2005	10-Q		10.4	11/3/2005
10.26†	License Agreement between Cepheid and Abaxis, Inc. dated September 30, 2005	10-Q		10.5	11/3/2005
10.27†	License Agreement between Cepheid and DxS Limited dated November 28, 2005	10-K		10.45	2/22/2006
10.28*	Employment Agreement dated January 24, 2007, by and between Cepheid and John L. Bishop	8-K		10.1	1/29/2007
10.29*	Share Purchase Agreement dated February 14, 2007, by and between Cepheid, Altana Technology Projects GmbH, and Altana Pharma AG	8-K		2.1	2/20/2007
10.30	Settlement and Cross-License Agreement between Cepheid and Idaho Technology, Inc. dated January 2, 2007	10-Q		10.1	5/10/2007
10.31	Sublicense agreement between Cepheid and bioMerieux S.A. dated January 16, 2007	10-Q		10.2	5/10/2007
10.32††	Master Purchase Order between Northrop Grumman Security Systems and Cepheid dated August 15, 2007	10-Q		10.1	11/5/2007
10.33*	Separation Agreement dated December 31, 2007, by and between Cepheid and John R. Sluis	10-K		10.39	2/29/2008

64

		Incorporated by Reference
Exhibit Number	Description of Exhibit	Form	File No.	Exhibit	Filing Date	Filed Herewith
10.34*	Employment Agreement dated February 6, 2008, by and between Cepheid and Andrew D. Miller	8-K		10.01	2/11/2008
10.35	Amended and Restated Form of Change of Control Retention and Severance Agreement between Cepheid and each of its executive officers	8-K		99.01	2/21/2008
10.36	Office Lease dated February 28, 2008, between BRCP Caribbean Portfolio, LLC, and Cepheid	10-Q		10.1	5/7/2008
10.37	Series C-2 Auction Rate Securities Rights (Incorporated by reference to Exhibit 4.6 to the Registration Statement on Form F-3 (File No. 333-153882) filed by UBS AG with the Securities and Exchange Commission on October 7, 2008)	F-3	333-153882	4.6	10/7/2008
10.38	Credit Line Agreement dated December 5, 2008, by and between Cepheid and UBS	10-K		10.38	2/26/2009
21.1	List of Subsidiaries	10-K		21.1	2/26/2009
23.1	Consent of Independent Registered Public Accounting Firm					X
31.1	Certification of Chief Executive Officer pursuant to Rule 13a-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002					X
31.2	Certification of Principal Financial Officer pursuant to Rule 13a-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002					X
32.1	Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002					X
32.2	Certification of Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002					X

* Management contract or compensatory plan or arrangement.

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

65

EX-23.1

Exhibit 23.1

Consent of Independent Registered Public Accounting Firm

We consent to the incorporation by reference in the Registration Statements (Form S-8, Nos. 333-41682, 333-65844, 333-91472, 333-106181, 333-117744, 333-122379, 333-131372, 333-134319, 333-149941, 333-151349, and 333-157031) pertaining to the 1997 Stock Option Plan, the 2000 Employee Stock Purchase Plan, the 2000 Non-Employee Directors Stock Option Plan and the 2006 Equity Incentive Plan, and the Registration Statement (Form S-3, No. 333-131520) of Cepheid of our report dated February 25, 2009, (except for Note 13, as to which the date is October 1, 2009) with respect to the consolidated financial statements and schedule of Cepheid and our report dated February 25, 2009 with respect to the effectiveness of internal control over financial reporting of Cepheid included in the Annual Report (“Form 10-K/A”) for the year ended December 31, 2008.

/s/    ERNST & YOUNG LLP

San Jose, California

October 1, 2009

EX-31.1

Exhibit 31.1

Certification of Chief Executive Officer

Pursuant to Section 302 of the

Sarbanes-Oxley Act of 2002

I, John L. Bishop, certify that:

1. I have reviewed this Amendment No. 1 on Form 10-K/A to the annual report on Form 10-K of Cepheid;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in the Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) Designed such internal control over financing reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: October 1, 2009

/S/    JOHN L. BISHOP        

John L. Bishop

Chief Executive Officer

(Principal Executive Officer)

EX-31.2

Exhibit 31.2

Certification of Principal Financial Officer

Pursuant to Section 302 of the

Sarbanes-Oxley Act of 2002

I, Andrew D. Miller, certify that:

1. I have reviewed this Amendment No. 1 on Form 10-K/A to the annual report on Form 10-K of Cepheid;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in the Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) Designed such internal control over financing reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: October 1, 2009

/S/    ANDREW D. MILLER        

Andrew D. Miller

Senior Vice President and Chief Financial Officer

(Principal Financial Officer)

EX-32.1

Exhibit 32.1

Certification of Chief Executive Officer Pursuant to

18 U.S.C. Section 1350,

As Adopted Pursuant to

Section 906 of the Sarbanes-Oxley Act of 2002

In connection with the Annual Report of Cepheid (the “Company”) on Form 10-K/A for the year ended December 31, 2008, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, John L. Bishop, as Chief Executive Officer of the Company, hereby certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

(1) The Report fully complies with the requirements of Section 13(a) of the Securities Exchange Act of 1934; and

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Date: October 1, 2009

/S/    JOHN L. BISHOP        

John L. Bishop

Chief Executive Officer

(Principal Executive Officer)

This certification accompanies this Report pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and is not deemed filed with the Securities and Exchange Commission and is not to be incorporated by reference into any filing of the Company under the Securities Act of 1933 or the Securities Exchange Act of 1934 (whether made before or after the date of the Report), irrespective of any general incorporation language contained in such filing.

EX-32.2

Exhibit 32.2

Certification of Principal Financial Officer to

18 U.S.C. Section 1350,

As Adopted Pursuant to

Section 906 of the Sarbanes-Oxley Act of 2002

In connection with the Annual Report of Cepheid (the “Company”) on Form 10-K/A for the year ended December 31, 2008, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Andrew D. Miller, as Principal Financial Officer of the Company, hereby certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

(1) The Report fully complies with the requirements of Section 13(a) of the Securities Exchange Act of 1934; and

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Date: October 1, 2009

/S/    ANDREW D. MILLER        

Andrew D. Miller

Senior Vice President and Chief Financial Officer

(Principal Financial Officer)

This certification accompanies this Report pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and is not deemed filed with the Securities and Exchange Commission and is not to be incorporated by reference into any filing of the Company under the Securities Act of 1933 or the Securities Exchange Act of 1934 (whether made before or after the date of the Report), irrespective of any general incorporation language contained in such filing.