10-Q

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

þ Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.

For the quarterly period ended September 30, 2006

o 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 — 20703

Adeza Biomedical Corporation

(Exact name of Registrant as specified in its charter)

Delaware	77-0054952
(State or Other Jurisdiction of	(I.R.S. Employer
Incorporation or Organization)	Identification Number)

1240 Elko Drive, Sunnyvale, California 94089
(Address of principal executive offices and zip code)

(408) 745-0975
(Registrant’s telephone number, including area code)

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

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

Large Accelerated Filer o           Accelerated Filer þ           Non-Accelerated Filer o

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

     As of October 27, 2006, 17,505,203 shares of the registrant’s common stock were outstanding.

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TABLE OF CONTENTS

	Page
PART I— FINANCIAL INFORMATION
Item 1. Condensed Financial Statements
Condensed Balance Sheets as of September 30, 2006 and December 31, 2005		3
Condensed Statements of Income for the three and nine months ended September 30, 2006 and 2005		4
Condensed Statements of Cash Flows for the nine months ended September 30, 2006 and 2005		5
Notes to Condensed Financial Statements		6
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		15
Item 3. Quantitative and Qualitative Disclosures About Market Risk		23
Item 4. Controls and Procedures		23
PART II — OTHER INFORMATION
Item 1. Legal Proceedings		24
Item 1A. Risk Factors		24
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		42
Item 3. Defaults upon Senior Securities		42
Item 4. Submission of Matters to a Vote of Security Holders		42
Item 5. Other Information		42
Item 6. Exhibits		43
Signatures		44
Exhibit Index
EXHIBIT 10.18
EXHIBIT 31.1
EXHIBIT 31.2
EXHIBIT 32.1
EXHIBIT 32.2

     Adeza Biomedical Corporation Trademarks and Registered Trademarks are trademarks of Adeza. Our trademarks and trade names include the stylized A, Adeza^®, E-tegrity^® Test, SalEst^®, FullTerm^™, Gestiva^™ and TLi_IQ^® System. Other service marks, trademarks and trade names referred to in this Form 10-Q are the property of their respective owners.

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PART I— FINANCIAL INFORMATION

ITEM 1. CONDENSED FINANCIAL STATEMENTS

ADEZA BIOMEDICAL CORPORATION

CONDENSED BALANCE SHEETS

(In thousands, except par value)

	September 30,			December 31,
	2006			2005
	(Unaudited)			(1)
ASSETS
Current assets:
Cash and cash equivalents	$	94,199		$	89,722
Accounts receivable, net		9,470			9,182
Inventories		1,030			849
Prepaid expenses and other current assets		410			292
Current deferred tax asset		4,929			4,929
Total current assets		110,038			104,974
Property and equipment, net		419			348
Noncurrent deferred tax asset		193			193
Intangible assets, net		92			128
Total assets	$	110,742		$	105,643
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	1,971		$	1,994
Accrued compensation		2,061			2,216
Accrued royalties		807			1,427
Other accrued liabilities		1,827			1,246
Taxes payable		2,008			1,322
Deferred revenue		82			33
Total current liabilities		8,756			8,238
Stockholders’ equity:
Common stock, $0.001 par value; 100,000 shares authorized; 17,504 and 17,376 shares issued and outstanding at September 30, 2006 and December 31, 2005, respectively		17			17
Additional paid-in capital		133,114			132,432
Deferred compensation		—			(2,604	)
Accumulated other comprehensive income		1			—
Accumulated deficit		(31,146	)		(32,440	)
Total stockholders’ equity		101,986			97,405
Total liabilities and stockholders’ equity	$	110,742		$	105,643

(1) - Derived from the December 31, 2005 audited financial statements included in the Annual Report on Form 10-K of Adeza Biomedical Corporation for fiscal year 2005.

See accompanying notes to condensed financial statements.

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ADEZA BIOMEDICAL CORPORATION

CONDENSED STATEMENTS OF INCOME

(In thousands, except per share amounts)
(Unaudited)

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2006		2005		2006			2005
Product sales	$	13,471	$	11,419	$	37,293		$	31,663
Cost of product sales		1,961		1,703		5,623			4,559
Gross profit		11,510		9,716		31,670			27,104
Operating costs and expenses:
Sales and marketing		6,581		4,566		20,042			14,078
General and administrative		1,840		1,959		6,302			5,363
Research and development		2,490		1,634		5,763			3,711
Total operating costs and expenses		10,911		8,159		32,107			23,152
Income (loss) from operations		599		1,557		(437	)		3,952
Interest income		1,256		729		3,378			1,802
Income before provision for income taxes		1,855		2,286		2,941			5,754
Provision for income taxes		1,104		136		1,647			319
Net income	$	751	$	2,150	$	1,294		$	5,435
Net income per share:
Basic	$	0.04	$	0.13	$	0.07		$	0.32
Diluted	$	0.04	$	0.12	$	0.07		$	0.31
Shares used to compute net income per share:
Basic		17,494		16,991		17,459			16,803
Diluted		18,156		17,931		18,174			17,798

See accompanying notes to condensed financial statements.

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ADEZA BIOMEDICAL CORPORATION

CONDENSED STATEMENTS OF CASH FLOWS

(In thousands)
(Unaudited)

	Nine Months Ended
	September 30,
	2006			2005
Cash flows from operating activities:
Net income	$	1,294		$	5,435
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		163			143
Stock-based compensation expense		2,705			740
Tax benefit from stock option exercises		112			135
Changes in operating assets and liabilities:
Accounts receivable		(288	)		(1,137	)
Inventories		(181	)		(72	)
Prepaid expenses and other assets		(117	)		10
Accounts payable		(23	)		(259	)
Accrued compensation		(155	)		(348	)
Accrued royalties		(620	)		(308	)
Other accrued liabilities		1,267			1,449
Deferred revenue		49			14
Net cash provided by operating activities		4,206			5,802
Cash flows from investing activities:
Purchases of property and equipment		(198	)		(193	)
Net cash used in investing activities		(198	)		(193	)
Cash flows from financing activities:
Net proceeds from issuances of common stock		469			1,122
Net cash provided by financing activities		469			1,122
Net increase in cash and cash equivalents		4,477			6,731
Cash and cash equivalents at beginning of period		89,722			80,118
Cash and cash equivalents at end of period	$	94,199		$	86,849
Supplemental cash flow information
Cash paid for income taxes	$	160		$	597

See accompanying notes to condensed financial statements.

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ADEZA BIOMEDICAL CORPORATION

NOTES TO CONDENSED FINANCIAL STATEMENTS

(Unaudited)

1. ORGANIZATION AND BUSINESS

     Adeza Biomedical Corporation (“Adeza” or the “Company”) is a Delaware corporation which was originally incorporated in the state of California on January 3, 1985 and reincorporated in Delaware in 1996. Adeza is engaged in the design, development, manufacturing, sales, and marketing of products for women’s health worldwide. The Company’s initial focus is on reproductive healthcare, using its proprietary technologies to predict preterm birth and assess infertility. The Company’s products consist of:

• The TLi_IQ^® System and FullTerm^™, The Fetal Fibronectin Test, which are used to assess the risk of preterm birth in pregnant women.

• The E-tegrity^® Test, which is used to determine the feasibility of embryo implantation in patients with infertility who are candidates for in vitro fertilization (“IVF”).

All of the Company’s assets are located in the U.S.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

     The accompanying unaudited condensed financial statements have been prepared in accordance with U.S. generally accepted accounting principles and applicable Securities and Exchange Commission rules and regulations for interim financial reporting. These financial statements do not include all of the information and footnotes required by U.S. generally accepted accounting principles for complete financial statements. The accompanying unaudited condensed financial statements reflect all adjustments (consisting of normal, recurring adjustments) that, in our opinion, are necessary for a fair presentation of the results for the interim periods presented. The results of operations for such periods are not necessarily indicative of the results expected for the full year or for any future periods. The accompanying condensed financial statements and related notes should be read in conjunction with the Company’s audited financial statements and notes included in its Annual Report on Form 10-K for the year ended December 31, 2005 as filed with the Securities and Exchange Commission.

Use of Estimates

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

Stock-Based Compensation

     Beginning as of January 1, 2006 the Company accounts for its employee stock option plans under the provisions of SFAS No. 123R. SFAS No. 123R requires the recognition of the fair value of stock-based compensation in net income. The fair value of the Company’s stock options was estimated using a Black-Scholes option valuation model. This model requires the input of highly subjective assumptions and elections in adopting and implementing SFAS No. 123R, including expected stock price volatility and the estimated life of each award. The fair value of stock-based awards is amortized over the vesting period of the award. The Company has elected to use the straight-line method for awards granted after the adoption of SFAS No. 123R and continues to use a graded vesting method for awards granted prior to the adoption of SFAS No. 123R. The Company makes quarterly assessments of the adequacy of its tax credit pool to determine if there are any deficiencies which require recognition in its condensed statements of operations. Prior to adoption of SFAS No. 123R, the Company accounted for its stock option plans under the provisions of Accounting Principles Board (APB) Opinion No. 25 “Accounting For Stock Issued to Employees” (APB No. 25) and Financial Accounting Standards Board (FASB) Interpretation No. 44, “Accounting for Certain Transactions Involving Stock Compensation — an Interpretation of APB Opinion No. 25” and made pro forma footnote disclosures as required by Statement of Financial Accounting Standards (SFAS) No. 148, “Accounting For Stock-

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Based Compensation — Transition and Disclosure”, which amends SFAS No. 123, “Accounting For Stock-Based Compensation”. Pro forma net income and pro forma net income per share disclosed in the footnotes to the Company’s condensed financial statements were estimated using a Black-Scholes option valuation model.

Recent Accounting Pronouncements

     In September 2006, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 157, “Fair Value Measurements” (“FAS 157”). SFAS 157 defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value measurements. SFAS 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007, and is effective for the Company as of January 1, 2008. The Company does not believe that the adoption of SFAS 157 will materially impact its results of operations, financial position or cash flows.

     In September 2006, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 108, “Considering the Effects of Prior Year Misstatements When Quantifying Misstatements in Current Year Financial Statements” (“SAB 108”), which provides interpretive guidance on how the effects of the carryover or reversal of prior year misstatements should be considered in quantifying a current year misstatement. SAB 108 is effective for fiscal years ending on or after November 15, 2006. The Company will be required to adopt the provisions of SAB 108 in its annual financial statements for the year ending December 31, 2006. The Company does not believe that the adoption of SAB 108 will materially impact its results of operations, financial position or cash flows.

     In July 2006, the FASB issued FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes — an Interpretation of FASB Statement No. 109” (FIN 48). FIN 48 applies to all tax positions related to income taxes subject to FASB Statement 109, Accounting for Income Taxes. Under FIN 48, a company would recognize the benefit from a tax position only if it is more-likely-than-not that the position would be sustained upon audit based solely on the technical merits of the tax position. FIN 48 clarifies how a company would measure the income tax benefits from the tax positions that are recognized, provides guidance as to the timing of the derecognition of previously recognized tax benefits and describes the methods for classifying and disclosing the liabilities within the financial statements for any unrecognized tax benefits. FIN 48 also addresses when a company should record interest and penalties related to tax positions and how the interest and penalties may be classified within the income statement and presented in the balance sheet. FIN 48 is effective for fiscal years beginning after December 15, 2006. The Company expects to adopt FIN 48 at the beginning of its fiscal year 2007. Differences between the amounts recognized in the statements of operations prior to and after the adoption of FIN 48 would be accounted for as a cumulative effect adjustment to the beginning balance of retained earnings. The Company is currently evaluating the impact of adopting FIN 48 on its financial statements.

     In November 2004, the FASB issued SFAS No. 151, “Inventory Costs, an amendment of ARB No. 43, Chapter 4” (“SFAS No. 151”). SFAS No. 151 clarifies that abnormal inventory costs such as costs of idle facilities, excess freight and handling costs, and wasted materials (spoilage) are required to be recognized as current period charges. The provisions of SFAS No. 151 were effective for fiscal years beginning after June 15, 2005. The adoption of SFAS No. 151 did not have a material impact on the Company’s results of operations, financial position or cash flows.

3. INVENTORIES

     Inventories are stated at the lower of cost or market and consist of the following (in thousands):

	As of		As of
	September 30,		December 31,
	2006		2005
Raw materials	$	527	$	386
Work in process		255		197
Finished goods		248		266
	$	1,030	$	849

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4. INTANGIBLE ASSETS

     Intangible assets are comprised entirely of purchased patents. The following table sets forth the carrying amount of amortizable intangible assets (in thousands):

	As of		As of
	September 30,		December 31,
	2006		2005
Gross carrying amount	$	240	$	240
Less: accumulated amortization		148		112
Net carrying amount	$	92	$	128

     Intangible assets are amortized on a straight line basis over their estimated useful lives of five years. Amortization expense is expected to be $48,000 per year in 2006 and 2007 and $32,000 for the year ending December 31, 2008.

5. NET INCOME PER SHARE

     Basic net income per share is calculated by dividing net income by the weighted-average number of common shares outstanding for the period. Diluted net income per share is computed by dividing net income by the weighted-average number of common shares and dilutive potential common shares outstanding for the period. For purposes of this calculation, options, and warrants are considered to be potential common shares and are only included in the calculation of diluted net income per share when their effect is dilutive.

     The following table sets forth the computation of basic and diluted net income per share (in thousands, except per share amounts):

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2006		2005		2006		2005
Numerator:
Net income	$	751	$	2,150	$	1,294	$	5,435
Denominator:
Weighted-average number of common shares used in basic earnings per share		17,494		16,991		17,459		16,803
Effect of dilutive securities:
Stock options		585		856		635		913
Warrants		77		84		80		82
Dilutive potential common shares		662		940		715		995
Weighted-average number of common shares and dilutive potential common shares used in diluted earnings per share		18,156		17,931		18,174		17,798
Net income per share:
Basic	$	0.04	$	0.13	$	0.07	$	0.32
Diluted	$	0.04	$	0.12	$	0.07	$	0.31

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     For the three and nine months ended September 30, 2006 options to purchase approximately 0.4 million and 0.3 million shares, respectively, of common stock with exercise prices greater than the average fair market value of the Company’s stock of $15.65 and $17.46, respectively, were excluded from the diluted net loss per share calculation because the effect would have been antidilutive. Comparatively, for both the three and nine months ended September 30, 2005 options to purchase approximately 0.1 million shares of common stock with exercise prices greater than the average fair market value of the Company’s stock of $16.65 and $14.93, respectively, were excluded from the diluted net loss per share calculation because the effect would have been antidilutive.

6. COMPREHENSIVE INCOME

     Statement of Financial Accounting Standards No. 130, “Reporting Comprehensive Income,” establishes standards for the reporting of comprehensive income and its components in the financial statements. Comprehensive income is defined as the change in equity of a business enterprise during a period from transactions and other events and circumstances from non-owner sources.

     The Company’s comprehensive income includes net income and unrealized gains (losses) on available-for-sale securities, comprised of commercial papers with maturities of less than three months, and is reflected as a component of stockholders’ equity. The components of comprehensive income, net of tax, were as follows (in thousands):

	Three Months Ended					Nine Months Ended
	September 30,					September 30,
	2006			2005		2006		2005
Net income	$	751		$	2,150	$	1,294	$	5,435
Unrealized gains (losses) on available-for-sale securities, net of tax		(12	)		—		1		—
Comprehensive income	$	739		$	2,150	$	1,295	$	5,435

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7. STOCK-BASED COMPENSATION

     Effective January 1, 2006, the Company adopted the provisions of SFAS No. 123R. SFAS No. 123R establishes accounting for stock-based awards exchanged for employee services. Accordingly, stock-based compensation cost is measured on the grant date, based on the fair value of the award and is recognized as an expense over the employee requisite service period. Prior to January 1, 2006, the Company accounted for its stock-based awards under the recognition and measurement provisions of Accounting Principles Board Opinion No. 25 “Accounting for Stock Issued to Employees” and related Interpretations as permitted by SFAS No. 123.

Prior to the Adoption of SFAS No. 123R

     Prior to the adoption of SFAS No. 123R, the Company provided disclosures required under SFAS No. 123, “Accounting for Stock-Based Compensation,” (“SFAS No. 123”) as amended by SFAS No.148, “Accounting for Stock-Based Compensation — Transition and Disclosures.” $0.2 million and $0.7 million of employee stock-based compensation expense was reflected in net income for the three and nine months ended September 30, 2005, respectively.

     During the preparation of the notes to the consolidated condensed financial statements for the three months ended March 31, 2006, the Company determined that the calculation of its pro forma net income reported under SFAS 123 for the year ended December 31, 2005, as previously reported, was understated primarily as a result of an incorrect change in the fair value calculation (and, therefore, the amortization expense related to) options granted in August 2004. Accordingly, pro forma net income reported under SFAS 123 for the three and nine month periods ended September 30, 2005, presented in the tables below, was revised. These revisions had no effect on the Company’s previously reported results of operations or financial condition. The stock-based employee and director compensation expense previously reported for the three and nine months ended September 30, 2005 was $0.6 million and $1.9 million, respectively, and the pro forma net income previously reported for the three and nine months ended September 30, 2005 was $1.8 million and $4.2 million, respectively.

	Three Months			Nine Months
	Ended			Ended
	September 30,			September 30,
(in thousands, except per share amounts)	2005			2005
Net income:
As reported	$	2,150		$	5,435
Add: Total stock based employee and director compensation expense determined under intrinsic value method for all awards, net of taxes		221			669
Less: Total stock based employee and director compensation expense determined under the fair value method for all awards, net of taxes		(1,069	)		(3,910	)
Pro forma net income	$	1,302		$	2,194
Reported net income per share:
Basic	$	0.13		$	0.32
Diluted	$	0.12		$	0.31
Pro forma net income per share:
Basic	$	0.08		$	0.13
Diluted	$	0.07		$	0.12
Shares used to compute net income per share:
Basic		16,991			16,803
Diluted		17,931			17,798

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Impact of Adoption of SFAS No. 123R

     The Company elected to adopt the modified prospective application method as provided by SFAS No. 123R. Under that transition method, compensation costs recognized in the three and nine months ended September 30, 2006, include (a) compensation cost for 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, and (b) compensation costs 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 No. 123R.

     In the three and nine months ended September 30, 2006, we recognized compensation expense in connection with the adoption of FAS 123R of $0.8 million and $2.7 million, respectively. Diluted earnings per share was reduced by $0.02 and $0.07 for the three and nine months ended September 30, 2006, respectively, as a result of the Company’s adoption of FAS 123R. As of September 30, 2006 the stock-based compensation capitalized as inventory was minimal.

     As a result of adoption FAS 123R, the Company’s income before income taxes and net income for the three months ended September 30, 2006 are $0.6 million and $0.2 million lower, respectively, than if the Company had continued to account for share-based compensation under Opinion 25.

Equity Incentive Program

     The Company’s equity incentive program is a long-term retention program that is intended to attract and retain qualified management and technical employees and align stockholder and employee interests. At September 30, 2006, the equity incentive program consisted of the 2004 Equity Incentive Plan (the 2004 Plan). Under the 2004 Plan, options, stock appreciation rights, stock purchase rights and restricted stock may be issued to employees, officers, directors, and consultants of Adeza. The 2004 Plan permits the grant of share options for up to 1,875,000 shares of common stock. The maximum number of shares shall be increased annually on January 1 of each year by a number of shares equal to the lesser of (a) three percent of the number of shares issued and outstanding on the immediately preceding December 31, (b) 525,000 Shares, and (c) a number of Shares set by the Board. The 2004 Plan provides that the exercise price for incentive stock options will be no less than 100% of fair value of Adeza’s common stock on the date of grant. Generally, these options vest ratably over four years and have a term of 10 years. No restricted stock, stock appreciation or purchase rights have been issued as of September 30, 2006.

     The following table provides certain information with respect to the 2004 Plan, which was in effect as of September 30, 2006:

					Number of Securities
					Remaining Available
					for Future Issuance
					Under Equity
	Number of				Compensation Plan
	Securities to be				(Excluding
	Issued upon		Weighted-Average		Securities
	Exercise of		Exercise Price of		Reflected in
	Outstanding Options		Outstanding Options		Column (a))
	(a)		(b)		(c)
Equity compensation plan approved by security holders		1,581,089	$	9.21		2,516,351

     The fair value of each option award is estimated on the date of grant using the Black-Scholes valuation model, consistent with the provisions of SFAS No. 123R, SEC SAB No. 107, “Share-Based Payments” and the Company’s prior period pro forma disclosures of net earnings, including stock-based compensation (determined under a fair value method as prescribed by SFAS No. 123). Expected volatilities used in 2006 are based on volatilities from the Company’s peer group, which is consistent with the technique the Company used prior to the adoption of SFAS No. 123R. Due to the Company’s short public trading history the Company determined that the use of a peer group is more reflective of market conditions and a better indicator of expected volatility than a historical volatility. The Company uses historical data to estimate the expected option forfeiture rate. The expected term of options granted is derived from analysis of the Company’s peer group and

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historical data. The risk-free rate for periods within the contractual life of the option is based on a risk-free zero-coupon spot interest rate at the end of the reporting period. The Company has never declared or paid any cash dividends and does not presently plan to pay cash dividends in the foreseeable future.

     The fair value of stock options granted to employees in the three and nine months ended September 30, 2006 and September 30, 2005 was estimated at the date of grant using the Black-Scholes model using the following weighted-average assumptions:

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2006			2005			2006			2005
Expected volatility		60	%		75	%		63	%		75	%
Risk-free interest rate		4.76	%		4.07	%		4.92	%		4.03	%
Expected term (in years)		5.0			4.0			5.0			4.0
Dividends		—			—			—			—

     SFAS No. 123R requires the use of option pricing models that were not developed for use in valuing employee stock options. The Black-Scholes option-pricing model was developed for use in estimating the fair value of short-lived exchange traded options that have no vesting restrictions and are fully transferable. In addition, option-pricing models require the input of highly subjective assumptions, including the option’s expected life and the price volatility of the underlying stock.

     The following table summarizes the combined activity under the equity incentive plans for the indicated periods:

							Weighted-		Weighted-Average		Aggregate
	Available			Options			Average		Remaining Contract		Intrinsic Value
	for Grant			Outstanding			Exercise Price		Term (in years)		(in thousands)
Balance at December 31, 2005		2,035,208			1,668,688		$	8.53		—		—
Shares authorized		521,290			—			—		—		—
Options granted		(85,600	)		85,600			17.28		—		—
Options exercised		—			(127,746	)		3.67		—		—
Options forfeited		45,453			(45,453	)		15.12		—		—
Balance at September 30, 2006		2,516,351			1,581,089		$	9.21		7.0	$	11,980
Vested and expected to vest at September 30, 2006					1,537,643		$	9.07		7.0	$	11,840
Exercisable at September 30, 2006					978,944		$	6.77		6.1	$	9,636

     The aggregate intrinsic value in the table above represents the total pretax intrinsic value, based on the Company’s closing stock price of $16.41 as of September 30, 2006, which would have been received by the option holders had all option holders with in-the-money options exercised their options as of that date. Stock options that expired during the nine months ended September 30, 2006 were minimal.

     The Company did not grant any stock options during the three months ended September 30, 2006. Therefore, there is no corresponding weighted-average grant fair value of stock options granted during the three months ended September 30, 2006. The total intrinsic value of options exercised during the three month period ended September 30, 2006 was approximately $0.3 million. The total cash received from employees as a result of stock option exercises during the three months ended September 30, 2006 was approximately $0.1 million. In connection with these exercises, the tax benefits realized by the Company for the three months ended September 30, 2006 was $0.1 million.

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     The Company settles employee stock option exercises with newly issued common shares.

     As of September 30, 2006, the unrecorded deferred stock-based compensation balance related to stock options was $4.4 million, and that amount will be recognized over an estimated weighted average amortization period of 1.2 years.

8. PROVISION FOR INCOME TAXES

     The Company recorded a provision for income taxes of $1.1 million for the three months ended September 30, 2006, related to federal and state taxes, compared to a provision for income taxes of $0.1 million for the three months ended September 30, 2005. The Company’s effective tax rate for the three months ended September 30, 2006 and 2005 was 59.5% and 5.9%, respectively.

     The Company recorded a provision for income taxes of $1.6 million for the nine months ended September 30, 2006, related to federal and state taxes, compared to a provision for income taxes of $0.3 million for the nine months ended September 30, 2005. The Company’s effective tax rate for the nine months ended September 30, 2006 and 2005 was 56.0% and 5.5%, respectively.

     For the three months ended September 30, 2006 and 2005, the provision for income taxes is based on the Company’s annual effective tax rate in compliance with SFAS 109. The annual effective tax rate was calculated on the basis of the Company’s expected level of profitability that results in federal and state income taxes. To the extent the Company’s expected profitability changes during the year, the effective tax rate would be revised to reflect any changes in the projected profitability. For the three months ended September 30, 2006, the difference between the provision for income tax that would be derived by applying the statutory rate to the Company’s income before tax and the provision actually recorded is primarily due to the impact of non-deductible 123R stock option compensation expenses. For the three months ended September 30, 2005, the difference between the provision for income tax that would be derived by applying the statutory rate to the Company’s income before tax and the provision actually recorded is primarily due to the benefit of operating loss carryforwards that reduced the provision to federal alternative minimum tax and state income tax. Excluding the effects of FAS123R, the Company’s tax rate would be closer to the federal statutory rate plus the state tax rate.

     The Company accounts for income taxes in accordance with SFAS No. 109, “Accounting for Income Taxes,” which requires that deferred tax assets and liabilities be recognized using enacted tax rates for the effect of temporary differences between the book and tax bases of recorded assets and liabilities. SFAS No. 109 also requires that deferred tax assets be reduced by a valuation allowance if it is more likely than not that some or all of the deferred tax assets will not be realized. The Company evaluates quarterly the realizability of its deferred tax assets by assessing its valuation allowance and, if necessary, the Company adjusts the amount of such allowance. The factors used to assess the likelihood of realization include the Company’s forecast of future taxable income and available tax planning strategies that could be implemented to realize the net deferred tax assets. The Company assessed its deferred tax assets at the end of 2005, as well as the end of the first, second and third quarters of 2006, and determined that it was more likely than not that the Company would be able to realize net deferred tax assets based upon its forecast of future taxable income and other relevant factors. Changes to the realization of the net deferred tax assets or to our income taxes payable would have an impact to the Company’s tax provision and in turn would affect net income.

9. SUBSEQUENT EVENT

     On October 20, 2006, the Company received an “approvable letter” from the U.S. Food and Drug Administration (FDA) with respect to its New Drug Application for Gestiva^™ for the prevention of preterm birth in women with a history of preterm delivery. An approvable letter is an official notification from the FDA that the FDA may approve the company’s NDA if specific conditions are satisfied. The approvable letter for Gestiva requires the completion of an additional animal study and certain other conditions that must be satisfied prior to obtaining final U.S. marketing approval. The approvable letter also outlines several post-approval clinical requirements, which are consistent with recommendations made by the FDA advisory committee in August 2006. The Company has requested a meeting with the FDA to better understand the FDA’s

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conditions for approval. Satisfying the conditions will require both time and expense. The Company cannot be certain when it will obtain FDA approval for Gestiva, if at all.

     A decision by the FDA regarding three-year exclusivity under Hatch-Waxman for Gestiva is expected to be made at the time of any final approval. Discussions with the FDA regarding our Orphan Drug application for seven-year exclusivity are ongoing. While the Company’s initial request for Orphan Drug designation was not granted, it plans to meet with the FDA to provide additional new information for further review by the Agency.

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

     The following discussion of our financial condition and results of operations should be read in conjunction with the condensed financial statements and the notes thereto included in Item 1 of this Quarterly Report on Form 10-Q. Statements in this Management’s Discussion and Analysis of Financial Condition and Results of Operations and elsewhere in this quarterly report on Form 10-Q which express that we “believe,” “anticipate,” “expect” or “plan to” as well as other statements which are not historical fact, are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Examples of forward-looking statements include, without limitation, statements regarding expected financial results, tax rates and stock-based compensation expense, the expansion of products, markets and offerings and additional product indications. Actual events or results may differ materially as a result of the risks and uncertainties described herein and elsewhere including, but not limited to, those factors described under “Risk Factors” below and those described under “Business” set forth in Part I of our Annual Report on Form 10-K for the year-ended December 31, 2005.

BUSINESS OVERVIEW

     We design, develop, manufacture and market innovative products for women’s health. Our initial focus is on reproductive healthcare, using our proprietary technologies to predict preterm birth and assess infertility. Our principal product is a patented diagnostic test FullTerm^™, The Fetal Fibronectin Test, that utilizes a single-use, disposable cassette and is analyzed on our patented instrument, the TLi_IQ^® System. This FDA-approved product is designed to objectively determine a woman’s risk of preterm birth by detecting the presence of a specific protein, fetal fibronectin, in vaginal secretions during pregnancy. We began selling our single-use, disposable FullTerm^™, The Fetal Fibronectin Test in 1999 and launched our second-generation system, the TLi_IQ^® System, in 2001. Sales of TLi_IQ^® Systems to hospital and clinical laboratories allow healthcare providers access to our FullTerm^™, The Fetal Fibronectin Test, resulting in the potential for better patient care and for significant cost savings by avoiding unnecessary medical treatment. We have also submitted to the FDA a New Drug Application, or NDA, for Gestiva^™ (17 alpha-hydroxyprogesterone caproate injection 250 mg/ml), our product candidate to prevent preterm birth in women who have a history of preterm delivery.

     We believe the key factors underlying our growth since 1999 include greater healthcare provider acceptance, demonstrated cost savings from the use of our tests, expanded reimbursement coverage by insurance companies, expansion of our sales force and increased marketing efforts. Continued growth in test volume and revenue will depend on the above and a number of factors, including placing additional TLi_IQ^® Systems in hospitals and clinical laboratories, increasing utilization of existing TLi_IQ^® Systems, increasing healthcare provider acceptance for other FDA-approved uses of the product and developing additional applications or products.

Recent Business Developments

Gestiva^™

     On August 29, 2006, we announced that the Reproductive Health Drugs Advisory Committee to the FDA recommended by a majority vote that the data presented by us in our Gestiva NDA support efficacy in preventing preterm birth prior to 35 weeks and that overall safety data are adequate and sufficiently reassuring to support marketing approval in women with a history of preterm delivery. The Reproductive Health Drugs Advisory Committee to the FDA also recommended the collection of post-marketing clinical data. Although Advisory Committee recommendations are not binding, typically FDA final determinations are consistent with their recommendations.

     On October 20, 2006, we received an “approvable letter” from the U.S. Food and Drug Administration (FDA) with respect to our New Drug Application for Gestiva^™ for the prevention of preterm birth in women with a history of preterm delivery. An approvable letter is an official notification from the FDA that the FDA may approve the company’s NDA if specific conditions are satisfied. The approvable letter for Gestiva requires the completion of an additional animal study and certain other conditions that must be satisfied prior to obtaining final U.S. marketing approval. The approvable letter also outlines several post-approval clinical requirements, which are consistent with recommendations made by the FDA advisory committee in August 2006. We have requested a meeting with the FDA to better understand the FDA’s conditions for approval. Satisfying the conditions will require both time and expense. We cannot be certain when we will obtain FDA approval for Gestiva, if at all.

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     A decision by the FDA regarding three-year exclusivity under Hatch-Waxman for Gestiva is expected to be made at the time of any final approval. Discussions with the FDA regarding our Orphan Drug application for seven-year exclusivity are ongoing. While our initial request for Orphan Drug designation was not granted, we plan to meet with the FDA to provide additional new information for further review by the Agency.

     If Gestiva is approved for marketing in the United States, we plan to use our existing sales force to market the product to the same physicians to whom we market FullTerm^™, The Fetal Fibronectin Test, thereby leveraging our direct sales efforts.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

     We prepare our financial statements in accordance with U.S. generally accepted accounting principles. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. Except as stated below regarding SFAS No. 123R, our critical accounting policies and estimates have not changed significantly from the critical accounting policies and estimates discussed in our Annual Report on Form 10-K for the year ended December 31, 2005.

Stock-Based Compensation

     Beginning as of January 1, 2006 we account for our employee stock option plans under the provisions of SFAS No. 123R. SFAS No. 123R requires the recognition of the fair value of stock-based compensation in net income. The fair value of our stock options was estimated using a Black-Scholes option valuation model. This model requires the input of highly subjective assumptions and elections in adopting and implementing SFAS No. 123R, including expected stock price volatility and the estimated life of each award. The fair value of stock-based awards is amortized over the vesting period of the award. We have elected to use the straight-line method for awards granted after the adoption of SFAS No. 123R and continue to use a graded vesting method for awards granted prior to the adoption of SFAS No. 123R. We make quarterly assessments of the adequacy of our tax credit pool to determine if there are any deficiencies which require recognition in our condensed statements of operations. Prior to adoption of SFAS No. 123R, we accounted for our stock option plans under the provisions of Accounting Principles Board (APB) Opinion No. 25 “Accounting For Stock Issued to Employees” (APB No. 25) and Financial Accounting Standards Board (FASB) Interpretation No. 44, “Accounting for Certain Transactions Involving Stock Compensation — an Interpretation of APB Opinion No. 25” and made pro forma footnote disclosures as required by Statement of Financial Accounting Standards (SFAS) No. 148, “Accounting For Stock-Based Compensation — Transition and Disclosure”, which amends SFAS No. 123, “Accounting For Stock-Based Compensation”. Pro forma net income and pro forma net income per share disclosed in the footnotes to our condensed financial statements were estimated using a Black-Scholes option valuation model. For more information, see Note 7 in the Notes to the Consolidated Financial Statements, “Stock-Based Compensation.”

RESULTS OF OPERATIONS

Product Sales

     Our product sales are derived primarily from the sale of our disposable FullTerm^™, The Fetal Fibronectin Test. In addition, we derive a small portion of our revenues from the sale of TLi_IQ^® Systems and other products. We currently use distributors for sales outside of the United States and Canada. Our business has been in the past and may continue to be seasonal and is affected by customer ordering patterns, which may involve quarterly or semi-annual orders, as well as other factors which may cause quarterly variances in our sales. As a result, our sales may not increase in sequential quarters and our net income may fluctuate significantly.

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     The following is a summary of product sales for the three months and nine months ended September 30, 2006 and September 30, 2005:

	Three Months Ended							Nine Months Ended
	September 30,				Percent			September 30,				Percent
(Dollars in thousands)	2006		2005		Change			2006		2005		Change
Product sales	$	13,471	$	11,419		18.0	%	$	37,293	$	31,663		17.8	%

     The $2.1 million increase in product sales for the three months ended September 30, 2006, compared to the three months ended September 30, 2005, and the $5.6 million increase in product sales for the nine months ended September 30, 2006, compared to the nine months ended September 30, 2005, were primarily attributable to increased sales volume of our Fetal Fibronectin Test cassettes.

     Geographic sales information is based on the location of the end customer. The following is a summary of product sales by geographic region for the three months and nine months ended September 30, 2006 and September 30, 2005:

	Three Months Ended									Nine Months Ended
	September 30,						Percent			September 30,						Percent
(Dollars in thousands)	2006			2005			Change			2006			2005			Change
United States	$	13,053		$	11,108			17.5	%	$	36,313		$	30,920			17.4	%
Percentage of total product sales		96.9	%		97.3	%					97.4	%		97.7	%
International	$	418		$	311			34.4	%	$	980		$	743			31.9	%
Percentage of total product sales		3.1	%		2.7	%					2.6	%		2.3	%

     International sales, as well as sales in the United States, remained relatively consistent as a percentage of total product sales for the three and nine months ended September 30, 2006 compared to the three and nine months ended September 30, 2005. We expect international sales, as a percentage of total product sales, to remain relatively consistent for the remainder of the year ending December 31, 2006.

Cost of Product Sales

     Our cost of product sales represents the cost of materials, direct labor and overhead associated with the manufacture of our products, and delivery charges, lab services and royalties. The following is a summary of cost of product sales for the three months and nine months ended September 30, 2006 and September 30, 2005:

	Three Months Ended									Nine Months Ended
	September 30,						Percent			September 30,						Percent
(Dollars in thousands)	2006			2005			Change			2006			2005			Change
Cost of product sales	$	1,961		$	1,703			15.1	%	$	5,623		$	4,559			23.3	%
Percentage of product sales		14.6	%		14.9	%					15.1	%		14.4	%

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     Cost of sales, as a percentage of product sales, for the three months ended September 30, 2006, compared to the three months ended September 30, 2005 remained relatively consistent. The increase in cost of product sales, as a percentage of product sales, for the nine months ended September 30, 2006 compared to the nine months ended September 30, 2005 was primarily due to a slight increase in overhead spending.

Royalties

     We have certain royalty commitments associated with the shipment and licensing of certain products. Royalty costs are generally based on a dollar amount per unit shipped or a percentage of the underlying revenue. The following is a summary of royalty costs for the three months and nine months ended September 30, 2006 and September 30, 2005:

	Three Months Ended									Nine Months Ended
	September 30,						Percent			September 30,						Percent
(Dollars in thousands)	2006			2005			Change			2006			2005			Change
Royalty costs	$	807		$	697			15.8	%	$	2,252		$	1,935			16.4	%
Percentage of product sales		6.0	%		6.1	%					6.0	%		6.1	%

     The increase in royalty costs for the three and nine months ended September 30, 2006, compared to the three and nine months ended September 30, 2005, was primarily due to the increase in sales volume over the respective periods. As a percentage of product sales, royalty costs remained relatively consistent for the three and nine months ended September 30, 2006 and 2005.

     We expect royalty costs as a percentage of product sales to fluctuate since royalty costs are dependent on several factors, including the level and type of sales and the level of allowed deductions. However, we believe royalty costs as a percentage of product sales will remain below 7.5% for the year ended December 31, 2006, assuming no new licenses involving royalties are required.

Gross Profit

	Three Months Ended									Nine Months Ended
	September 30,						Percent			September 30,						Percent
(Dollars in thousands)	2006			2005			Change			2006			2005			Change
Gross profit	$	11,510		$	9,716			18.5	%	$	31,670		$	27,104			16.8	%
Percentage of product sales		85.4	%		85.1	%					84.9	%		85.6	%

     Gross margins, or gross profit as a percentage of sales, for the three and nine months ended September 30, 2006, compared to the three and nine months ended September 30, 2005, remained relatively consistent.

Sales and Marketing

     Sales and marketing expenses consist primarily of sales and marketing personnel and sales force incentive compensation and costs related to travel, tradeshows, promotional materials and programs, advertising and healthcare provider education materials and events.

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	Three Months Ended									Nine Months Ended
	September 30,						Percent			September 30,						Percent
(Dollars in thousands)	2006			2005			Change			2006			2005			Change
Sales and marketing expenses	$	6,581		$	4,566			44.1	%	$	20,042		$	14,078			42.4	%
Percentage of product sales		48.9	%		40.0	%					53.7	%		44.5	%

     The $2.0 million increase in sales and marketing expenses for the three months ended September 30, 2006, compared to the three months ended September 30, 2005 was primarily attributable to (i) an increase of $1.1 million related to the expansion of our direct sales force and associated costs, (ii) an increase of $0.6 million due to marketing programs, and (iii) an increase of $0.3 million in stock-based compensation expense, primarily associated with the adoption of SFAS No. 123R on January 1, 2006.

     The $6.0 million increase in sales and marketing expenses for the nine months ended September 30, 2006, compared to the nine months ended September 30, 2005 was primarily attributable to (i) an increase of $3.8 million related to the expansion of our direct sales force and associated costs, (ii) an increase of $1.1 million due to marketing programs, and (iii) an increase of $1.1 million in stock-based compensation expense, primarily associated with the adoption of SFAS No. 123R on January 1, 2006.

     We expect our selling and marketing expenditures to increase as we continue our efforts to increase our market penetration and prepare for marketing and selling efforts related to Gestiva. We also expect our employee related costs to increase, including stock-based compensation expense.

General and Administrative

     Our general and administrative expenses consist primarily of personnel expenses for accounting, human resources, information technology and corporate administration functions. Other costs include facility costs, professional fees for legal and accounting services including patent expenses.

	Three Months Ended									Nine Months Ended
	September 30,						Percent			September 30,						Percent
(Dollars in thousands)	2006			2005			Change			2006			2005			Change
General and administrative expenses	$	1,840		$	1,959			(6.1	)%	$	6,302		$	5,363			17.5	%
Percentage of product sales		13.7	%		17.2	%					16.9	%		16.9	%

     The $0.1 million decrease in general and administrative expenses for the three months ended September 30, 2006 compared to the three months ended September 30, 2005 was primarily attributable to a decrease of $0.4 million in legal fees and other general costs. This decrease was partially offset by (i) an increase of $0.2 million in stock-based compensation expense, primarily associated with the adoption of SFAS No. 123R on January 1, 2006 and (ii) an increase of $0.1 million in personnel costs.

     The $0.9 million increase in general and administrative expenses for the nine months ended September 30, 2006, compared to the nine months ended September 30, 2005 was primarily attributable to (i) an increase of $0.8 million in costs associated with operating as a public company, including personnel costs, the timing of billings for professional services related to audit and tax, and other general costs, and (ii) an increase of $0.7 million in stock-based compensation expense, primarily associated with the adoption of SFAS No. 123R on January 1, 2006. This increase was partially offset by a decrease of $0.6 million in legal fees and other general costs.

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     We expect our general and administrative expenses to increase primarily related to continuously increasing costs associated with being a public company, anticipated increased headcount and legal expenses. We also expect our employee related costs to increase, including stock-based compensation expense.

Research and Development

     Our research and development expenses consist of costs incurred for company-sponsored research and development activities. These expenses consist primarily of direct and research-related allocated overhead expenses such as facilities costs, salaries and benefits, and material and supply costs and include costs associated with clinical trials.

	Three Months Ended									Nine Months Ended
	September 30,						Percent			September 30,						Percent
(Dollars in thousands)	2006			2005			Change			2006			2005			Change
Research and development expenses	$	2,490		$	1,634			52.4	%	$	5,763		$	3,711			55.3	%
Percentage of product sales		18.5	%		14.3	%					15.5	%		11.7	%

     The increase in research and development expenses for the three and nine months ended September 30, 2006, compared to the three and nine months ended September 30, 2005, was primarily attributable to an increase in costs associated with our continued product development efforts, including costs related to Gestiva, our drug candidate for the prevention of preterm birth in women who have a history of preterm delivery.

     We expect that our research and development costs will increase as a result of our continued product development efforts. We also expect our employee-related costs to increase, including stock-based compensation expense. In addition, significant costs may be incurred related to pre-clinical and clinical requirements to be incurred before and after any potential FDA approval for Gestiva.

Interest Income

     Interest income consists primarily of interest income generated from our investments in commercial paper, money market funds and repurchase agreements.

	Three Months Ended									Nine Months Ended
	September 30,						Percent			September 30,						Percent
(Dollars in thousands)	2006			2005			Change			2006			2005			Change
Interest income	$	1,256		$	729			72.3	%	$	3,378		$	1,802			87.5	%
Percentage of product sales		9.3	%		6.4	%					9.1	%		5.7	%

     The increase in interest income for the three and nine months ended September 30, 2006, compared to the three and nine months ended September 30, 2005, was primarily attributable to an increase in the levels of cash and cash equivalents, as well as higher average interest rates.

Provision for Income Taxes

	Three Months Ended									Nine Months Ended
	September 30,						Percent			September 30,						Percent
(Dollars in thousands)	2006			2005			Change			2006			2005			Change
Provision for income taxes	$	1,104		$	136			711.8	%	$	1,647		$	319			416.3	%
Percentage of product sales		8.2	%		1.2	%					4.4	%		1.0	%

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     We recorded a provision for income taxes of $1.1 million for the three months ended September 30, 2006, related to federal and state taxes, compared to a provision for income taxes of $0.1 million for the three months ended September 30, 2005. Our effective tax rate for the three months ended September 30, 2006 and 2005 was 59.5% and 5.9%, respectively.

     We recorded a provision for income taxes of $1.6 million for the nine months ended September 30, 2006, related to federal and state taxes, compared to a provision for income taxes of $0.3 million for the nine months ended September 30, 2005. Our effective tax rate for the nine months ended September 30, 2006 and 2005 was 56.0% and 5.5%, respectively.

     For the three months ended September 30, 2006 and 2005, the provision for income taxes is based on our annual effective tax rate in compliance with SFAS 109. The annual effective tax rate was calculated on the basis of our expected level of profitability that results in federal and state income taxes. To the extent our expected profitability changes during the year, the effective tax rate would be revised to reflect any changes in the projected profitability. For the three months ended September 30, 2006, the difference between the provision for income tax that would be derived by applying the statutory rate to our income before tax and the provision actually recorded is primarily due to the impact of non-deductible 123R stock option compensation expenses. For the three months ended September 30, 2005, the difference between the provision for income tax that would be derived by applying the statutory rate to our income before tax and the provision actually recorded is primarily due to the benefit of operating loss carryforwards that reduced the provision to federal alternative minimum tax and state income tax. Excluding the effects of FAS123R, the Company’s tax rate would be closer to the federal statutory rate plus the state tax rate.

     We account for income taxes in accordance with SFAS No. 109, “Accounting for Income Taxes,” which requires that deferred tax assets and liabilities be recognized using enacted tax rates for the effect of temporary differences between the book and tax bases of recorded assets and liabilities. SFAS No. 109 also requires that deferred tax assets be reduced by a valuation allowance if it is more likely than not that some or all of the deferred tax assets will not be realized. We evaluate quarterly the realizability of its deferred tax assets by assessing its valuation allowance and, if necessary, we adjust the amount of such allowance. The factors used to assess the likelihood of realization include our forecast of future taxable income and available tax planning strategies that could be implemented to realize the net deferred tax assets. We assessed our deferred tax assets at the end of 2005, as well as the end of the first, second and third quarters of 2006, and determined that it was more likely than not that we would be able to realize net deferred tax assets based upon our forecast of future taxable income and other relevant factors. Changes to the realization of the net deferred tax assets or to our income taxes payable would have an impact to our tax provision and in turn would affect net income.

LIQUIDITY AND CAPITAL RESOURCES

     Since our inception, our operations have been primarily financed through public and private equity investments, working capital provided by our product sales, capital leases, and research and development contracts. Our cash and cash equivalents were $94.2 million as of September 30, 2006. All of our cash equivalents have original maturities of three months or less.

     Our operating, investing and financing activities for the nine months ended September 30, 2006 and September 30, 2005 are summarized as follows:

	Nine Months Ended
	September 30,
(Dollars in thousands)	2006			2005
Net cash provided by operating activities	$	4,206		$	5,802
Net cash used in investing activities		(198	)		(193	)
Net cash provided by financing activities		469			1,122
Net increase in cash and cash equivalents	$	4,477		$	6,731

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Operating Activities

     Our operating activities generated cash of $4.2 million during the nine months ended September 30, 2006, compared to generating cash of $5.8 million during the nine months ended September 30, 2005. This $1.6 million decrease in net cash generated from operating activities was primarily driven by a decrease in net income, excluding non-cash charges, of $2.2 million. This decrease was partially offset by an increase in working capital sources of cash of $0.6 million. The major contributor to the increase in working capital sources of cash included a higher cash flow from the collection of accounts receivables.

     We expect that cash provided by operating activities may fluctuate in future periods as a result of a number of factors, including fluctuations in our operating results, the timing of product shipments, the rate of collections of accounts receivable, inventory management, the timing of tax and other payments, and our ability to manage other areas of working capital.

Investing Activities

     Our investing activities consumed cash of $0.2 million during the nine months ended September 30, 2006, compared to consuming cash of $0.2 million during the nine months ended September 30, 2005. Cash consumed by investing activities for both periods was related to the purchase of property and equipment.

Financing Activities

     Our financing activities generated cash of $0.5 million during the nine months ended September 30, 2006, compared to generating cash of $1.1 million during the nine months ended September 30, 2005. Cash generated from financing activities for both periods was due to the proceeds from the exercise of employee stock options.

     In addition to cash generated from product sales, we believe our existing cash and cash equivalents will be sufficient to meet our anticipated cash requirements for at least the next two years. However, future research and development, clinical trials and sales and marketing expenses, as well as administration support, or licensing or acquisition of other products may require additional capital resources. We may raise additional funds through public or private equity offerings, debt financings, capital lease transactions, corporate collaborations or other means. Due to the uncertainty of financial markets, financing may not be available to us on acceptable terms or at all. Therefore, we may raise additional capital from time to time due to favorable market conditions or strategic considerations even if we have sufficient funds for planned operations.

     Our future capital requirements are difficult to forecast and will depend on many factors, including:

• success of our product sales and related collections;

• future expenses to expand and support our sales and marketing activities;

• costs relating to changes in regulatory policies or laws that affect our operations;

• maintaining and expanding our manufacturing capacity;

• the level of investment in research and development and clinical trials required to maintain and improve our technology position;

• costs of filing, prosecuting, defending and enforcing patent claims and other intellectual property rights; and

• our need or decision to acquire or license businesses, products or technologies.

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     If at any time sufficient capital is not available, either through existing capital resources or through raising additional funds, we may be required to delay, reduce the scope of, eliminate or divest one or more of our research, clinical or sales and marketing programs or our entire business.

Contractual Obligations

     As of September 30, 2006, we had three facility leases which include a one-year term expiring on September 30 2007, as well as an operating lease for a telephone system. We had no long-term debt, capital lease obligations, long-term purchase agreements or other commitments. There have been no new material contractual obligations since December 31, 2005. See Note 5 of our Notes to Financial Statements included in our annual Report on Form 10-K for the year 2005 for more detailed information.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

     There have been no significant changes in our market risk compared to the disclosures in Item 7A of our Annual Report on Form 10-K for the year ended December 31, 2005.

Item 4. Controls and Procedures

     Evaluation of disclosure controls and procedures. As required by Exchange Act Rule 13a-15(b), as of the end of the period covered by this Form 10-Q, we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and our Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures as defined in Rule 13a-15(e). Based upon that evaluation, our Chief Executive Officer along with our Chief Financial Officer, concluded that our disclosure controls and procedures are effective at the reasonable assurance level.

     Changes in internal controls. There were no changes in our internal controls over financial reporting during the quarter ended September 30, 2006 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

     Limitations on Effectiveness of Disclosure Controls. We intend to review and evaluate the design and effectiveness of our disclosure controls and procedures on an ongoing basis and to correct any material deficiencies that we may discover. Our goal is to ensure that our senior management has timely access to material information that could affect our business. While we believe the present design of our disclosure controls and procedures is effective to achieve our goal, future events affecting our business may cause us to modify our disclosure controls and procedures. The effectiveness of controls cannot be absolute because the cost to design and implement a control to identify errors or mitigate the risk of errors occurring should not outweigh the potential loss caused by errors that would likely be detected by the control. Moreover, we believe that disclosure controls and procedures cannot be guaranteed to be 100% effective all of the time. Accordingly, a control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system’s objectives will be met.

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PART II— OTHER INFORMATION

Item 1. Legal Proceedings

     None.

Item 1A. Risk Factors

     In addition to other information in this report, the following factors should be considered carefully in evaluating our company. If any of the risks or uncertainties described in this Form 10-Q or in our annual report on Form 10-K for the year ended December 31, 2005 actually occurs, our business, results of operations or financial condition could be materially adversely affected. The risks and uncertainties described in this Form 10-Q are not the only ones facing the company. Additional risks and uncertainties of which we are unaware or currently deem immaterial may also become important factors that may harm our business. The risk factors set forth below contain a number of material changes relative to those set forth in the “RISK FACTORS” section of our annual report on Form 10-K for the year ended December 31, 2005. The changes relate primarily to Gestiva, our therapeutic product candidate for the prevention of preterm birth in women who have a history of preterm delivery.

RISKS RELATING TO OUR BUSINESS

Because our revenues and financial results depend significantly on a limited product line, if we are unable to manufacture or sell our products in sufficient quantities and in a timely manner, our business will suffer.

     To date, substantially all of our revenue has resulted from sales of our principal product line, our FullTerm^™, The Fetal Fibronectin Test, the TLi_IQ^® System (and its predecessor, the TLi System) and related consumables. Although we intend to introduce additional products, we expect sales of the Fetal Fibronectin Test to account for substantially all of our near-term revenue. Because our business is highly dependent on our Fetal Fibronectin Tests, the TLi_IQ^® System and the related consumables, factors adversely affecting the pricing of or demand for these products could have a material and adverse effect on our business and cause the value of our securities to decline substantially. We will lose revenue if alternative diagnostic products or technologies gain commercial acceptance or if reimbursement is limited. We cannot assure that we will be able to continue to manufacture these products in commercial quantities at acceptable costs. Our inability to do so would adversely affect our operating results and cause our business to suffer.

If our products do not achieve and sustain market acceptance, we may fail to generate sufficient revenue to maintain our business.

     Our commercial success depends in large part on our ability to achieve and sustain market acceptance of our principal product line, FullTerm^™, The Fetal Fibronectin Test and the TLi_IQ^® System. A key element of our business plan calls for us to expand sales of our TLi_IQ^® System in hospitals and clinical laboratories and increase the related sales of the Fetal Fibronectin Test and other consumables used in conjunction with the TLi_IQ^® System. To accomplish this, we will need to convince healthcare providers of the benefits of our products through various means, including through published papers, presentations at scientific conferences and additional clinical trials. If existing users of our products determine that these products do not satisfy their requirements, or if our competitors develop a product perceived to better satisfy their requirements, our sales of Fetal Fibronectin Tests and other consumables may decline, and our revenues may correspondingly decline.

     In addition, our commercial success may depend on our ability to gain market acceptance for our other products and product candidates, including Gestiva. Market acceptance of our product portfolio will depend on our ability to develop additional applications of our existing products and to introduce new products to additional markets, including the oncology diagnostic market, the reproductive endocrinology and infertility markets and other women’s health markets.

     Other factors that might influence market acceptance of our products and product candidates include the following:

• evidence of clinical utility;

• convenience and ease of use;

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• availability of alternative and competing diagnostic products;

• cost-effectiveness;

• effectiveness of marketing, distribution and pricing strategy;

• publicity concerning these products or competitive products;

• concerns regarding product safety; and

• reimbursement.

     Our marketing and development efforts could require us to expend significant time and resources, and we may not succeed in these efforts. If our products are unable to achieve or maintain broad market acceptance, our revenues and operating results may be negatively impacted and our business would suffer.

Our quarterly revenues and operating results are subject to significant fluctuations, and our stock price may decline if we do not meet the expectations of investors and analysts.

     As of September 30, 2006, we had an accumulated deficit of $31.1 million. For the quarters ended September 30, 2006, June 30, 2006 and March 31, 2006, we had net income of $751,000, $537,000 and $6,000, respectively. However, we may not sustain profitability and cannot guarantee losses will not occur in the future. Our quarterly revenues and operating results are difficult to predict and have in the past and may in the future fluctuate significantly from quarter to quarter due to a number of factors, many of which are outside our control. These factors include, but are not limited to:

• our ability to increase market acceptance of women’s health diagnostics generally and of our products in particular, as discussed under “Risk Factors — If our products do not achieve and sustain market acceptance, we may fail to generate sufficient revenue to maintain our business”;

• our need and ability to generate and manage growth as discussed under “Risk Factors — If we fail to properly manage our anticipated growth in the United States or abroad, we may incur significant additional costs and expenses and our operating results may suffer”;

• delays in, or failure of, delivery of components by our suppliers as more fully described in “Risk Factors — We rely on a limited number of suppliers, and if these suppliers fail or are unable to perform in a timely and satisfactory manner, we may be unable to manufacture our products or satisfy product demand in a timely manner, which could delay the production or sale of these products”;

• risks related to Gestiva described below, including those discussed under “Risk Factors— If we are unable to obtain or maintain regulatory approval for Gestiva, we will be limited in our ability to commercialize Gestiva, and our business will be harmed,” “—The market for Gestiva may be very competitive because we have no patent protection for Gestiva, and we may not obtain regulatory exclusivity for Gestiva,” and “— We rely on a limited number of suppliers, and if these suppliers fail or are unable to perform in a timely and satisfactory manner, we may be unable to manufacture our products or satisfy product demand in a timely manner, which could delay the production or sale of our products.”

• the quarterly variations and seasonal nature of our business, and the resulting demand for our products based on procurement cycles of our customers;

• changes in the manner in which our operations are regulated;

• the adoption of new accounting policies;

• increases in the length of our sales cycle;

• fluctuations in gross margins;

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• compensation charges related to the issuance of stock options; and

• difficult political and economic conditions.

     These and other factors make it difficult for us to predict sales for subsequent periods and future performance. 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. We believe quarterly comparisons of our financial results are not necessarily meaningful and should not be relied upon as an indication of our future performance.

     In addition, we expect to incur additional expenses to execute our business plan, and these expenses will increase as we expand our marketing efforts, research and development activities, clinical testing and manufacturing capacity. These expenses, among other things, may cause our net income and working capital to decrease or result in a net loss. If sales do not continue to grow, we may not be able to maintain profitability. Our expansion efforts may prove more expensive than we currently anticipate, and we may not succeed in increasing our revenues sufficiently to offset these higher expenses. If we fail to do so, the market price for our common stock will likely decline.

If third-party payors do not adequately reimburse our customers, market acceptance of our products may be impaired, which may adversely affect our revenues and our operating results.

     Market acceptance of our products and the majority of our sales depend, in large part, on the availability of adequate reimbursement for the use of our products from government insurance plans, including Medicare and Medicaid, managed care organizations, private insurance plans and other third-party payors primarily in the United States and, to a lesser extent abroad. Third-party payors are often reluctant to reimburse healthcare providers for the use of medical diagnostic products incorporating new technology.

     Because each third-party payor individually approves reimbursement, obtaining these approvals can be a time-consuming and costly process that requires us to provide scientific and clinical support for the use of each of these products to each third-party payor separately with no assurance that approval will be obtained. For example, the policies of some third-party payors limit reimbursement for the use of our Fetal Fibronectin Test to women with signs and symptoms of preterm labor. In addition, if Gestiva is approved, we will need to dedicate considerable resources to obtaining approvals for reimbursement. This individualized process can delay the market acceptance of new products and may have a negative effect on our revenues and operating results.

     Market acceptance of our products internationally may depend in part upon the availability of reimbursement within prevailing healthcare payment systems. Reimbursement and healthcare payment systems in international markets vary significantly by country and include both government sponsored healthcare and private insurance. We may not obtain international reimbursement approvals in a timely manner, if at all. Our failure to receive international reimbursement approvals may negatively impact market acceptance of our products in the international markets in which those approvals are sought.

     We believe third-party payors are increasingly limiting coverage for medical diagnostic and pharmaceutical products in the United States and internationally, and in many instances are exerting pressure on product suppliers to reduce their prices. Consequently, third-party reimbursement may not be consistently available or adequate to cover the cost of our products. Additionally, third-party payors who have previously approved a specific level of reimbursement may reduce that level. Under prospective payment systems, in which healthcare providers may be reimbursed a set amount based on the type of diagnostic procedure performed, such as those utilized by Medicare and in many privately managed care systems, the cost of our diagnostic products may not be justified and reimbursed. Any limitations on reimbursement for our products could limit our ability to commercialize and sell new products and continue to sell our existing products, or may cause the prices of our existing products to be reduced, which may adversely affect our revenues and operating results.

If we fail to properly manage our anticipated growth in the US or abroad, we may incur significant additional costs and expenses and our operating results may suffer.

     Growth of our business is likely to place a significant strain on our managerial, operational and financial resources and systems. In the United States, while we anticipate hiring additional personnel to assist in the planned expansion of sales efforts for our current products and the development of future products, we may not be able to successfully increase sales of current products or introduce new products and meet our growth goals. The strain on our management and staff may be

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particularly acute as we expand into the therapeutic business as well as the diagnostic business. To manage our anticipated growth, we must attract and retain qualified personnel and manage and train them effectively. We will depend on our personnel and third parties to effectively market our products to an increasing number of hospitals, physicians and other healthcare providers. We will also depend on our personnel to develop next generation technologies. Further, our anticipated growth will place additional strain on our suppliers and manufacturers, as well as our own internal manufacturing processes, resulting in an increased need for us to carefully monitor for quality assurance. In addition, we may choose or be required to relocate or expand our manufacturing facility to accommodate potential growth in our business. Any failure by us to manage our growth effectively could have an adverse effect on our ability to achieve our revenue and profitability goals.

     Our plans to expand our presence in international markets will cause us to incur various costs and expenses and may strain our operating and financial systems and resources in a manner that could materially and adversely affect our operating results. We will be subject to the regulatory oversight of additional authorities as we expand internationally. These authorities may impose regulations and restrictions on the sales and marketing of our products that are different and potentially more restrictive than those placed on us by regulators in the US. We may be required to expend considerable resources to comply with these requirements. Ultimately, we may not be able to comply with such regulations in a timely manner, if at all. If we are unable to satisfy these requirements on commercially reasonable terms, our ability to commercialize our products would be hampered and our revenues may be adversely affected.

We will need to devote considerable resources to comply with federal, state and foreign regulations and, if we are unable to fully comply, we could face substantial penalties.

     We are directly or indirectly through our customers subject to extensive regulation by both the federal government and the states and foreign countries where we conduct our business. Companies such as ours are required to expend considerable resources complying, in particular, with laws such as the following:

• the Federal Food, Drug and Cosmetic Act, which regulates the design, testing, manufacture, labeling, marketing, distribution and sale of medical devices and pharmaceuticals;

• the Federal Anti-Kickback Law, which prohibits the illegal inducement of referrals for which payment may be made under federal healthcare programs such as the Medicare and Medicaid Programs;

• Medicare laws and regulations that prescribe the requirements for coverage and payment, including the amount of such payment, and laws prohibiting false claims for reimbursement under Medicare and Medicaid;

• CE mark which could limit our ability to sell in Europe; and

• ISO 13485 which could limit our ability to sell in Canada.

     Companies such as ours are also required to comply with laws and regulations regarding the practice of medicine by non-physicians, consumer protection and Medicare and Medicaid payments. If our past or present operations are found to be in violation of any of the laws described above or the other governmental regulations to which we or our customers are subject, we may be subject to the applicable penalty associated with the violation, including civil and criminal penalties, damages, fines, exclusion from the Medicare and Medicaid programs and the curtailment or restructuring of our operations. If we are required to obtain permits or licenses under these laws that we do not already possess, we may become subject to substantial additional regulation or incur significant expense. Any penalties, damages, fines, curtailment or restructuring of our operations may adversely affect our ability to operate our business and our financial results. Because many of these laws have not been fully interpreted by the regulatory authorities or the courts, and their provisions are open to a variety of interpretations and additional legal or regulatory change, we may be at a heightened risk of being found to be in violation of these laws. As we expand our business beyond diagnostic products, we will need to comply with laws and regulations in addition to those applicable to diagnostic products. Any action against us for violation of these laws, even if we successfully defend against it, could cause us to incur significant legal expenses, divert our management’s attention from the operation of our business and damage our reputation.

If we are unable to maintain our existing regulatory approvals and clearances for our existing diagnostic products, or obtain new regulatory approvals and clearances for our diagnostic product candidates, our ability to commercially distribute our products and our business may be significantly harmed.

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     The FDA, and comparable agencies of other countries generally regulate our diagnostic products as medical devices. In the United States, FDA regulations govern, among other things, the activities that we perform, including product development, product testing, product labeling, product storage, manufacturing, advertising, promotion, product sales, reporting of certain product failures and distribution. Most of the new products that we plan to develop and commercialize in the United States will require either pre-market notification, also known as 510(k) clearance, or pre-market approval, from the FDA prior to marketing. The 510(k) clearance process requires us to notify the FDA of our intent to market a medical device. The overall 510(k) clearance process usually takes from three to twelve months from the time of submission to the time that you can begin to sell a product in the market, but can take significantly longer. The pre-market approval process, often referred to as the PMA process, is much more costly, lengthy and uncertain and generally takes between one and three years from submission to PMA approval, but may take significantly longer and such clearance or approval may never be obtained.

     All of the diagnostic products that we have submitted and may submit in the future for FDA clearance or approval are or will be subject to substantial restrictions, including, among other things, restrictions on the indications for which we may market our products, which could result in reductions in or an inability to grow our revenues. Even if regulatory approval of a product is granted, the approval may be subject to limitations on the indicated uses for which the product may be marketed or certain requirements for costly post-marketing testing and surveillance to monitor the performance and clinical utility of the product. For example, any of our products that have received FDA approval, such as our FullTerm^™, The Fetal Fibronectin Test or TLi_IQ^® System, remain subject to ongoing post-marketing regulation and oversight by the FDA. The marketing claims that we are permitted to make in labeling our diagnostic products, if cleared or approved by the FDA, are limited to those specified in any clearance or approval. Our intention to expand the use of our products into new areas such as the prediction of successful induction of labor and oncology will require us to make new submissions to the FDA.

     In addition, we are subject to review, periodic inspection and marketing surveillance by the FDA to determine our compliance with regulatory requirements for any product for which we obtain marketing approval. Following approval, our manufacturing processes, subsequent clinical data and promotional activities are subject to ongoing regulatory obligations. If the FDA finds that we have failed to comply with these requirements or later discovers previously unknown problems with our products, including unanticipated adverse events of unanticipated severity or frequency, manufacture or manufacturing processes or failure to comply with regulatory requirements, it can institute a wide variety of enforcement actions, ranging from a public warning letter to more severe sanctions, including:

• fines, injunctions and civil penalties;

• recall or seizure of our products;

• restrictions on our products or manufacturing processes, including operating restrictions, partial suspension or total shutdown of production;

• denial of requests for 510(k) clearances or PMAs of product candidates;

• withdrawal of 510(k) clearances or PMAs already granted;

• disgorgement of profits; and

• criminal prosecution.

     Any of these enforcement actions could affect our ability to commercially distribute our products in the United States and may also harm our ability to conduct the clinical trials necessary to support the marketing, clearance or approval of these products and could materially and adversely affect our business.

     Our PMA supplement seeking approval for use of our FullTerm^™, The Fetal Fibronectin Test in predicting successful induction of labor has been submitted to the FDA. The FDA initially placed its review of the application on hold while a third party we have engaged conducts an audit of all of the clinical study sites because of the number of protocol deviations, in order to confirm the accuracy of the data. The audit has been completed and we will need to submit new analyses of the data and a corrective action plan to the FDA before it will resume its review of the application. The new analyses of the data or the corrective action plan may not be acceptable to us or to the FDA and we may not continue to pursue or obtain FDA approval for this application.

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     We rely on our CLIA-certified laboratory located at our facility in Sunnyvale, California to process E-tegrity Tests. The Centers for Medicare and Medicaid Services, or the CMS, requires that operators of CLIA-certified laboratories submit to surveillance and follow-up inspections. If we are unable to meet the CMS’s requirements for continued operation pursuant to CLIA, our laboratory may lose its CLIA certification, and we may be unable to continue to process E-tegrity Tests. As a result, our business may be harmed.

If we are unable to obtain or maintain regulatory approval for Gestiva, we will be limited in our ability to commercialize Gestiva, and our business will be harmed. In addition, if pre-marketing or post-marketing approval requirements are too expensive or too time-consuming and could adversely affect our financial condition, we may elect to not commercialize, or not continue commercializing, Gestiva.

     The research, testing, manufacturing, selling and marketing of pharmaceutical product candidates are subject to extensive regulation by the FDA and other regulatory authorities in the United States and other countries, which regulations differ from country to country. Obtaining and maintaining regulatory approval typically is an uncertain process, is costly and takes many years. For example, the FDA’s approvable letter for Gestiva requires us to conduct certain animal studies, which will be expensive and delay approval, and there can be no assurance that such studies, once completed, will result in Gestiva’s approval. Moreover, the FDA has requested expensive, time-consuming post-marketing studies of Gestiva, which could cause us to elect not to commercialize, or not continue commercializing, the product. In addition, failure to comply with the FDA and other applicable foreign and U.S. regulatory requirements may subject us to administrative or judicially imposed sanctions. These include warning letters, civil and criminal penalties, injunctions, product seizure or detention, product recalls, total or partial suspension of production, and refusal to approve pending NDAs, or supplements to approved NDAs.

     Regulatory approval of an NDA or NDA supplement is never guaranteed. Despite the time, resources and effort expended, failure can occur at any stage. The FDA has substantial discretion in the approval process for human medicines. The FDA can deny, delay or limit approval of a product candidate for many reasons including:

• the FDA may not find that there is adequate evidence that our product candidate is safe or effective;

• the FDA may not find data from the clinical or preclinical testing to be sufficient; or

• the FDA may not approve our or our third party manufacturers’ processes or facilities.

     Future governmental action or changes in FDA policy or personnel may also result in delays or rejection of an NDA in the United States. If we receive regulatory approval for Gestiva, we will also be subject to ongoing FDA obligations and continued regulatory oversight and review, such as continued safety reporting requirements; and we may also be subject to additional FDA post-marketing obligations, such as Phase IV studies. If we are not able to maintain regulatory compliance, we may not be permitted to market Gestiva or any other therapeutic product candidates.

     Any regulatory approvals that we receive for Gestiva or any other product candidates may also be subject to limitations on the indicated uses for which the medicine may be marketed or contain requirements for potentially costly post-marketing follow-up studies. In addition, if the FDA approves any of our product candidates, the labeling, packaging, adverse event reporting, storage, advertising, promotion and record-keeping for the medicine will be subject to extensive regulatory requirements. The subsequent discovery of previously unknown problems with the medicine, including adverse events of unanticipated severity or frequency, may result in restrictions on the marketing of the medicine, and could include withdrawal of the medicine from the market.

If we modify our marketed diagnostic products, we may be required to obtain new 510(k) clearances or PMAs, or we may be required to cease marketing or recall the modified products until clearances are obtained.

     Any modification to a 510(k)-cleared or pre-market approved diagnostic device that could significantly affect its safety or effectiveness, or that would constitute a major change in its intended use, requires a new 510(k) clearance or PMA, such as the development of our FullTerm^™, The Fetal Fibronectin Test as a diagnostic test for the induction of labor. The

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FDA requires every manufacturer to make the determination of whether new clearance or approval is required for 510(k)-cleared devices. The FDA may review any manufacturer’s decision. The FDA may not agree with our decisions regarding whether new clearances or approvals are necessary. If the FDA requires us to seek 510(k) clearance or PMA for any modification to a previously cleared or approved product, we may be required to cease marketing or to recall the modified product until we obtain clearance or approval, and we may be subject to significant regulatory fines or penalties. Any recall or FDA requirement that we seek additional approvals or clearances could result in delays, fines, costs associated with modification of a product, loss of revenue and potential operating restrictions imposed by the FDA.

Even if we receive approval for the marketing and sale of Gestiva for the prevention of preterm birth in women who have a history of preterm delivery, it may never be accepted as a treatment for preterm birth in women who have a history of preterm delivery.

     Many factors may affect the market acceptance and commercial success of Gestiva for the prevention of preterm birth in women who have a history of preterm delivery. Although there is currently no FDA-approved treatment for the prevention of preterm birth in women who have a history of preterm delivery, the comparable formulation to Gestiva, 17 alpha-hydroxyprogesterone caproate (or 17P), is available from compounding pharmacies, and there is one other company developing a different formulation of progesterone applied via a vaginal gel. Even if the FDA approves Gestiva, physicians may adopt Gestiva only if they determine, based on experience, clinical data, side effect profiles and other factors, that it is preferable to other products or treatments then in use. Acceptance of Gestiva among influential practitioners will be essential for market acceptance of Gestiva.

     Other factors that may affect the market acceptance and commercial success of Gestiva include:

• the effectiveness of Gestiva, including any side effects, as compared to alternative treatment methods;

• the product labeling or product insert required by the FDA for Gestiva;

• the cost-effectiveness of Gestiva and the availability of insurance or other third-party reimbursement for patients using Gestiva;

• the timing of market entry of Gestiva relative to competitive products;

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

• the rate of adoption of Gestiva by physicians and by target patient population.

     The failure of Gestiva to achieve market acceptance would prevent us from generating meaningful product revenue from Gestiva.

We have limited experience marketing pharmaceutical products, and will need to develop pharmaceutical sales and marketing capabilities to successfully commercialize Gestiva.

     We plan to use our existing sales force to market Gestiva. However, our management and sales force have limited experience in marketing or selling pharmaceutical products. To achieve commercial success for Gestiva, we must invest considerable time and resources in educating and training our management and sales force in pharmaceutical marketing generally, and in the marketing of Gestiva specifically. However, our Gestiva sales and marketing efforts may not be successful or cost-effective. For example, in the event that the commercial launch of Gestiva is delayed due to FDA requirements or other reasons, we may make investments in Gestiva marketing and sales too early relative to the launch of Gestiva. If our Gestiva sales and marketing efforts are not successful, cost-effective and timely, our profitability may be adversely affected.

If we experience delays in the development of new products or delays in planned improvements to our products, our commercial opportunities will be reduced and our future competitive position may be adversely affected.

     To improve our competitive position, we believe that we will need to develop new diagnostic and therapeutic products, as well as improve our existing instruments, reagents and ancillary products. Improvements in automation and the

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number of tests that can be performed in a specified period of time will be important to the competitive position of our products as we market to a broader, perhaps less technically proficient, group of customers. Our ability to develop new products and make improvements in our products may face difficult technological challenges leading to delays in development, particularly as we expand our business beyond diagnostic products. If we are unable to successfully complete development of new products or if we are unable to successfully complete the planned enhancements to our products, in each case without significant delays, our future competitive position may be adversely affected.

If other companies develop and market technologies or products faster than we do, or if those products are more cost effective or useful than our products, our commercial opportunities will be reduced or eliminated.

     The extent to which any of our technologies and products achieve and sustain market acceptance will depend on numerous competitive factors, many of which are beyond our control. Competition in the medical device, diagnostic product and pharmaceutical industries is intense and has been accentuated by a rapid pace of technological development.

     While no company directly competes with us in our core diagnostic markets, there are other diagnostic techniques currently in use to diagnose the likelihood of preterm birth, such as ultrasound. In addition, other companies may develop new diagnostic products or technologies that could compete with or entirely displace our products and technologies. For example, other biomarkers, including cytokines and other proteins indicative of infection, and proteomics are the subject of research that may yield new products or technologies. The effectiveness of these alternative techniques may improve with time and additional research by clinicians or manufacturers. The medical devices and diagnostic products industries include large diagnostics and life sciences companies. Most of these entities have substantially greater research and development capabilities and financial, scientific, manufacturing, marketing, sales and service resources than we do.

     Gestiva, if approved for the prevention of preterm birth in women who have a history of preterm delivery, may compete with compounding pharmacies selling 17P for the prevention of preterm birth, such as Wedgewood Pharmacy. We are also aware of another company, Columbia Laboratories, that is currently enrolling patients in a clinical trial for a product candidate for the prevention of preterm birth. Any regulatory exclusivity we obtain with respect to Gestiva will not block the Columbia Laboratories product candidate, because the product candidate being developed by Columbia Laboratories contains a different active ingredient and is a different dosage form than Gestiva.

     Some of our actual and potential competitors have more experience than we do in research and development, clinical trials, regulatory matters, manufacturing, marketing and sales.

     These organizations also compete with us to:

• pursue acquisitions, joint ventures or other collaborations;

• license proprietary technologies that are competitive with our technologies;

• attract funding; and

• attract and hire scientific and other talent.

     If we cannot successfully compete with new products or technologies, sales of our products and our competitive position will suffer, and our stock price might be adversely affected. Because of their greater experience with commercializing technologies and larger research and development capabilities, other companies might succeed in developing and commercializing technologies or products earlier and obtaining regulatory approvals and clearances from the FDA more rapidly than we do. Other companies also might develop more effective technologies or products that are more predictive, more highly automated or more cost-effective, which may render our technologies or products obsolete or non-competitive.

If we or any of our third-party manufacturers for our diagnostic do not operate in accordance with Quality System Regulations, we could be subject to FDA enforcement actions, including the seizure of our products and the halt of our production.

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     We and any third-party manufacturers that we currently rely on or will rely on in the future for our diagnostic products, including those we rely on to produce components of our products, must continuously adhere to the current good manufacturing practices, or cGMP, set forth in the FDA’s Quality System Regulations, or QSR, and enforced by the FDA through its facilities inspection program. In complying with QSR, we and our third-party manufacturers must expend significant time, money and effort in design and development, testing, production, record keeping and quality control to assure that our products meet applicable specifications and other regulatory requirements. The failure to comply with these specifications and other requirements could result in an FDA enforcement action, including the seizure of products and shutting down of production. We or any of these third-party manufacturers may also be subject to comparable or more stringent regulations of foreign regulatory authorities. In any of these circumstances, our ability to develop, produce and sell our products could be impaired.

     We have received regulatory approvals for some of the operations located at our Sunnyvale, California headquarters, including our CLIA-certified laboratory. Should we choose to relocate, or if for some reason we are required to relocate some or all of our facilities from this location, we may be required to apply for regulatory approvals for the new location. It may be difficult or impossible for us to obtain the necessary approvals to continue our business in its present form at any such new location, and our business may be harmed as a result.

We rely on a limited number of suppliers, and if these suppliers fail or are unable to perform in a timely and satisfactory manner, we may be unable to manufacture our products or satisfy product demand in a timely manner, which could delay the production or sale of our products.

     We rely on a limited number of suppliers for both raw materials and components necessary for the manufacture of our diagnostic products, including our FullTerm^™, The Fetal Fibronectin Test and TLi_IQ^® System. We acquire all of these components, assemblies and raw materials on a purchase-order basis, which means that the supplier is not required to supply us with specified quantities over a certain period of time or to set aside part of its inventory for our forecasted requirements. If we need alternative sources for key components, assemblies or raw materials for any reason, such components, assemblies or raw materials may not be immediately available. If alternative suppliers are not immediately available, we will have to identify and qualify alternative suppliers, and delivery of such components, assemblies or raw materials may be delayed. Consequently, if we do not forecast properly, or if our suppliers are unable or unwilling to supply us in sufficient quantities or on commercially acceptable terms, we may not have access to sufficient quantities of these components, assemblies and raw materials on a timely basis and may not be able to satisfy product demand. We may not be able to find an adequate alternative supplier if required, in a reasonable time period, or on commercially acceptable terms, if at all. Our inability to obtain a supplier for the manufacture of our products may force us to curtail or cease operations, which would have a material adverse effect on our product sales and profitability. We also relied upon a fulfillment provider to process orders for our products, coordinate invoicing and collections, as well as ship our products to customers in the United States through September 30, 2005. In the fourth quarter of 2005, we transferred the fulfillment operation back to Adeza. Any problems with this transition may have a material adverse effect on our product sales and profitability.

     In addition, if any of these components, assemblies or raw materials are no longer available in the marketplace, we will be forced to further develop our technologies to incorporate alternate components, assemblies and raw materials and to do so in compliance with QSR. If we incorporate new components, assemblies or raw materials into our products, we may need to seek and obtain additional approvals or clearances from the FDA or foreign regulatory agencies, which could delay the commercialization of these products.

We have no manufacturing capabilities for Gestiva and we may depend on third parties who are single source suppliers to manufacture Gestiva. If these suppliers are unable to continue manufacturing Gestiva and we are unable to obtain supply from alternative sources, our business will be harmed.

     We currently have no experience in, and we do not own facilities for, nor do we plan to develop our own facilities for, manufacturing Gestiva. To date, our need for Gestiva has been limited to the amounts required in connection with our Gestiva NDA submission, which includes stability studies related to Gestiva. We have obtained our supply of Gestiva pursuant to a clinical supply agreement with a contract manufacturer, and we have obtained our supply of the active pharmaceutical ingredient in Gestiva on a purchase order basis. We do not intend to establish our own manufacturing facilities for Gestiva, and we are in the process of negotiating commercial supply agreements with the contract manufacturer and the supplier of the active ingredient. If we are successful in negotiating commercial supply agreements with those parties, each of them may be a single source supplier to us. In the event we are unable, for whatever reason, to obtain Gestiva or the

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active pharmaceutical ingredient in Gestiva in quantities sufficient for commercialization, we may not be able to identify alternate manufacturers able to meet our needs on commercially reasonable terms and in a timely manner, or at all. If we are unable, for whatever reason, to obtain sufficient quantities of Gestiva from our contract manufacturers, we may not be able to manufacture in a timely manner, if at all.

If our third party manufacturers of Gestiva fail to comply with FDA regulations or otherwise fail to meet our requirements, our product development and commercialization efforts may be delayed.

     We depend on third party manufacturers to supply Gestiva. Our suppliers and manufacturers must comply with the FDA’s current Good Manufacturing Practices, or cGMP, regulations and guidelines. Our suppliers and manufacturers may encounter difficulties in achieving quality control and quality assurance and may experience shortages of qualified personnel.

     Their failure to follow cGMP or other regulatory requirements and to document their compliance with cGMP may lead to significant delays in the availability of products for commercial use or clinical study or the termination or hold on a clinical study, or may delay or prevent filing or approval of marketing applications for Gestiva.

     Failure of our third party suppliers and manufacturers or us to comply with applicable regulations could result in sanctions being imposed on us, including fines, injunctions, civil penalties, failure of regulatory authorities to grant marketing approval of our products, delays, suspension or withdrawal of approvals, license revocation, seizures or recalls of products, operating restrictions and criminal prosecutions, any of which could harm our business. If the operations of any current or future supplier or manufacturer were to become unavailable for any reason, commercialization of Gestiva could be delayed and our revenue from product sales could be reduced.

     If we use a different third-party manufacturer to produce commercial quantities of Gestiva than we used for the studies we conducted in connection with the Gestiva NDA submission, the FDA may require us to conduct a study to demonstrate that the product used in our studies is equivalent to the final commercial product. If we are unable to establish that the product is equivalent, or if the FDA disagrees with the results of our study, commercial launch of Gestiva would be delayed.

We depend on distributors to market and sell our products in overseas markets, and if our foreign distributors fail in their efforts or are unwilling or unable to devote sufficient resources to market and sell our products, our ability to effectively market our products and our business will be harmed.

     Our international sales totaled $0.4 million for the three months ended September 30, 2006, $0.3 million for the three months ended June 30, 2006, $0.2 million for the three months ended March 31, 2006, and $1.0 million in the years ended December 31, 2005 and 2004. Our international sales currently depend upon the marketing efforts of and sales by certain distributors in Europe, Australia, the Pacific Rim region and South America. In most instances, our distribution arrangements are governed by short-term purchase orders. We also rely upon certain of these distributors to assist in obtaining product registration and reimbursement approvals in certain international markets, and we may not be able to engage qualified distributors in our targeted markets. The distributors that we are able to obtain may not perform their obligations. If a distributor fails to invest adequate resources and support in promoting our products and training physicians, hospitals and other healthcare providers in the proper techniques for using our products or in awareness of our products, or if a distributor ceases operations, we would likely be unable to achieve significant sales in the territory represented by the distributor. If we decide to market new products abroad, we will likely need to educate our existing or new distributors about these new products and convince them to distribute the new products. If these distributors are unwilling or unable to market and sell our products, we may experience delayed or reduced market acceptance and sales of our products outside the United States. Our failure to engage adequate distributors, or the failure of the distributors to perform their obligations as expected, may harm our ability to effectively market our products and our business.

The regulatory approval process outside the United States varies depending on foreign regulatory requirements and may limit our ability to develop, manufacture and sell our products internationally.

     To market any of our products outside of the United States, we and certain of our distributors, are subject to numerous and varying foreign regulatory requirements, implemented by foreign health authorities, governing the design and conduct of human clinical trials and marketing approval for pharmaceutical and diagnostic products. The approval procedure varies among countries and can involve additional testing, and the time required to obtain approval may differ from that

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required to obtain FDA approval. The foreign regulatory approval process includes all of the risks associated with obtaining FDA approval set forth above, and approval by the FDA does not ensure approval by the health authorities of any other country, nor does the approval by foreign health authorities ensure approval by the FDA.

If our products do not perform as expected, we may experience reduced 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 medical diagnostic devices. Our customers are particularly sensitive to product defects and errors because of the use of our products in medical practice. Our reputation and the public image of our products may be impaired for any of the following reasons:

• failure of our products to perform as expected;

• a perception that our products are difficult to use; and

• litigation concerning the performance of our products.

     Even after any underlying problems are resolved, any manufacturing defects or performance errors in our products could result in lost revenue, delay in market acceptance, damage to our reputation, increased service and warranty costs and claims against us.

If product liability suits or other claims and product field actions are initiated against us, we may be required to engage in expensive and time-consuming litigation, pay substantial damages, face increased insurance rates and sustain damage to our reputation, which would significantly impair our financial condition.

     Our business exposes us to potential product liability claims and field action risks that are inherent in the testing, manufacturing, marketing and sale of pharmaceutical and diagnostic products. We may be unable to avoid product liability claims or field actions, including those based on claims that the use or failure of our products resulted in a misdiagnosis or harm to a patient. Although we believe that our liability coverage is adequate for our current needs, and while we intend to expand our product liability insurance coverage to any products for which we obtain marketing approval, including Gestiva, insurance may be unavailable, prohibitively expensive or may not fully cover our potential liabilities. If we are unable to maintain sufficient insurance coverage on reasonable terms or to otherwise protect against potential product liability claims or field actions, we may be unable to continue to market our products and develop new markets. Defending a lawsuit could be costly and significantly divert management’s attention from conducting our business. A successful product liability claim brought against us in excess of any insurance coverage we have at that time could cause us to incur substantial liabilities, potentially in excess of our total assets, and our business to fail. In addition, we are a specialty company focused on women’s health. We have a narrow customer base that is subject to significant malpractice litigation that may place us at risk of the same. Product liability claims, product field actions or other regulatory proceedings may damage our reputation by raising questions about our products’ safety and efficacy could significantly harm our reputation, interfere with our efforts to market our products and make it more difficult to obtain the funding and commercial relationships necessary to maintain our business.

If we or others identify side effects after our therapeutic products are on the market, we may be required to perform lengthy additional clinical trials, change the labeling of our products or withdraw our products from the market, any of which would hinder or preclude our ability to generate revenues.

     If we or others identify side effects after any of our therapeutic products are on the market:

• regulatory authorities may withdraw their approvals;

• we may be required to reformulate our products, conduct additional clinical trials, make changes in labeling of our products or implement changes to or obtain re-approvals of our manufacturing facilities;

• we may experience a significant drop in the sales of the affected products;

• our reputation in the marketplace may suffer; and

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• we may become the target of lawsuits, including class action lawsuits.

     Any of these events could harm or prevent sales of the affected products or could increase the costs and expenses of commercializing and marketing these products.

We depend on the services of key personnel to implement our strategy, and if we lose key management or scientific personnel, scientific collaborators or other advisors or are unable to attract and retain other qualified personnel, we may be unable to execute our business plan and our operations and business would suffer.

     Our success depends, in large part, on the efforts and abilities of Emory Anderson, who is our President and Chief Executive Officer, Dr. Durlin Hickok, who is our Vice President, Medical Affairs, Dr. Robert Hussa, our Vice President, Research and Development, Mark Fischer-Colbrie, who is our Vice President of Finance and Administration and Chief Financial Officer, and Marian Sacco, our Vice President, Sales and Marketing, as well as the other members of our senior management and our scientific and technical personnel. While we have executed management continuity agreements, we do not currently have employment agreements with any of these individuals. We do not currently carry key person insurance on the lives of any of these executives. Many of these people have been members of our executive team for several years, and their knowledge of our business would be difficult or time-consuming to replace. We also depend on our scientific collaborators and other advisors, particularly with respect to our research and development efforts. If we lose the services of one or more of our key officers, employees or consultants, or are unable to retain or attract the services of existing or new scientific collaborators and other advisors, our research and development and product development efforts could be delayed or curtailed, our ability to execute our business strategy would be impaired, and our stock price might be adversely affected.

Most of our operations are currently conducted at a single location that may be at risk from earthquakes and other natural or unforeseen disasters.

     We currently conduct all of our manufacturing, development and management activities at a single location in Sunnyvale, California near known fault zones. In addition, our E-tegrity Tests are currently processed solely through our CLIA-certified laboratory located at our Sunnyvale facility. Despite precautions taken by us, any future natural or man-made disaster, such as a fire, earthquake or terrorist activity, could cause substantial delays in our operations, damage or destroy our equipment or inventory, and reduce our sales or cause us to incur additional expenses. In addition, the facility and some pieces of manufacturing equipment would be difficult to replace and could require substantial replacement lead-time. A disaster could seriously harm our business and results of operations. While we carry insurance for certain business interruptions, some natural and man-made disasters are excluded from our insurance policies, including those caused by terrorist acts or earthquakes. We believe that our insurance coverage is generally adequate for our current needs in the event of losses not caused by excluded events, but we may be subject to interruptions caused by excluded events or extraordinary events resulting in losses in excess of our insurance coverage or for which we have no coverage. This could impair our operating results and financial condition.

If we use biological and hazardous materials in a manner that causes injury, we could be liable for damages.

     Our research and development activities sometimes involve the controlled use of potentially harmful biological materials, hazardous materials and chemicals that are dangerous to human health and safety or the environment. We are subject on an ongoing basis to federal, state and local laws and regulations governing the use, storage, handling and disposal of these materials and specified waste products. The cost of compliance with these laws and regulations might be significant and could negatively affect our profitability. We believe our safety procedures for handling and disposing of these materials comply in all material aspects with federal, state and local laws and regulations and to date, we have not been required to take any action to correct any noncompliance. However, we cannot completely eliminate the risk of accidental contamination or injury to third parties from the use, storage, handling or disposal of these materials. Although we believe our insurance coverage is adequate for our current needs, in the event of contamination or injury, we could be held liable for any resulting damages, and any liability could exceed our resources or any applicable insurance coverage we may have.

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Potential business combinations could require significant management attention and prove difficult to integrate with our business, which could distract our management, disrupt our business, dilute stockholder value and adversely affect our operating results.

     If we become aware of potential business combination candidates to our business, which could include license, co-promote, joint venture, and other types of arrangements, we may decide to combine with such businesses or acquire their assets in the future. We have acquired businesses or product lines in the past. For example, we acquired exclusive rights to the SalEst Test in 2003. While we have not encountered such difficulties following our prior acquisitions, business combinations generally involve a number of additional difficulties and risks to our business, including:

• failure to integrate management information systems, personnel, research and development and marketing, operations, sales and support;

• potential loss of key current employees or employees of the other company;

• disruption of our ongoing business and diversion of management’s attention from other business concerns;

• potential loss of the other company’s customers;

• failure to develop further the other company’s technology successfully;

• unanticipated costs and liabilities; and

• other accounting consequences.

     In addition, we may not realize benefits from any business combination we may undertake in the future. If we fail to successfully integrate such businesses, or the technologies associated with such business combinations into our company, the revenue and operating results of the combined company could be adversely affected. Any integration process would require significant time and resources, and we may not be able to manage the process successfully. If our customers are uncertain about our ability to operate on a combined basis, they could delay or cancel orders for our products. We may not successfully evaluate or utilize the acquired technology or accurately forecast the financial impact of a combination, including accounting charges or volatility in the stock price of the combined entity. We may find challenges associated with integration particularly difficult if we acquire a business in an area unfamiliar to us or our senior management team. If we fail to successfully integrate other companies with which we may combine in the future, our business could be harmed.

If we fail to obtain necessary funds for our operations, we will be unable to continue to develop and commercialize new products and technologies and we may need to downsize or halt our operations.

     We expect capital outlays and operating expenditures to increase over the next several years as we expand our infrastructure, commercialization, manufacturing, clinical trials and research and development activities. We believe that our cash and cash equivalents, will be sufficient to meet our operating and capital requirements for at least the next two years. However, our present and future funding requirements will depend on many factors, including, among other things:

• the level of research and development investment required to maintain and improve our technology position;

• costs of filing, prosecuting, defending and enforcing patent claims and other intellectual property rights;

• the success of our product sales and related collections;

• our need or decision to acquire or license businesses, products or technologies;

• maintaining or expanding our manufacturing or commercialization capacity;

• greater than expected costs associated with Gestiva;

• competing technological and market developments; and

• costs relating to changes in regulatory policies or laws that affect our operations.

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     As a result of these factors, we may need to raise additional funds, and we cannot be certain that such funds will be available to us on acceptable terms when needed, if at all. In addition, if we raise additional funds through collaboration, licensing or other similar arrangements, it may be necessary to relinquish potentially valuable rights to our future products or proprietary technologies, or grant licenses on terms that are not favorable to us. If we cannot raise funds on acceptable terms, we may not be able to expand our operations, develop new products, take advantage of future opportunities or respond to competitive pressures or unanticipated customer requirements and may be required to delay, reduce the scope of, eliminate or divest one or more of our research, clinical or sales and marketing programs or our entire business.

RISKS RELATING TO OUR INTELLECTUAL PROPERTY

If we are unable to protect our proprietary rights, we may not be able to compete effectively.

     Our success depends significantly on our ability to protect our proprietary rights to the technologies used in our products. We rely on patent protection, as well as a combination of copyright, trade secret and trademark laws, and nondisclosure, confidentiality and other contractual restrictions, to protect our proprietary technology. However, these legal means afford only limited protection and may not adequately protect our rights or permit us to gain or keep any competitive advantage. For example, our pending US and foreign patent applications may not issue as patents at all, or if they do, they may not issue as patents in a form that will be advantageous to us or may issue and be subsequently successfully challenged by others and invalidated. Additionally, our family of issued patents and patent applications, if and when issued, relating to our FullTerm^™, The Fetal Fibronectin Test and TLi_IQ^® System, have a range of expiration dates from 2007 to 2025. Upon the expiration of one or more patents relating to our FullTerm^™, The Fetal Fibronectin Test and TLi_IQ^® System, we may not be able to protect our proprietary rights relating to the technologies used in these products. In addition, our pending patent applications include claims to material aspects of our products and procedures that are not currently protected by issued patents. Both the patent application process and the process of managing patent disputes can be time-consuming and expensive. Competitors may be able to design around our patents or develop products that provide outcomes comparable to ours. Although we have taken steps to protect our intellectual property and proprietary technology, including entering into confidentiality agreements and intellectual property assignment agreements with our employees, consultants and advisors, such agreements may not be enforceable or may not provide meaningful protection for our trade secrets or other proprietary information in the event of unauthorized use or disclosure or other breaches of the agreements. In addition, the laws of some foreign countries may not protect our intellectual property rights to the same extent as do the laws of the United States.

     If any of these events occur, our business will suffer and the market price of our common stock may decline.

     Although we may initiate litigation to stop the infringement of our patent claims or to attempt to force an unauthorized user of our patented inventions or trade secrets to compensate us for the infringement or unauthorized use, patent and trade secret litigation is complex and often difficult and expensive, and would consume the time of our management and other significant resources. If the outcome of litigation is adverse to us, third parties may be able to use our technologies without payments to us. Moreover, other companies against whom we might initiate litigation may be better able to sustain the costs of litigation because they have substantially greater resources. Because of these factors relating to litigation, we may be effectively unable to prevent misappropriation of our patent and other proprietary rights.

Our rights to use technologies and patents licensed to us by third parties are not within our control, and we may not be able to commercialize our products without these technologies.

     We have licensed a number of patents, including patents related to our FullTerm^™, The Fetal Fibronectin Test and our E-tegrity Test from third parties, including the Fred Hutchinson Cancer Research Center, Inverness Medical and the University of Pennsylvania. Our business may significantly suffer if one or more of these licenses terminate or expire, if we or our licensors fail to abide by the terms of the licenses or fail to prevent infringement by third parties or if the licensed patents are found to be invalid.

     If we violate the terms of our licenses, or otherwise lose our rights to these patents, we may be unable to continue developing and selling our products. Our licensors or others may dispute the scope of our rights under any of these licenses. The licensors under these licenses may breach the terms of their respective agreements or fail to prevent infringement of the licensed patents by third parties. Loss of any of these licenses for any reason could materially harm our financial condition and operating results.

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     In addition, if we determine that our products do not incorporate the patented technology that we have licensed from third parties, or that one or more of the patents that we have licensed is not valid, we may dispute our obligation to pay royalties to our licensors.

     Any dispute with a licensor could be complex, expensive and time-consuming and an outcome adverse to us could materially harm our business and impair our ability to commercialize our products, including our FullTerm^™, The Fetal Fibronectin Test. As a result, our stock price might be adversely affected.

If the use of our technologies conflicts with the intellectual property rights of third parties, we may incur substantial liabilities, and we may be unable to commercialize products based on these technologies in a profitable manner, if at all.

     Other companies may have or acquire patent rights that they could enforce against us. If they do so, we may be required to alter our technologies, pay licensing fees or cease activities. If our technologies conflict with patent rights of others, third parties could bring legal action against us or our licensees, suppliers, customers or collaborators, claiming damages and seeking to enjoin manufacturing and marketing of the affected products. If these legal actions are successful, in addition to any potential liability for damages, we might have to obtain a license in order to continue to manufacture or market the affected products. A required license under the related patent may not be available on acceptable terms, if at all.

     Because patent applications can take many years to issue, there may be currently pending applications unknown to us or reissuance applications that may later result in issued patents upon which our technologies may infringe. There could also be existing patents of which we are unaware that our technologies may infringe. In addition, if third parties file patent applications or obtain patents claiming technology also claimed by us in pending applications, we may have to participate in interference proceedings in the US Patent and Trademark Office to determine priority of invention. If third parties file oppositions in foreign countries, we may also have to participate in opposition proceedings in foreign tribunals to defend the patentability of the filed foreign patent applications. We may have to participate in interference proceedings involving our issued patents or our pending applications.

     If a third party claims that we infringe upon its proprietary rights, it could cause our business to suffer in a number of ways, including:

• we may become involved in time-consuming and expensive litigation, even if the claim is without merit;

• we may become liable for substantial damages for past infringement if a court decides that our technologies infringe upon a competitor’s patent;

• a court may prohibit us from selling or licensing our product without a license from the patent holder, which may not be available on commercially acceptable terms, if at all, or which may require us to pay substantial royalties or grant cross-licenses to our patents; and

• we may have to redesign our product so that it does not infringe upon others’ patent rights, which may not be possible or could require substantial funds or time.

     If any of these events occur, our business will suffer and the market price of our common stock may decline.

If we are involved in intellectual property claims and litigation, the proceedings may divert our resources and subject us to significant liability for damages, substantial litigation expense and the loss of our proprietary rights.

     In order to protect or enforce our patent rights, we may initiate patent litigation. In addition, others may initiate patent litigation against us. We may become subject to interference proceedings conducted in patent and trademark offices to determine the priority of inventions. There are numerous issued and pending patents in the medical device field. The validity and breadth of medical technology patents may involve complex legal and factual questions for which important legal principles may remain unresolved.

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     Litigation may be necessary to assert or defend against infringement claims, enforce our issued and licensed patents, protect our trade secrets or know-how or determine the enforceability, scope and validity of the proprietary rights of others. Our involvement in intellectual property claims and litigation could:

• divert existing management, scientific and financial resources;

• subject us to significant liabilities;

• allow our competitors to market competitive products without obtaining a license from us;

• cause product shipment delays and lost sales;

• require us to enter into royalty or licensing agreements, which may not be available on terms acceptable to us, if at all; or

• force us to discontinue selling or modify our products, or to develop new products.

The market for Gestiva may be very competitive because we have no patent protection for Gestiva, and we may not obtain regulatory exclusivity for Gestiva.

     There is no United States patent covering either the formulation of 17P, or the use of 17P for the prevention of preterm birth in women who have a history of preterm delivery. Accordingly, we currently have no patent protection with respect to Gestiva and do not expect to obtain patent protection for Gestiva.

     We will have marketing exclusivity for Gestiva from competition from other pharmaceutical companies, but not from compounding pharmacies, only if we obtain either Orphan Drug designation or three year regulatory exclusivity for Gestiva. The FDA Orphan Drug designation is reserved for promising new therapies being developed to treat life-threatening or very serious diseases that affect fewer than 200,000 people in the U.S. The Orphan Drug Act guarantees market exclusivity from any other companies, other than potentially compounding pharmacies which are not regulated by the FDA, for the FDA approved indication for seven years to the first sponsor that obtains market approval for an orphan-designated product. Our initial request for Orphan Drug designation was denied, and we plan to meet with the FDA to provide additional new information for further review. There can be no assurance that our Orphan Drug designation request will be approved.

     If the FDA approves the Gestiva NDA but does not approve our Orphan Drug application for Gestiva, we may be granted regulatory exclusivity for three years from approval of the Gestiva NDA because the use of 17P for the prevention of preterm birth in women who have a history of preterm delivery would be a new indication of a previously approved active ingredient. An award of three years of exclusivity to a drug product means that the FDA cannot approve an application submitted under Section 505(b)(2) of the Federal Food, Drug and Cosmetic Act or an abbreviated new drug application for the same product for the same indication for three years. To obtain three-year exclusivity, the NDA covering a subject drug must include reports of new clinical investigations conducted by the sponsor that are essential to FDA approval of the new indication or dosage form. As we may not meet the guidelines for obtaining exclusivity there can be no assurance that we will receive three years of exclusivity.

     Gestiva, if approved for the prevention of preterm birth in women who have a history of preterm delivery, may compete with compounding pharmacies selling 17P for the prevention of preterm birth, and, possibly, another company that is developing a product candidate for the prevention of preterm birth. Our present and potential competitors include large compounding pharmacies and major pharmaceutical companies which have considerably greater financial, technical and marketing resources than we do.

     Because we have no patent covering the composition of 17P or the use of 17P for the prevention of preterm birth in women who have a history of preterm delivery, if an NDA covering the use of 17P for another indication is approved by the FDA, physicians could prescribe 17P labeled for other indications for patients at risk for preterm birth in women who have a history of preterm delivery. Monitoring and ensuring that patients who have a history of preterm delivery receive Gestiva rather than another form of 17P may be difficult and costly.

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We may be subject to damages resulting from claims that we or our employees have wrongfully used or disclosed alleged trade secrets of their former employers.

     Many of our employees were previously employed at universities or other diagnostic or biotechnology companies, including our potential competitors. Although no claims against us are currently pending, we may be subject to claims that these employees or we have inadvertently or otherwise used or disclosed trade secrets or other proprietary information of their former employers. Litigation may be necessary to defend against these claims. Even if we are successful in defending against these claims, litigation could result in substantial costs and be a distraction to management. If we fail in defending such claims, in addition to paying monetary damages, we may lose valuable intellectual property rights or personnel. A loss of key research personnel or their work product could hamper or prevent our ability to market existing or new products, which could severely harm our business.

If we cannot obtain additional licenses to intellectual property owned by third parties that we desire to incorporate into new products we plan to develop, we may not be able to develop or commercialize these future products.

     We are developing diagnostic products designed to expand the utility of fetal fibronectin in multiple applications. The technology that we ultimately may use in the development and commercialization of these future products may be protected by patent and other intellectual property rights owned by third parties. If we are unable to obtain rights to use necessary third-party intellectual property under commercially reasonable terms, or at all, we may be unable to develop these products, and this could harm our ability to expand our commercial product offerings and to generate additional revenue from these products.

RISKS RELATING TO OUR COMMON STOCK

If we are unable to timely satisfy regulatory requirements relating to internal controls, our stock price could suffer.

     Section 404 of the Sarbanes-Oxley Act of 2002 requires that certain companies perform a comprehensive evaluation of their internal control over financial reporting. At the end of each year, we must perform an evaluation of our internal control over financial reporting, include in our annual report the results of the evaluation, and have our independent auditors attest to such evaluation. If we fail to complete future evaluations on time, or if our independent auditors cannot attest to our future evaluations, we could fail to meet our regulatory reporting requirements and be subject to regulatory scrutiny and a loss of public confidence in our internal controls, which could have an adverse effect on our stock price.

If our principal stockholders, executive officers and directors choose to act together, they may be able to control our management and operations, which may prevent us from taking actions that may be favorable to our stockholders.

     Our executive officers, directors and principal stockholders, and entities affiliated with them, beneficially owned in the aggregate approximately 32% of our common stock as of March 31, 2006. This significant concentration of share ownership may adversely affect the trading price of our common stock because investors often perceive disadvantages in owning stock in companies with controlling stockholders. These stockholders, acting together, have the ability to exert substantial influence over all matters requiring approval by our stockholders, including the election and removal of directors and any proposed merger, consolidation or sale of all or substantially all of our assets. In addition, they could dictate the management of our business and affairs. This concentration of ownership could have the effect of delaying, deferring or preventing a change in control of us or impeding a merger or consolidation, takeover or other business combination that could be favorable to our stockholders.

The future sale of our securities could dilute our common stockholders’ investments and negatively affect our stock price.

     If our common stockholders sell substantial amounts of common stock in the public market, or the market perceives that such sales may occur, the market price of our common stock could fall. The holders of a substantial number of shares of our common stock, subject to some conditions, could require us to file registration statements covering their shares or to include their shares in registration statements that we may file for ourselves or other stockholders. Furthermore, if we were to include in a company-initiated registration statement shares held by those holders pursuant to the exercise of their registration rights, the sale of those shares could impair our ability to raise needed capital by depressing the price at which we could sell our common stock. If we issue equity or debt securities to raise additional funds, our existing stockholders may experience dilution and the new equity or debt securities may have rights, preferences and privileges senior to those of our existing stockholders. Furthermore, we may enter into financing transactions at prices that represent a substantial discount to market

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price. Raising funds through the issuance of equity securities will dilute the ownership of our existing stockholders. A negative reaction by investors and securities analysts to any sale of debt or our equity securities could result in a decline in the trading price of our common stock.

The price and volume of our common stock experience fluctuations, which could lead to costly litigation for us.

     Our stock price has been volatile. From December 10, 2004, the date of our initial public offering, through September 30, 2006, our stock has traded as high as $23.35 and as low as $10.97. The market price of our common stock may fluctuate substantially due to a variety of factors, including:

• media reports and publications and announcements about women’s health and cancer diagnostic products or new cancer treatments or innovations that could compete with our products;

• new regulatory pronouncements, changes in regulatory guidelines, such as adverse changes in reimbursement for women’s health and cancer diagnostic products, and the timing of regulatory approvals concerning the products in our pipeline;

• market conditions or trends related to the medical devices and diagnostic products industries or the market in general;

• changes in financial estimates or recommendations by securities analysts;

• the seasonal nature of our revenues and expenses;

• analysts’ perceptions of our ability to compete successfully in both the diagnostic and therapeutic businesses;

• variations in our quarterly operating results; and

• changes in accounting principles.

     The market prices of the securities of medical devices and diagnostic products companies, particularly companies like ours without a long history of product sales and earnings, have been highly volatile and are likely to remain highly volatile in the future. This volatility has often been unrelated to the operating performance of particular companies. Moreover, market prices for stocks of biotechnology and medical diagnostic related companies, particularly following an initial public offering, frequently reach levels that bear no relationship to the operating performance of these companies. These market prices may not be sustainable and are highly volatile. In the past, companies that experience volatility in the market price of their securities have often faced securities class action litigation. Whether or not meritorious, litigation brought against us could result in substantial costs, divert our management’s attention and resources and harm our ability to grow our business.

Anti-takeover provisions in our certificate of incorporation and bylaws and under Delaware law may inhibit a change in control or a change in management that our stockholders consider favorable.

     Provisions in our certificate of incorporation and bylaws could delay or prevent a change of control or change in management that would provide our stockholders with a premium to the market price of our common stock. These provisions include those:

• authorizing the issuance without further approval of “blank check” preferred stock that could be issued by our board of directors to increase the number of outstanding shares and thwart a takeover attempt;

• prohibiting cumulative voting in the election of directors, which would otherwise allow less than a majority of stockholders to elect director candidates;

• limiting the ability to remove directors;

• limiting the ability of stockholders to call special meetings of stockholders;

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• prohibiting stockholder action by written consent, thereby requiring all stockholder actions to be taken at a meeting of stockholders; and

• establishing advance notice requirements for nominations for election to the board of directors or for proposing matters that can be acted upon by stockholders at stockholder meetings.

     In addition, Section 203 of the Delaware General Corporation Law limits business combination transactions with 15% stockholders that have not been approved by our board of directors. These provisions and others could make it difficult for a third party to acquire us, or for members of our board of directors to be replaced, even if doing so would be beneficial to our stockholders. Because our board of directors is responsible for appointing the members of our management team, these provisions could in turn affect any attempt to replace the current management team. If a change of control or change in management is delayed or prevented, our stockholders may lose an opportunity to realize a premium on their shares of common stock or the market price of our common stock could decline.

We do not expect to pay dividends in the foreseeable future. As a result, our stockholders must rely on stock appreciation for any return on their investment in our common stock.

     We do not anticipate paying cash dividends on our common stock in the foreseeable future. Any payment of cash dividends will depend on our financial condition, results of operations, capital requirements and other factors and will be at the discretion of our board of directors. Accordingly, our stockholders will have to rely on capital appreciation, if any, to earn a return on their investment in our common stock. Furthermore, we may, in the future, become subject to contractual restrictions on, or prohibitions against, the payment of dividends.

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

     On December 10, 2004, we completed an initial public offering of 3,750,000 shares of our common stock. The common stock sold in the offering was registered under the Securities Act of 1933, as amended, on the Registration Statement on Form S-1 (Reg. No. 333-118012) that was declared effective by the SEC on December 9, 2004. The offering commenced on December 10, 2004. On December 21, 2004, the underwriters in the offering exercised their over-allotment option to purchase an additional 562,500 shares of our common stock to cover over-allotments. All 4,312,500 of the shares sold in the offering were sold at the initial public offering price of $16.00 per share. After deducting underwriting discounts and commissions and offering expenses, we received net proceeds form the offering of approximately $61.9 million.

     During the nine months ended September 30, 2006, we spent (i) approximately $20.0 million of the proceeds from the offering on sales and marketing efforts, (ii) approximately $5.8 million on research and development activities related to product development, clinical trials and regulatory approvals for additional indications for our Fetal Fibronectin Test, and (iii) approximately $6.3 million on other general corporate purposes. The remaining proceeds from the offering have been placed in temporary investments of marketable securities for future use as needed.

Item 3. Defaults upon Senior Securities

     None.

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

     None.

Item 5. Other Information

     None.

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Item 6. Exhibits

Exhibit
number	Description
10.18	Net Industrial Space Lease, executed on September 19, 2006, between Adeza and Tasman V, LLC.
31.1	Certificate pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended of Emory V. Anderson.
31.2	Certificate pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended of Mark D. Fischer-Colbrie.
32.1	Certificate pursuant to 18 U.S.C. Section 1350 of Emory V.Anderson.
32.2	Certificate pursuant to 18 U.S.C. Section 1350 of Mark D. Fischer-Colbrie.

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Signatures

     Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on this 7^th day of November 2006.

ADEZA BIOMEDICAL CORPORATION
By:	/s/ Emory V. Anderson Emory V. Anderson
	President and Chief Executive Officer
By:	/s/ Mark D. Fischer-Colbrie Mark D. Fischer-Colbrie
	Vice President, Finance and Administration and Chief Financial Officer

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EXHIBIT INDEX

Exhibit
number	Description
10.18	Net Industrial Space Lease, executed on September 19, 2006, between Adeza and Tasman V, LLC.
31.1	Certificate pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended of Emory V. Anderson.
31.2	Certificate pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended of Mark D. Fischer-Colbrie.
32.1	Certificate pursuant to 18 U.S.C. Section 1350 of Emory V. Anderson.
32.2	Certificate pursuant to 18 U.S.C. Section 1350 Mark D. Fischer-Colbrie.

EX-10.18

Exhibit 10.18

NET

INDUSTRIAL SPACE LEASE

by and between

Tasman V, LLC

as Landlord

and

Adeza Biomedical Corporation

as Tenant

TABLE OF CONTENTS

ARTICLE I: REFERENCES	1
1.1REFERENCES	1
ARTICLE 2: LEASED PREMISES, TERM AND POSSESSION	2
2.1 DEMISE OF LEASED PREMISES	2
2.2 RIGHT TO USE COMMON AREAS	2
2.3 LEASE COMMENCEMENT DATE AND LEASE TERM	2
2.4 DELIVERY OF POSSESSION	2
2.5 ACCEPTANCE OF POSSESSION	3
2.6 SURRENDER OF POSSESSION	3
2.7 EARLY OCCUPANCY	3
ARTICLE 3: RENT, LATE CHARGES AND SECURITY DEPOSITS	3
3.1 BASE MONTHLY RENT	3
3.2 ADDITIONAL RENT	4
3.3 YEAR-END ADJUSTMENTS	4
3.4 LATE CHARGE AND INTEREST ON RENT IN DEFAULT	4
3.5 PAYMENT OF RENT	4
3.6 PREPAID RENT	4
3.7 SECURITY DEPOSIT	4
ARTICLE 4: USE OF LEASED PREMISE AND COMMON AREAS	5
4.1 PERMITTED USE	5
4.2 GENERAL LIMITATIONS ON USE	5
4.3 NOISE AND EMISSIONS	5
4.4 TRASH DISPOSAL	5
4.5 PARKING	5
4.6 SIGNS	6
4.7 COMPLIANCE WITH LAWS	6
4.8 COMPLIANCE WITH INSURANCE REQUIREMENTS	6
4.9 LANDLORD’S RIGHT TO ENTER	6
4.10 CONTROL OF COMMON AREAS	6
4.11 RULES AND REGULATIONS	7
4.12 ENVIRONMENTAL PROTECTION	7
ARTICLE 5: REPAIRS, MAINTENANCE, SERVICES AND UTILITIES	7
5.1 REPAIRS AND MAINTENANCE	7
5.2 SERVICES AND UTILITIES	7
5.3 ENERGY AND RESOURCE CONSUMPTION	8
5.4 LIMITATION OF LANDLORD’S LIABILITY	8
ARTICLE 6: ALTERATIONS AND IMPROVEMENTS	8
6.1 BY TENANT	8
6.2 OWNERSHIP OF IMPROVEMENTS	8
6.3 ALTERATIONS REQUIRED BY LAW	8
6.4 LIENS	9
ARTICLE 7: ASSIGNMENT AND SUBLETTING BY TENANT	9
7.1 BY TENANT	9
7.2 MERGER OR REORGANIZATION	9
7.3 LANDLORD’S ELECTION	9
7.4 CONDITIONS TO LANDLORD’S CONSENT	9
7.5 ASSIGNMENT CONSIDERATION AND EXCESS RENTAL DEFINED	10
7.6 PAYMENTS	10
7.7 GOOD FAITH	10
7.8 EFFECT OF LANDLORD’S CONSENT	10

ARTICLE 8: LIMITATIONS ON LANDLORD’S LIABILITY AND INDEMNITY	10
8.1 LIMITATION ON LANDLORD’S LIABILITY AND RELEASE	10
8.2 TENANT’S INDEMNIFICATION OF LANDLORD	11
ARTICLE 9: INSURANCE	11
9.1 TENANT’S INSURANCE	11
9.2 LANDLORD’S INSURANCE	12
9.3 MUTUAL WAIVER OF SUBROGATION	12
ARTICLE 10: DAMAGE TO LEASED PREMISES	12
10.1 LANDLORD’S DUTY TO RESTORE	12
10.2 LANDLORD’S RIGHT TO TERMINATE	12
10.3 TENANT’S RIGHT TO TERMINATE	13
10.4 TENANT’S WAIVER	13
10.5 ABATEMENT OF RENT	13
ARTICLE 11: CONDEMNATION	13
11.1 LANDLORD’S RIGHT TO TERMINATE	13
11.2 TENANT’S RIGHT TO TERMINATE	13
11.3 TEMPORARY TAKING	13
11.4 RESTORATION AND ABATEMENT OF RENT	13
11.5 DIVISION OF CONDEMNATION AWARD	14
ARTICLE 12: DEFAULT AND REMEDIES	14
12.1 EVENTS OF TENANT’S DEFAULT	14
12.2 LANDLORD’S REMEDIES	14
12.3 LANDLORD’S DEFAULT AND TENANT’S REMEDIES	15
12.4 LIMITATION ON TENANT’S RECOURSE	15
12.5 TENANT’S WAIVER	15
ARTICLE 13: GENERAL PROVISIONS	15
13.1 TAXES ON TENANT’S PROPERTY	15
13.2 HOLDING OVER	16
13.3 SUBORDINATION	16
13.4 TENANT’S ATTORNMENT UPON FORECLOSURE	16
13.5 LENDER PROTECTION	16
13.6 ESTOPPEL CERTIFICATES	16
13.7 TENANTS’ FINANCIAL INFORMATION	16
13.8 TRANSFER BY LANDLORD	17
13.9 FORCE MAJEURE	17
13.10 NOTICES	17
13.11 ATTORNEY’S FEES	17
13.12 DEFINITIONS	17
13.13 GENERAL WAIVERS	18
13.14 MISCELLANEOUS	18
ARTICLE 14: CORPORATE AUTHORITY, BROKERS AND ENTIRE AGREEMENT	19
14.1 CORPORATE AUTHORITY	19
14.2 BROKERAGE COMMISSIONS	19
14.3 ENTIRE AGREEMENT	19
14.4 LANDLORD’S REPRESENTATIONS	19
ADDENDUM TO INDUSTRIAL SPACE LEASE	20
15.1 PAYMENT OF PROJECT MAINTENANCE COSTS	20
15.2 CONDITION OF THE PREMISES	20
15.3 EARLY OCCUPANCY	20
15.4 OPTION TO EXTEND	20
15.6 EFFECT OF ADDENDUM	20

NET INDUSTRIAL SPACE LEASE

          THIS LEASE, dated July 12, 2006 for reference purposes only, is made by and between Tasman V, LLC (“Landlord”) and Adeza Biomedical Corporation (“Tenant”), to be effective and binding upon the parties as of the date of the designated signatories to the Lease shall have executed this Lease (the “Effective Date of this Lease”).

ARTICLE I: REFERENCES

     1.1 REFERENCES

     All references in this Lease (subject to any further clarifications contained in this Lease) to the following terms shall have the following meaning or refer to the respective address, person, date, time period, amount, percentage, calendar year or fiscal year as below set forth.

A. Tenant’s Address for Notices:	1240 Elko Drive
	Sunnyvale, Ca 94089
B. Tenant’s Representative:	Emory V. Anderson
Phone Number:	408-745-0975
C. Landlord’s Address for Notices:	c/o SARATOGA MANAGEMENT CO.
	4125 Blackford Avenue, Suite 250
	San Jose, CA 95117
D. Landlord’s Representative:	Saratoga Management Co.
Phone Number:	408-249-8105
E. Intended Commencement Date:	August 1, 2006
F. Intended Term:	1240 Elko, 1237 Reamwood and
	1239 Reamwood to be bundled and
	co-terminus, with a one-year lease
	and 2 one-year options.
G. Lease Expiration Date:	September 30, 2007
H. Tenant’s Punch list Period:	N/A
I. First Month’s Prepaid Rent:	$2,400.00 (for addition of 1239 Reamwood)
J. Last Month’s Prepaid Rent:	none
K. Tenant’s Security Deposit:	$2,400.00 (for addition of 1239 Reamwood)
L. Late Charge Amount:	Five-(5%) percent
M. Real Property Tax Base Year:	N/A, triple net
N. Insurance Base Year:	N/A, triple net
O. Tenant’s Required Liability Coverage:	$1,000,000 single limit
P. Tenant’s Number of Parking Spaces:	94
Q. Brokers:	Saratoga Management Co., Inc.

     R. Project: That certain real property situated in the City of Sunnyvale County of Santa Clara, State of California, as presently improved with two (2) building(s), which real property is shown on the Site Plan attached hereto at Exhibit “A” and is commonly known as or otherwise described as follows:

  A. 17,600 square feet, more or less, of the complex at 1240 ElkoDrive, Sunnyvale, CA.
  B. 5,000 square feet, more or less, of the complex at 1237 Reamwood Ave., Sunnyvale, CA.
  C. 4,800 square feet, more or less, of the complex at 1239 Reamwood Ave., Sunnyvale, CA.

     S. Buildings: Those certain Buildings within the Project in which the leased Premises are located, which Buildings are shown outlined in black on Exhibit “A” hereto.

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     T. Common Areas: The “Common Areas” shall mean those areas within the Project which are located outside the buildings and which are provided and designated by Landlord from time to time for general use by tenants of the Project including driveways, pedestrian walkways, parking spaces, landscaped areas and enclosed trash disposal areas.

     U. Leased Premises: That certain interior space within the Buildings which space is shown outlined in black on the Floor Plan attached hereto as Exhibit “A” consisting of approximately 27,400 square feet and, for purposes of this Lease, agreed to contain said number of square feet. The Leased Premises are commonly known as or otherwise described as follows: that 9,800 square feet of a 20,000 square foot building at 1233-1239 Reamwood Avenue, Sunnyvale CA. plus 17,600 square feet of a building at 1234-1240 Elko Drive, Sunnyvale, CA.

     V. Base Monthly Rent: The term “Base Monthly Rent” shall mean the following:

Period	Base Monthly Rent
August 1, 2006 to September 30, 2007	$	19,860.00	Total
A. 1240 Elko Drive	$	14,960.00
B. 1237 Reamwood Ave.	$	2,500.00
C. 1239 Reamwood Ave.	$	2,400.00

     W. Permitted Use: The term “Permitted Use” shall mean the following:

          Warehouse and office

     X. Exhibits: The term “Exhibits” shall mean the Exhibits to this Lease which are described as follows:

          Exhibit “A” — Site Plan showing the Project and delineating the Buildings in which the Leased Premises are located.

          Exhibit “B” — Floor Plans outlining the Leased Premises.

     Y. Addenda: The term “Addenda” shall mean the Addendum (or Addenda) to this Lease which is (or are) described as follows:

          Paragraph 15.1 through 15.4.

ARTICLE 2: LEASED PREMISES, TERM AND POSSESSION

     2.1 DEMISE OF LEASED PREMISES

     Landlord hereby leases to Tenant and Tenant hereby leases from Landlord for Tenant’s own use in the conduct of Tenant’s business and not for purposes of speculating in real estate, for the Lease Term and upon the terms and subject to the conditions of this Lease, that certain interior space described in Article I as the Leased Premises, reserving and excepting to Landlord the exclusive right to all profits to be derived from any assignments or sublettings by Tenant during the Lease Term by reason of the appreciation in the fair market rental value of the Leased Premises. Landlord further reserves the right to install, maintain, use and replace ducts, wires, conduits and pipes leading through the Leased Premises in locations, which will not materially interfere with Tenant’s use of the Lease Premises. Tenant’s Lease of the Leased Premises, together with the appurtenant right to use the Common Areas as described in Paragraph 2.2 below, shall be conditioned upon and be subject to the continuing compliance by Tenant with (I) all the terms and conditions of this Lease, (ii) all Laws governing the use of the Leased Premises and the Project, (iii) all Private Restrictions, easements and other matters now of public record respecting the use of the Leased Premises and the Project, and (iv) all reasonable rules and regulations from time to time established by Landlord.

     2.2 RIGHT TO USE COMMON AREAS

     As an appurtenant right to Tenant’s right to the use of the Leased Premises, Tenant shall have the non-exclusive right to use the Common Areas in conjunction with other tenants of the Project and their invitees, subject to the limitations on such use as set forth in Article 4, and solely for the purposes for which they were designed and intended. Tenant’s right to use the Common Areas shall terminate concurrently with any termination of this Lease.

     2.3 LEASE COMMENCEMENT DATE AND LEASE TERM

     The term of this Lease shall begin, and the Lease Commencement Date shall be deemed to have occurred, on the Intended Commencement Date (as set forth in Article I) unless either (i) Landlord is unable to deliver possession of the Leased Premises to Tenant on the Intended Commencement Date, in which case the Lease Commencement Date shall be determined pursuant to Paragraph 2.4 below or (ii) Tenant enters into possession of the Leased Premises prior to the Intended Commencement Date, in which case the Lease Commencement Date shall be as determined pursuant to Paragraph 2.7 below (the “Lease Commencement Date”). The term of this Lease shall end on the Lease Expiration Date (as set forth in Article I), irrespective of whatever date the Lease Commencement Date is determined to be pursuant to the foregoing sentence. The Lease Term shall be that period of time commencing on the Lease Commencement Date and ending on the Lease Expiration Date (the “Lease Term”), unless Tenant chooses to exercise either the first and/or second of its options to extend the Lease Expiration Date for a period of one (1) year each.

     2.4 DELIVERY OF POSSESSION

     Landlord shall deliver to Tenant possession of the Leased Premises on or before the Intended Commencement Date (as set forth in Article I) in their presently existing condition, broom clean,

2

unless Landlord shall have agreed, as a condition to Tenant’s obligation to accept possession of the Leased Premises, pursuant to an Addenda attached to and made a part of this Lease to modify existing interior improvements or to make, construct and/or install additional specified improvements within the Leased Premises, in which case Landlord shall deliver to Tenant possession of the Leased Premises on or before the Intended Commencement Date as so modified and/or improved. If Landlord is unable to so deliver possession of the Leased Premises to Tenant on or before the Intended Commencement Date, for whatever reason, Landlord shall not be in default under this Lease, nor shall this Lease be void, voidable or cancelable by Tenant until the lapse of one hundred twenty days after the Intended Commencement Date (the “delivery grace period”); however, the Lease Commencement Date shall not be deemed to have occurred until such date as Landlord notifies Tenant that the Leased Premises are Ready for Occupancy. Additionally, the delivery grace period above set forth shall be extended for such number of days as Landlord may be delayed in delivering possession of the Leased Premises to Tenant by reason of Force Majeure or the actions of Tenant. If Landlord is unable to deliver possession of the Leased Premises to Tenant within the described delivery grace period (including any extensions thereof by reason of Force Majeure or the actions of the Tenant), then Tenant’s sole remedy shall be to cancel and terminate this Lease, and in no event shall Landlord be liable to Tenant for such delay. Tenant may not cancel this Lease at any time after the Landlord notifies Tenant the Leased Premises are Ready for Occupancy.

     2.5 ACCEPTANCE OF POSSESSION

     Tenant acknowledges that it has inspected the Leased Premises and is willing to accept them in their existing condition, broom clean, unless Landlord shall have agreed, as a condition to Tenant’s obligation to accept possession of the Leased Premises, pursuant to an Addenda attached to and made a part of this Lease to modify existing interior improvements or to make construction and/or install additional specified improvements within the Leased premises, in which case Tenant agrees to accept possession of the Leased Premises when Landlord has substantially completed such modifications or improvements and the Leased Premises are Ready for Occupancy. If Landlord shall have so modified existing improvements or constructed additional improvements within the Leased Premises for Tenant, Tenant shall, within Tenant’s Punch list Period (as set forth in Article I) which shall commence on the date that Landlord notifies Tenant that the Leased Premises are Ready for Occupancy, submit to Landlord a punch list of all incomplete and/or improper work performed by Landlord. Upon the expiration of Tenant’s Punch list Period, Tenant shall be conclusively deemed to have accepted the Leased Premises in their then-existing condition as so delivered by Landlord to Tenant, except as to those items reasonably set forth in the punch list submitted to Landlord prior to the expiration of said period. Landlord agrees to correct all items reasonably set forth in Tenant’s Punch list, provided that such punch list was submitted to Landlord within Tenant’s Punch list Period. Additionally, Landlord agrees to place in good working order all existing plumbing, lighting, heating, ventilating and air conditioning systems within the Leased Premises and all man doors and roll-up truck doors serving the Leased Premises to the extent that such systems and/or items are not in good operating condition as of the date Tenant accepts possession of the Leased Premises; provided that, and only if, Tenant notifies Landlord in writing of such failures or deficiencies within five business days from the date Tenant so accepts possession of the Lease Premises.

     2.6 SURRENDER OF POSSESSION

     Immediately prior to the expiration or upon the sooner termination of this Lease, Tenant shall remove all of Tenant’s signs from the exterior of the Building and shall remove all of Tenant’s equipment, trade fixtures, furniture, supplies, wall decorations and other personal property from the Leased Premises, and shall vacate and surrender the Leased Premises to Landlord in the same condition, broom clean, as existed at the Lease Commencement Date, reasonable wear and tear excepted. Tenant shall repair all damage to the Leased Premises caused by Tenant’s removal of Tenant’s property and all damage to the exterior of the building caused by Tenant’s removal of Tenant’s signs. Tenant shall patch and refinish, to Landlord’s reasonable satisfaction, all penetrations made by Tenant or its employees to the floor, walls or ceiling of the Leased Premises, whether such penetrations were made with Landlord’s approval or not. Tenant shall repair or replace all stained or damaged ceiling tiles, wall coverings and floor coverings to the reasonable satisfaction of Landlord. Tenant shall repair all damage caused by Tenant to the exterior surface of the Building and the paved surfaces of the outside areas adjoining the Leased Premises and, where necessary, replace or resurface the same. Additionally, Tenant shall, prior to the expiration or sooner termination of this Lease, remove any improvements constructed or installed by Tenant which Landlord requests be so removed by Tenant and repair all damage caused by such removal. If the Leased Premises are not surrendered to Landlord in the condition required by this Paragraph at the expiration or sooner termination of this Lease, Landlord may, at Tenant’s expense, so remove Tenant’s signs, property and/or improvements not so removed and make such repairs and replacements not so made or hire, at Tenant’s expense, independent contractors to perform such work. Tenant shall be liable to Landlord all costs incurred by Landlord in returning the Leased Premises to the required condition, plus interest on all costs incurred from the date paid by Landlord at the then maximum rate of interest not prohibited by Law until paid, payable by Tenant to Landlord within ten days after receipt of a statement therefore from Landlord. Tenant shall indemnify Landlord against loss or liability resulting from delay by Tenant in so surrendering the Leased Premises, including, without limitation, any claims made by any succeeding tenant or any losses to Landlord due to lost opportunities to lease to succeeding tenants.

     2.7 EARLY OCCUPANCY

     If Tenant enters into possession of the Leased Premises prior to the Intended Commencement Date (or permits its contractors to enter the Leased Premises prior to the Intended Commencement Date), unless otherwise agreed in writing by Landlord, the Lease Commencement Date shall be deemed to have occurred on such sooner date, and Tenant shall be obligated to perform all its obligations under this Lease, including the obligation to pay rent, from that sooner date.

ARTICLE 3: RENT, LATE CHARGES AND SECURITY DEPOSITS

     3.1 BASE MONTHLY RENT

     Commencing on the Lease Commencement Date (as determined pursuant to Paragraph 2.3 above) and continuing throughout the Lease Term, Tenant shall pay to Landlord, without prior demand therefore, in advance on the first day of each calendar month, as base monthly rent, the amount set forth as “Base Monthly Rent” in Article I (the “Base Monthly Rent”).

3

     3.2 ADDITIONAL RENT

     Commencing on the Lease Commencement Date (as determined pursuant to Paragraph 2.3 above) and continuing throughout the Lease Term, in addition to the Base Monthly Rent, Tenant shall pay to Landlord as additional rent (the “Additional Rent”) the following amounts:

          A. Tenant’s Proportionate share of all Project Maintenance Costs. Landlord may bill Tenant, on a periodic basis not more frequently than monthly, Tenant’s Proportionate Share of such costs as paid or incurred by Landlord, and Tenant shall pay to Landlord such share of such costs together with an accounting fee equal to five percent of the amount so billed within ten days from the date Landlord shall have billed Tenant for same.

          B. Tenant’s Proportionate Share of Landlord’s Insurance Costs and Real Property Taxes plus an accounting fee equal to five percent of such amount. Payment shall be made by whichever of the following methods is from time to time designated by Landlord:

               (1) Landlord may bill to tenant, on a periodic basis not more frequently than monthly, Tenant’s Proportionate Share of Landlord’s Insurance Costs or Real Property Taxes, as paid or incurred by Landlord during the current period together with an accounting fee equal to five percent of the amount billed, within ten days after receipt of a written bill therefore from Landlord; or

               (2) Landlord may deliver to Tenant Landlord’s reasonable estimate of Landlord’s Insurance Costs and/or Real Property Taxes it anticipates will be paid or incurred for the ensuring calendar or fiscal year, as the case requires, and Tenant shall pay its Proportionate Share for such year, together with an accounting fee equal to five percent of the estimated amount, in equal monthly installments during such year with the installments of Base Monthly Rent. Landlord reserves the right to change from time to time the method of billing Tenants its Proportionate Share or the periodic basis on which such increases are billed.

          C. Landlord’s share of the consideration received by Tenant upon certain assignments and sublettings as required by Article 7;

          D. Any legal fees and costs that Tenant is obligated to pay or reimburse to Landlord pursuant to Article 13; and

          E. Any other charges or reimbursements due Landlord from Tenant pursuant to the terms of this Lease.

     3.3 YEAR-END ADJUSTMENTS

     If Landlord shall have elected to charge Tenant its Proportionate Share of Landlord’s Insurance Costs and/or Real Property Taxes on an estimated basis in accordance with the provisions of Paragraph 3.2B(2) above, Landlord shall furnish to Tenant within three months following the end of the applicable calendar or fiscal year, as the case may be, a statement setting forth (i) the amount of Landlord’s Insurance Costs and/or Real Property Taxes paid or incurred during the just ended calendar or fiscal year, as appropriate, (ii) the amount of Landlord’s Insurance Costs and/or Real Property Taxes paid during the applicable Base Year, and (iii) Tenant’s Proportionate Share of Landlord’s Insurance Costs and/or Real Property taxes for the just ended fiscal or calendar year, as appropriate. If Tenant shall have paid more than its Proportionate Share for the previous year, Landlord shall, at its election, either (i) credit the amount of such overpayment toward the next ensuing payment or payments of Additional Rent that would otherwise be due or (ii) refund in cash to Tenant the amount of such overpayment. If such year-end statements shall show that Tenant did not pay its Proportionate Share in full, then Tenant shall pay to Landlord the amount of such underpayment, together with the accounting fee applicable thereto, within ten days from Landlord’s billing of same to Tenant. The provisions of this Paragraph shall survive the expiration or sooner termination of this Lease.

     3.4 LATE CHARGE AND INTEREST ON RENT IN DEFAULT

     Tenant acknowledges that the late payment by Tenant of any monthly installment of Base Monthly Rent or any Additional Rent will cause Landlord to incur certain costs and expenses not contemplated under this Lease, the exact amounts of which are extremely difficult or impractical to fix. Such costs and expenses will include, without limitation, administration and collection costs and processing and accounting expenses. Therefore, if any installment of base Monthly Rent is not received by Landlord from Tenant within six calendar days after the same becomes due, Tenant shall immediately pay to Landlord a late charge in an amount equal to the amount set forth in Article I as the “Late Charge Amount”, and if any Additional Rent is not received by Landlord within six calendar days after same becomes due, Tenant shall immediately pay to Landlord a late charge in an amount equal to ten percent of the Additional Rent not so paid. Landlord and Tenant agree that this late charge represents a reasonable estimate of such costs and expenses and is fair compensation to Landlord for its loss suffered by reason of Tenant’s failure to make timely payment. In no event shall this provision for a late charge be deemed to grant to Tenant a grace period or extension of time within which to pay any rental installment or prevent Landlord from exercising any right or remedy available to Landlord upon Tenant’s failure to pay each rental installment due under this Lease when due, including the right to terminate this Lease. If any rent remains delinquent for a period in excess of six calendar days, then, in addition to such late charge, Tenant shall pay to Landlord interest on any rent that is not so paid from said sixth day at the then maximum rate of interest not prohibited by Law until paid.

     3.5 PAYMENT OF RENT

     All rent shall be paid in lawful money of the United States, without any abatement, deduction of offset for any reason whatsoever, to Landlord at such address as Landlord may designate from time to time. Tenant’s obligation to pay Base Monthly Rent and all Additional Rent shall be prorated at the commencement and expiration of the Lease Term. The failure by Tenant to pay any Additional Rent as required pursuant to this Lease when due shall be treated the same as a failure by Tenant to pay Base Monthly Rent when due, and Landlord shall have the same rights and remedies against Tenant as Landlord would have if Tenant failed to pay the Base Monthly rent when due.

     3.6 PREPAID RENT

     Tenant has paid to Landlord the amount set forth in Article I as “First Month’s Prepaid Rent” as prepayment of rent for credit against the first installment(s) of Base Monthly Rent due hereunder. Additionally, Tenant has paid to Landlord the amount set forth in Article I as “Last Month’s Prepaid Rent” as prepayment of rent for credit against the last installment(s) of Base Monthly Rent due hereunder, subject, however, to the provisions of Paragraph 3.7 below.

     3.7 SECURITY DEPOSIT

     Tenant has deposited with Landlord the amount set forth in Article I as the “Security Deposit” as security for the performance by Tenant of the terms of this Lease to be performed by Tenant, and

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not as prepayment of rent. Landlord may apply such portion or portions of the Security Deposit as are reasonably necessary for the following purposes: (i) to remedy any default by Tenant in the payment of Base Monthly Rent or Additional Rent or a late charge or interest on defaulted rent; (ii) to repair damage to the Leased Premises caused by Tenant; (iii) to clean and repair the Leased Premises following their surrender to Landlord if not surrendered in the condition required pursuant to the provisions of Article 2; and (iv) to remedy any other default of Tenant to the extent permitted by Law including, without limitation, paying in full on Tenant’s behalf any sums claimed by material men or contractors of Tenant to be owing to them by Tenant for work done or improvements made at Tenant’s request to the Leased Premises. In this regard, Tenant hereby waives any restriction on the uses to which the Security Deposit may be applied as contained in Section 1950.7(c) of the California Civil Code and/or any successor statute. In the event the Security Deposit or any portion thereof is so used, Tenant shall pay to Landlord, promptly upon demand, an amount in cash sufficient to restore the Security Deposit to the full original sum. If Tenant fails to promptly restore the Security Deposit and if Tenant shall have paid to Landlord any sums and “Last Month’s Prepaid Rent”, Landlord may, in addition to any other remedy Landlord may have under this Lease, reduce the amount of Tenant’s Last Month’s Prepaid Rent by transferring all or portions of such Last Month’s Prepaid Rent to Tenant’s Security Deposit until such Security Deposit is restored to the amount set forth in Article I. Landlord shall not be deemed a trustee of the Security Deposit. Landlord may use the Security Deposit in Landlord’s ordinary business and shall not be required to segregate it from its general accounts. Tenants shall not be entitled to any interest on the Security Deposit. If Landlord transfer the Building during the Lease Term, Landlord may pay the Security Deposit to any subsequent owner in conformity with the provisions of Section 1950.7 of the California Civil Code and/or any successor statute, in which event the transferring Landlord shall be released from all liability for the return of the Security Deposit. Tenant specifically grants to Landlord (and hereby waives the provisions of California Civil Code Section 1950.7 to the contrary) a period of sixty days following a surrender of the Leased Premises by Tenant to Landlord within which to restore the Security Deposit (less permitted deductions) to Tenant, it being agreed between Landlord and Tenant that sixty days is a reasonable period of time within which to inspect the Leased Premises, make required repairs, receive and verify workmen’s billings therefore, and prepare a final accounting with respect to such deposit. In no event shall the Security Deposit or any portion thereof, be considered prepaid rent.

ARTICLE 4: USE OF LEASED PREMISE AND COMMON AREAS

     4.1 PERMITTED USE

     Tenant shall be entitled to use the Leased Premises solely for the “Permitted Use” as set forth in Article I and for no other purpose whatsoever. Tenant shall continuously and without interruption use the Leased Premises for such purpose for the entire Lease Term. Any discontinuance of such use for a period of thirty consecutive calendar days shall be, at Landlord’s election, a default by Tenant under the terms of this Lease. Subject to the limitations contained in this Article 4, Tenant shall have the right to use the Common Area, in conjunction with other tenants and during normal business hours, solely for the purposes for which they were intended and for no other purposes whatsoever. Tenant shall not have the right to use the exterior surfaces of exterior walls, the area beneath the floor or the area above the ceiling of the Leased Premises.

     4.2 GENERAL LIMITATIONS ON USE

     Tenant shall not do or permit anything to be done in or about the Leased Premises, the Building, the Common Areas or the Project which does or could (i) interfere with the rights of other tenants or occupants of the Building or the Project, (ii) jeopardize the structural integrity of the Building or (iii) cause damage to any part of the Building or the Project. Tenant shall not operate any equipment within the Leased Premises which does or could (i) injure, vibrate or shake the Leased Premises or the Building, (ii) damage, overload or impair the efficient operation of any electrical, plumbing, heating, ventilating or air conditioning systems within or servicing the Leased Premises or the Building or (iii) damage or impair the efficient operation of the sprinkler system (if any) within or servicing the Leased Premises or the Building. Tenant shall not install any equipment or antennas on or make any penetrations of the exterior walls or roof of the Building. Tenant shall not affix any equipment to or make any penetrations or cuts in the floor, ceiling or walls of the Leased Premises. Tenant shall not place any loads upon the floors, walls, ceiling or roof systems, which could endanger the structural integrity of the Building or damage its floors, foundations or supporting structural components. Tenants shall not place any explosive, flammable or harmful fluids or other waste materials in the drainage systems of the Building or the Project. Tenant shall not drain or discharge any fluids in the landscaped areas or across the paved areas of the Project. Tenant shall not use any area located outside the Leased Premises for the storage of its materials, supplies, inventory or equipment, and all such materials, supplies, inventory and equipment shall at all times be stored within the Leased Premises. Tenant shall not commit or permit to be committed any waste in or about the Leased Premises, the Common Areas or the Project.

     4.3 NOISE AND EMISSIONS

     All noise generated by Tenant in its use of the Leased Premises shall be confined or muffled so that it does not interfere with the business of or annoy other tenants of the Building or the Project. All dust, fumes, odors and other emissions generated by Tenant’s use of the Leased Premises shall be sufficiently dissipated in accordance with sound environmental practices and exhausted from the Leased Premises in such a manner so as not to interfere with the business of or annoy other tenants of the Building or the Project, or cause any damage to the Leased Premises or the Building or any component part thereof or the property of other tenants of the Building or the Project.

     4.4 TRASH DISPOSAL

     Tenant shall provide trash and garbage disposal facilities inside the Leased Premises for all of its trash, garbage and waste requirements and shall cause such trash, garbage and waste to be regularly removed from the Leased Premises at Tenant’s sole cost. Tenant shall keep all areas outside the Leased Premises and all fire corridors and mechanical equipment rooms in or about the Leased Premises free and clear of all trash, garbage, waste and boxes containing same at all times.

     4.5 PARKING

     Tenant is allocated, and Tenant and its employees and invitees shall have the non-exclusive right to use, not more than the number of parking spaces set forth in Article I as “Tenant’s Number of Parking Spaces”. Tenant shall not, at any time, use or permit its employees or invitees to use more parking spaces than the number so allocated to Tenant. Tenant shall not have the exclusive right to

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use any specific parking space, and Landlord reserves the right to designate from time to time the location of the parking spaces allocated for Tenant’s use. In the event Landlord elects or is required by any Law to limit or control parking within the Project, whether by validation of parking tickets or any other method, Tenant agrees to participate in such validation or other programs as reasonably established by Landlord. Tenant shall not, at any time, park or permit to be parked any trucks or vehicles adjacent to entryways or loading areas within the Project so as to interfere in any way with the use of such areas, nor shall Tenant, at any time, park or permit the parking of Tenant’s trucks or other vehicles, or the trucks and vehicles of Tenant’s supplier or others, in any portion of the Common Areas not designated by Landlord for such use by Tenant. Tenant shall not, at any time, park or permit to be parked any recreational vehicles, inoperative vehicles or equipment on any portion of the common parking area or other Common Areas of the Project. Tenant agrees to assume responsibility for compliance by its employees and invitees with the parking provisions contained herein. If Tenant or its employees park any vehicle within the Project in violation of these provisions, then Landlord may charge Tenant, as Additional Rent, and Tenant agrees to pay, as Additional Rent, Ten Dollars per day for each day or partial day that each such vehicle is parked in any area other than that designated. Tenant hereby authorizes Landlord, at Tenant’s sole expense, to tow away from the Project and store until redeemed by its owner any vehicle belonging to Tenant or Tenant’s employees parked in violation of these provisions.

     4.6 SIGNS

     Tenant shall not place or install on or within any portion of the Lease Premises, the Building, the Common Areas or the Project any sign (other than a business identification sign first approved by Landlord in accordance with this Paragraph), advertisements, banners, placards or pictures which are visible from the exterior of the Leased Premises. Tenant shall not place or install on or within any portion of the Leased Premises, the Building, the Common Areas or the Project any business identification sign which is visible from the exterior of the Leased Premises until Landlord shall have first approved in writing the location, size, content, design, method of attachment and material to be used in the making of such sign. Any signs, once approved by Landlord, shall be installed only in strict compliance with Landlord’s approval, at Tenant’s expense, using a person first approved by Landlord to install same. Landlord may remove any signs (not first approved in writing by Landlord), advertisements, banners, placards or pictures so placed by Tenant on or within the Leased Premises, the Building, the Common Areas or the Project and charge to Tenant the cost of such removal, together with any costs incurred by Landlord to repair any damage caused thereby, including any cost incurred to restore the surface upon which such sign was so affixed to its original condition. Tenant shall remove any such signs, repair any damage caused thereby, and restore the surface upon which the sign was affixed to its original condition, all to Landlord’s reasonable satisfaction, upon the termination of this Lease.

     4.7 COMPLIANCE WITH LAWS

     Tenant shall not use or permit any person to use the Leased Premises in any manner, which violates any Laws. Tenant shall abide by and shall promptly observe and comply with, at its sole cost and expense, all Laws respecting the use and occupancy of the Leased Premises, the Building, the Common Areas or the Project and shall defend with competent counsel, indemnify and hold Landlord harmless from any claims, damages or liability resulting from Tenant’s failure to do so.

     4.8 COMPLIANCE WITH INSURANCE REQUIREMENTS

     With respect to any insurance policies carried by Landlord in accordance with the provisions of this Lease, Tenant shall not conduct (nor permit any other person to conduct) any activities within the Leased Premises, or store, keep or use anything within the Leased Premises which (i) is prohibited under the terms of any such policies, (ii) could result in the termination of the coverage afforded under any such policies, (iii) could give to the insurance carrier the right to cancel any of such policies, or (iv) could cause an increase in the rates (over standard rates) charged for the coverage afforded under any of such policies. Tenant shall comply with all requirements of any insurance company, insurance underwriter, or Board of Fire Underwriters, which are necessary to maintain, at standard rates, the insurance coverages carried by either Landlord or Tenant pursuant to this Lease.

     4.9 LANDLORD’S RIGHT TO ENTER

     Landlord and its agents shall have the right to enter the Leased Premises during normal business hours and subject to Tenant’s reasonable security measures for the purpose of (i) inspecting the same; (ii) supplying any services to be provided by Landlord to Tenant; (iii) showing the Leased Premises to prospective purchasers, mortgagee or tenants; (iv) making necessary alterations, additions or repairs; (v) performing any of Tenant’s obligations when Tenant has failed to do so after giving Tenant reasonable written notice of its intent to do so; and (vi) posting notices of non-responsibility. Additionally, Landlord shall have the right to enter the Leased Premises at times of emergency. Any entry into the Leased Premises or portions thereof obtained by Landlord in accordance with this Paragraph shall not under any circumstances be construed or deemed to be a forcible or unlawful entry or a detainer of the Leased Premises, or an eviction, actual or constructive, of Tenant from the Leased Premises or any portion thereof.

     4.10 CONTROL OF COMMON AREAS

     Landlord shall at all times have exclusive control of the Common Areas. Landlord shall have the right, without the same constituting an actual or constructive eviction and without entitling Tenant to any reduction of or abatement of rent, to: (i) temporarily close any part of the Common Areas to whatever extent required in the opinion of Landlord’s counsel to prevent a dedication thereof or the accrual of any prescriptive rights therein; (ii) temporarily close all or any part of the Common Areas to perform maintenance or for any other reason deemed sufficient by Landlord; (iii) change the shape, size, location, number and extent of improvements within the Common Areas including, without limitation, changing the location of driveways, entrances, exits, parking spaces, parking areas, sidewalks, directional or locator signs, or the direction of the flow of traffic; and (iv) to make additions to the Common Areas including, without limitation, the construction of parking structures. Landlord shall have the right to change the name or address of the building. Tenant, in its use of the Common Areas, shall keep the Common Areas free and clear of all obstructions created for or permitted by Tenant. If, in the opinion of Landlord, unauthorized persons are using any of the Common Areas by reason of, or under claim of, the express or implied authority or consent of Tenant, then Tenant, upon demand of Landlord, shall restrain, to the fullest extent then allowed by Law, such unauthorized use, and shall initiate such appropriate proceedings as may be required to so restrain such use. Nothing contained herein shall affect the right of Landlord at any time to remove any unauthorized person from the Common Areas or to prohibit the use of the Common Areas by unauthorized persons, including, without limitation, the right to prohibit mobile food and beverage

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vendors. In exercising any such right regarding the Common Areas, Landlord shall make a reasonable effort to minimize any disruption to Tenant’s business.

     4.11 RULES AND REGULATIONS

     Landlord shall have the right from time to time to establish reasonable rules and regulations and/or amendments or additions thereto respecting the use of space within the Project and the use of the Common Areas for the care and orderly management of the Project and the safety of its tenants, occupants and invitees. Upon delivery to Tenant of a copy of such rules and regulations or any amendment or additions thereto, Tenant shall comply with such rules and regulations. A violation by Tenant of any of such rules and regulations shall constitute a default by Tenant under this Lease. If there is a conflict between the rules and regulations and any of the provisions of this Lease, the provisions of this Lease shall prevail. Landlord shall not be responsible or liable to Tenant for the violation of such rules and regulations by any other tenant of the Project.

     4.12 ENVIRONMENTAL PROTECTION

     Landlord may voluntarily cooperate in a reasonable manner with the efforts of all governmental agencies in reducing actual or potential environmental damage. Tenant shall not be entitled to terminate this Lease or to any reduction in or abatement of rent by reason of such compliance or cooperation. Tenant agrees at all times to cooperate fully with Landlord and to abide by all rules and regulations and requirements which Landlord may reasonably prescribe in order to comply with the requirements and recommendations of governmental agencies regulating, or otherwise involved in, the protection of the environment.

ARTICLE 5: REPAIRS, MAINTENANCE, SERVICES AND UTILITIES

     5.1 REPAIRS AND MAINTENANCE

     Except in the case of damage to or destruction of the Leased Premises, the Building or the Project caused by an Act of God or other peril, in which case the provisions of Article 10 shall control, the parties shall have the following obligations and responsibilities with respect to the repair and maintenance of the Leased Premises, the Building and the Common Areas.

          A. Tenant’s Obligation: Tenant shall, at all times during the Lease Term at its sole cost and expense, regularly clean and continuously keep and maintain in good order, condition and repair the Leased Premises and every part thereof and all appurtenances thereto, including, without limiting the generality of the foregoing, (i) all interior walls, floor and ceilings, (ii) all windows, doors and skylights, (iii) all electrical wiring, conduits, connectors and fixtures, (iv) all plumbing, pipes, sinks, toilets, faucets and drains, (v) all lighting fixtures, bulbs, and lamps, (vi) all heating, ventilating and air conditions equipment located within the Leased Premises or located outside the Leased Premises (e.g. rooftop compressors) and serving the Leased Premises (other than Common Area HVAC as defined in Subparagraph B below), and (vii) all entranceways to the Leased Premises. Tenant, if requested to do so by Landlord, shall hire, at Tenant’s sole cost and expense, a licensed heating, ventilating and air conditioning contractor to regularly and periodically inspect (not less frequently than every three months) and perform required maintenance on the heating, ventilating and air conditioning equipment and systems serving the Leased Premises, or alternatively, Landlord may, at its election, contract in its own name for such regular and periodic inspections of and maintenance on such heating, ventilating and air conditioning equipment and systems and charge to Tenant, as Additional Rent, the cost thereof. Tenant shall, at its sole cost and expense, repair all damage to the Building, the Common Areas or the Project caused by the activities of Tenant, its employees, invitees or contractors promptly following written notice from Landlord to so repair such damage. If Tenant shall fail to perform the required maintenance or fail to make repairs required of it pursuant to this Paragraph within a reasonable period of time following notice from Landlord to do so, then Landlord may, at its election and without waiving any other remedy it may otherwise have under this Lease or at Law, perform such maintenance or make such repairs and charge to Tenant, as Additional Rent, the costs so incurred by Landlord for same. All glass within or a part of the Leased Premises, both interior and exterior, is at the sole risk of Tenant and Tenant shall promptly replace any broken glass at Tenant’s expense with glass of the same kind, size and quality.

          B. Landlord’s Obligation: Landlord shall, at all times during the Lease Term, maintain in good condition and repair: (i) the exterior and structural parts of the Building (including the foundation, sub flooring, load-bearing and exterior walls, and roof); (ii) the Common Areas; and (iii) the electrical and plumbing systems located outside the Leased Premises which serve the Building. Additionally, to the extent that the Building contains central heating, ventilating and/or air conditioning systems located outside the Leased Premises which are designed to serve, and are then servicing, more than a single tenant within the Building (“Common HVAC”), Landlord shall maintain in good operating condition and repair such Common HVAC equipment and systems. The provisions of this Subparagraph B shall in no way limit the right of Landlord to charge to tenants of the Project, as Additional Rent pursuant to Article 3, the costs incurred by Landlord in making such repairs and/or performing such maintenance.

     5.2 SERVICES AND UTILITIES

     The parties shall have the following responsibilities and obligations with respect to obtaining and paying the cost of providing the following utilities and other services to the Leased Premises:

          A. Gas and Electricity: Tenant shall arrange, at its sole cost and expense and its own name, for the supply of gas and electricity to the Leased Premises. In the event that such services are not separately metered, Tenant shall, at its sole expense, cause such meters to be installed. Tenant shall be responsible for determining if the local supplier of gas and/or electricity can supply the needs of Tenant and whether or not the existing gas and/or electrical distribution systems within the Building and the Leased Premises are adequate for Tenant’s needs. Tenant shall pay all charges for gas and electricity as so supplied to the Leased Premises.

          B. Water: Landlord shall provide the Leased Premises with water for lavatory and drinking purposes only. Tenant shall pay, as Additional Rent, the cost to Landlord of providing water to the Leased Premises. In the event Landlord determines that Tenant is using more water than what normally would be required for lavatory and drinking purposes, Landlord at its election may install (or require Tenant to install at Tenant’s sole cost) a separate meter for purposes of measuring Tenant’s water usage and, based upon such meter readings, periodically charge Tenant, as Additional Rent, a sum equal to Landlord’s estimate of the cost of Tenant’s excess water usage. In the event that Landlord shall so install such a separate meter, Tenant shall pay to Landlord, upon demand, the cost

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incurred by Landlord in purchasing and installing such meter and thereafter all costs incurred by Landlord in maintaining said meter. The cost of Tenant’s excess water usage shall include any costs to Landlord in keeping account of such usage and all governmental fees, public charges of the like attributable to or based upon (such as sewer usage fees) the use of water to the extent of such excess usage.

          C. Security Service: Tenant acknowledges that Landlord is not responsible for the security of the Leased Premises or the protection of Tenant’s property or Tenant’s employees, invitees or contractors, and that to the extent Tenant determines that such security or protection services are advisable or necessary, Tenant shall arrange for and pay the costs of providing same.

          D. Trash Disposal: Tenant acknowledges that Landlord is not responsible for the disposal of Tenant’s waste, garbage or trash and that Tenant shall arrange, in its own name and at its sole cost, for the regular and periodic removal of such waste, garbage or trash from the Leased Premises. In no event shall Landlord be required to provide trash bins for the disposal of Tenant’s waste, garbage or trash.

     5.3 ENERGY AND RESOURCE CONSUMPTION

     Landlord may voluntarily cooperate in a reasonable manner with the efforts of governmental agencies and/or utility suppliers in reducing energy or other resource consumption within the Project. Tenant shall not be entitled to terminate this Lease or to any reduction in or abatement of rent by reason of such compliance or cooperation. Tenant agrees at all times to cooperate fully with Landlord and to abide by all reasonable rules established by Landlord (i) in order to maximize the efficient operation of the electrical, heating, ventilating and air conditioning systems and all other energy or other resource consumption systems within the Project and/or (ii) in order to comply with the requirements and recommendations of utility suppliers and governmental agencies regulating the consumption of energy and/or other resources.

     5.4 LIMITATION OF LANDLORD’S LIABILITY

     Landlord shall not be liable to Tenant for injury to Tenant, its employees, agents, invitees or contractors, damage to Tenant’s property or loss of Tenant’s business or profits, nor shall Tenant be entitled to terminate this Lease or to any reduction in or abatement of rent by reason of (i) Landlord’s failure to perform any maintenance or repairs to the Project until Tenant shall have first notified Landlord, in writing, of the need for such maintenance or repairs, and then only after Landlord shall have had a reasonable period of time following its receipt of such notice within which to perform such maintenance or repairs, or (ii) any failure, interruption, rationing or other curtailment in the supply of water, electric current, gas or other utility service to the Leased Premises, the Building or the Project from whatever cause (other than Landlord’s active negligence or willful misconduct), or (iii) the unauthorized intrusion or entry into the Leased Premises by third parties (other than Landlord).

ARTICLE 6: ALTERATIONS AND IMPROVEMENTS

     6.1 BY TENANT

     Tenant shall not make any alterations to or modifications of the Leased Premises or construct any improvements to or within the Leased Premises without Landlord’s prior written approval, and then not until Landlord shall have first approved, in writing, the plans and specifications therefore, which approval shall not be unreasonably withheld. All such modifications, alterations or improvements, once so approved, shall be made, constructed or installed by Tenant at Tenant’s expense, using a licensed contractor first approved by Landlord, in substantial compliance with the Landlord-approved plans and specifications therefore. All work undertaken by Tenant shall be done in accordance with all Laws and in a good and workmanlike manner using new materials of good quality. Tenant shall not commence the making of any such modifications or alterations or the construction of any such improvements until (i) all required governmental approvals and permits shall have been obtained, (ii) all requirements regarding insurance imposed by this Lease have been satisfied, (iii) Tenant shall have given Landlord at least five business days prior written notice of its intention to commence such work so that Landlord may post and file notices of non-responsibility, and (iv) if requested by Landlord, Tenant shall have obtained contingent liability and broad form builder’s risk insurance in an amount satisfactory to Landlord to cover any perils relating to the proposed work not covered by insurance carried by Tenant pursuant to Article 9. In no event shall tenant make any modifications, alterations or improvements to the Common Areas or any areas outside of the Leased Premises. As used in this Article, the term “modifications, alterations and/or improvements” shall include, without limitation, the installation of additional electrical outlets, overhead lighting fixtures, drains, sinks, partitions, doorways, or the like.

     6.2 OWNERSHIP OF IMPROVEMENTS

     All modifications, alterations and improvements made or added to the Leased Premises by Tenant (other than Tenant’s inventory, equipment, movable furniture, wall decorations and trade fixtures) shall be deemed real property and a part of the Leased Premises, but shall remain the property of Tenant during the Lease Term. Any such modifications, alterations or improvements, once completed, shall not be altered or removed from the Leased Premises during the Lease Term without Landlord’s written approval first obtained in accordance with the provisions of Paragraph 6.1 above. At the expiration or sooner termination of this Lease, all such modifications, alterations and improvements (other than Tenant’s inventory, equipment, movable furniture, wall decorations and trade fixtures) shall automatically become the property of Landlord and shall be surrendered to Landlord as a part of the Leased Premises as required pursuant to Article 2, unless Landlord shall require Tenant to remove any of such modifications, alterations or improvements in accordance with the provisions of Article 2, in which case Tenant shall so remove same. Landlord shall have no obligation to reimburse to Tenant all or any portion of the cost or value of any such modifications, alterations or improvements so surrendered to Landlord. All modifications, alterations or improvements which are installed or constructed on or attached to the Leased Premises by Landlord at Landlord’s expense shall be deemed real property and a part of the Leased Premises and shall be the property of the Landlord. All lighting, plumbing, electrical, heating, ventilating and air conditioning fixtures, partitioning, window coverings, wall coverings and floor coverings installed by Tenant shall be deemed improvements to the Leased Premises and not trade fixtures of Tenant.

     6.3 ALTERATIONS REQUIRED BY LAW

     Tenant shall make all modifications, alterations and improvements to the Leased Premises, at its sole cost, that are required by Law because of (i) Tenant’s use or occupancy of the Leased Premises, (ii) Tenant’s application for any permit or governmental approval, or (iii) Tenant’s making of any

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modifications, alterations or improvements to or within the Leased Premises. If Landlord shall, at any time during the Lease Term, be required by any governmental authority to make any modifications, alterations or improvements to the Building or the Project, the cost incurred by Landlord in making such modifications, alterations or improvements, including an eighteen percent per annum cost of money factor, shall be amortized by Landlord over the useful like of such modifications, alterations or improvements, as determined in accordance with generally accepted accounting standards, and the monthly amortized cost of such modifications, alterations and improvement as so amortized shall be considered a Project Maintenance Costs.

     6.4 LIENS

     Tenant shall keep the Leased Premises, the Building and the Project free from any liens and shall pay when due all bills arising out of any work performed, materials furnished, or obligations incurred by Tenant, its agents, employees or contractors relating to the Leased Premises. If any such claim of lien is recorded against Tenant’s interest in this Lease, the Leased Premises, the Building or the Project, Tenant shall bond against, discharge or otherwise cause such lien to be entirely released within ten days after the same has been so recorded.

ARTICLE 7: ASSIGNMENT AND SUBLETTING BY TENANT

     7.1 BY TENANT

     Tenant shall not sublet the Leased Premises (or any portion thereof) or assign or encumber its interest in this Lease, whether voluntarily or by operation of Law, without Landlord’s prior written consent first obtained in accordance with the provisions of this Article 7. Any attempted subletting, assignment or encumbrance without Landlord’s prior written consent, which should not be unreasonably withheld, at Landlord’s election, shall constitute a default by Tenant under the terms of this Lease. The acceptance of rent by Landlord from any person or entity other than Tenant, or the acceptance of rent by Landlord from Tenant with knowledge of a violation of the provisions of this Paragraph, shall not be deemed to be a waiver by Landlord of any provision of this Article or this Lease or to be a consent to any subletting by Tenant or any assignment

     7.2 MERGER OR REORGANIZATION

     If Tenant is a corporation, any dissolution, merger, consolidation or other reorganization of Tenant, or the sale or other transfer in the aggregate over the Lease Term of a controlling percentage of the capital stock of Tenant, shall be deemed a voluntary assignment of Tenant’s interest in this Lease. The phrase “controlling percentage” means the ownership of and the right to vote stock possessing more than fifty percent of the total combined voting power of all classes of Tenant’s capital stock issued, outstanding and entitled to vote for the election of directors. If Tenant is a partnership, a withdrawal or change, voluntary, involuntary or by operation of Law, of a general partner, or the dissolution of the partnership, shall be deemed a voluntary assignment of Tenant’s interest in this Lease.

     7.3 LANDLORD’S ELECTION

     If Tenant shall desire to assign its interest under this Lease or to sublet the Leased Premises, Tenant must first notify Landlord, in writing, of its intent to so assign or sublet, at least ninety days in advance of the date it intends to so assign its interest in this Lease or sublet the Leased Premises but not sooner than one hundred eighty days in advance of such date, specifying in detail the terms of such proposed assignment or subletting, including the name of the proposed assignee or sublessee, the proposed assignee’s or sublessee’s intended use of the Leased Premises, a current financial statement of such proposed assignee or sublessee and the form of documents to be used in effectuating such assignment or subletting. Landlord shall have a period of fifteen days following receipt of such notice within which to do one of the following: (a) cancel and terminate this Lease effective as of the intended subletting or assignment date set forth in Tenant’s notice, or (b) if Landlord shall not have elected to cancel and terminate this Lease, to either (i) consent to such requested assignment or subletting subject to Tenant’s compliance with the conditions set forth in Paragraph 7.4 below or (ii) refuse to so consent to such requested assignment or subletting, provided that such consent shall not be unreasonably refused. During said fifth day period, Tenant covenants and agrees to supply to Landlord, upon request, all necessary or relevant information which Landlord may reasonably request respecting such proposed assignment or subletting and/or the proposed assignee or sublessee.

     7.4 CONDITIONS TO LANDLORD’S CONSENT

     If Landlord elects to consent, or shall have been ordered to so consent by a court of competent jurisdiction to such requested assignment, subletting or encumbrance, such consent shall be expressly conditioned upon the occurrence of each of the conditions below set forth, and any purported assignment, subletting or encumbrance made or ordered prior to the full and complete satisfaction of each of the following conditions shall be void and, at the election of Landlord, which election may be exercised at any time following such a purported assignment, subletting or encumbrance but prior to the satisfaction of each of the stated conditions, shall constitute a material default by Tenant under this Lease giving Landlord the absolute right to terminate this Lease unless such default is promptly cured by satisfying in full each such condition by the assignee, sublessee or encumbrancer. The conditions are as follows:

          A. Landlord having approved in form and substance the assignment or sublease agreements (or the encumbrance agreement), which approval shall not be unreasonably withheld by Landlord if the requirements of this Article 7 are otherwise complied with.

          B. Each such sublessee or assignee having agreed, in writing satisfactory to Landlord and its counsel and for the benefit of Landlord, to assume, to be bound by, and to perform the obligations of this Lease to be performed by Tenant (or, in the case of an encumbrance, each encumbrancer having similarly agreed to assume, be bound by and to perform Tenant’s obligations upon a foreclosure or transfer in lieu thereof).

          C. Tenant having fully and completely performed all of its obligations under the terms of this Lease through and including the date of such assignment or subletting.

          D. Tenant having reimbursed to Landlord all reasonable costs and attorneys’ fees incurred by Landlord in conjunction with the processing and documentation of any such requested subletting, assignment or encumbrance.

          E. Tenant having delivered to Landlord a complete and fully executed duplicate original of such sublease agreement, assignment agreement or encumbrance (as applicable) and all related agreements.

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          F. Tenant having paid, or having agreed in writing to pay as to future payments, to Landlord one hundred percent of all assignment consideration or excess rentals to be paid to Tenant or to any other on Tenant’s behalf or for Tenant’s benefit for such assignment or subletting as follows:

               (1) If Tenant assigns its interest under this Lease and if all or a portion of the consideration for such assignments is to be paid by the assignee at the time of the assignment, that Tenant shall have paid to Landlord and Landlord shall have received an amount equal to one hundred percent of the assignment consideration so paid or to be paid (whichever is greater) at the time of the assignment by the assignee or;

               (2) If Tenant assigns its interest under this Lease and if Tenant is to receive all or a portion of the consideration for such assignment in future installments, that Tenant and Tenant’s assignee shall have entered into a written agreement with and for the benefit of Landlord satisfactory to Landlord and its counsel whereby Tenant and Tenant’s assignee jointly agree to pay to Landlord an amount equal to one hundred percent of all such future assignment consideration installments to be paid by such assignee as and when such assignment consideration is so paid.

               (3) If Tenant subleases the Leased Premises, that Tenant and Tenant’s sublessee shall have entered into a written agreement with and for the benefit of Landlord satisfactory to Landlord and its counsel whereby Tenant and Tenant’s sublessee jointly agree to pay to Landlord one hundred percent of all excess rentals to be paid by such sublessee as and when such excess rentals are so paid.

     7.5 ASSIGNMENT CONSIDERATION AND EXCESS RENTAL DEFINED

     For purposes of this Article, the term “assignment consideration” shall mean all consideration to be paid by the assignee to Tenant or to any other on Tenant’s behalf or for Tenant’s benefit as consideration for such assignment, less any commissions paid by Tenant to a licensed real estate broker for arranging such assignment (not to exceed then standard rates), and the term “excess rentals” shall mean all consideration to be paid by the sublessee to Tenant or to any other on Tenant’s behalf or for Tenant’s benefit for the sublease of the Leased Premises in excess of the rent due Landlord under the terms of this Lease for the same period, less any commissions paid by Tenant to a licensed real estate broker for arranging such sublease (not to exceed then standard rates). Tenant agrees that the portion of any assignment consideration and/or excess rentals arising from any assignment or subletting by Tenant which is to be paid to Landlord pursuant to this Article now is and shall then be the property of Landlord and not the property of Tenant.

     7.6 PAYMENTS

     All payments required by this Article to be made to Landlord shall be made in cash in full as and when they become due. At the time when Tenant, Tenant’s assignee or sublessee makes each such payment to Landlord, Tenant or Tenant’s assignee or sublessee, as the case may be, shall deliver to Landlord an itemized statement in reasonable detail showing the method by which the amount due Landlord was calculated and certified by the party making such payment as true and correct.

     7.7 GOOD FAITH

     The rights granted to Tenant by this Article are granted in consideration of Tenant’s express covenant that all pertinent allocations which are made by Tenant between the rental value of the Leased Premises and the value of any of Tenant’s personal property which may be conveyed or leased generally concurrently with and which may reasonably be considered a part of the same transaction as the permitted assignment or subletting shall be made fairly, honestly and in good faith. If Tenant shall breach this Covenant of Good Faith, Landlord may immediately declare Tenant to be in default under the terms of this Lease and terminate this Lease and/or exercise any other rights and remedies Landlord would have under the terms of this Lease in the case of a material default by Tenant under this Lease.

     7.8 EFFECT OF LANDLORD’S CONSENT

     No subletting, assignment or encumbrance, even with the consent of Landlord, shall relieve Tenant of its personal and primary obligation to pay rent and to perform all of the other obligations to be performed by Tenant hereunder. Consent by Landlord to one or more assignments or encumbrances of Tenant’s interest in this Lease to one or more sublettings of the Leased Premises shall not be deemed to be a consent to any subsequent assignment, encumbrance or subletting. If Landlord shall have been ordered by a court of competent jurisdiction to consent to a requested assignment or subletting, or such and assignment or subletting shall have been ordered over the objection of Landlord, such assignment or subletting shall not be binding between the assignee (or sublessee) and Landlord until such time as all conditions set forth in Paragraph 7.4 above have been fully satisfied (to the extent not then satisfied) by the assignee or sublessee, including, without limitation, the payment to Landlord of all agreed assignment considerations and/or excess rentals then due Landlord.

ARTICLE 8: LIMITATIONS ON LANDLORD’S LIABILITY AND INDEMNITY

     8.1 LIMITATION ON LANDLORD’S LIABILITY AND RELEASE

     Landlord shall not be liable to Tenant for, and Tenant hereby releases Landlord and its partners and officers from, any and all liability, whether in contract, tort or on any other basis, for any injury to or any damages sustained by Tenant, its agents, employees, contractors or invitees; any damage to Tenant’s property; or any loss to Tenant’s business, loss of Tenant’s profits or other financial loss of Tenant resulting from or attributable to the condition of, the management of, the maintenance of, or the protection of the Leased Premises, the Building, the Project or the Common Areas, including, without limitation, any such injury, damage or loss resulting from (i) the failure, interruption, rationing or other curtailment or cessation in the supply of electricity, water, gas or other utility service to the Project, the Building or the Leased Premises; (ii) the vandalism or forcible entry into the Building or the Leased Premises; (iv) the failure to provide security and/or adequate lighting in or about the Project, the Building or the Leased Premises; (v) the existence of any design or construction defects within the Project, the Building or the Leased Premises; (vi) the failure of any mechanical systems to function property (such as the HVAC systems; or (vii) the blockage of access to any portion of the Project, the Building or the Leased Premises, except to the extent such damage was proximately caused by Landlord’s active negligence or willful misconduct, or Landlord’s failure to perform an obligation expressly undertaken pursuant to this Lease but only if Tenant shall have given Landlord prior written notice to perform such obligation and Landlord shall have failed to perform such obligation within a reasonable period of time following receipt of written notice from Tenant to so perform such obligation. In this regard, Tenant acknowledges that it is fully apprised of the

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provisions of Law relating to releases, and particularly to those provisions contained in Section 1542 of the California Civil Code, which reads as follows:

A general release does not extend to claims which the creditor does not know or suspect in his favor at the time of executing this release, which, if known by him must have materially affected his settlement with the debtor.

     Notwithstanding such statutory provision, and for the purpose of implementing a full and complete release and discharge, Tenant hereby (i) waives the benefit of such statutory provision and (ii) acknowledges that, subject to the exceptions specifically set forth herein, the release and discharge set forth in this Paragraph is a full and complete settlement and release and discharge of all claims and is intended to include in its effect, without limitation, all claims which Tenant, as of the date hereof, does not know of or suspect to exist in its favor.

     8.2 TENANT’S INDEMNIFICATION OF LANDLORD

     Tenant shall defend, with competent counsel satisfactory to Landlord, any claims made or legal actions filed or threatened by third parties against Landlord with respect to the death, bodily injury, personal injury, damage to property or interference with contractual or other rights suffered by any third party (including other tenants within the Project) which (i) occurred within the Leased Premises or (ii) resulted from Tenant’s use or occupancy of the Leased Premises or the Common Area or (iii) resulted from Tenant’s activities in or about the Leased Premises, the Building or the Project, and Tenant shall indemnify and hold Landlord, Landlord’s principals, employees and agents harmless from any loss (including loss of rents by reason of vacant space which otherwise would have been leased but for such activities), liability, penalties, or expense whatsoever (including any legal fees incurred by Landlord with respect to defending such claims) resulting therefrom, except to the extent proximately caused by the active negligence or willful misconduct of Landlord. This indemnity agreement shall survive until the latter to occur of (i) the date of the expiration, or sooner termination, of this Lease, or (ii) the date Tenant actually vacates the Leased Premises.

ARTICLE 9: INSURANCE

     9.1 TENANT’S INSURANCE

     Tenant shall maintain insurance complying with all of the following:

          A. Tenant shall procure, pay for and keep in full force and effect, at all times during the Lease Term, the following:

               (1) Comprehensive general liability insurance insuring Tenant against liability for personal injury, death and damage to property occurring within the Leased Premises, or resulting from Tenant’s use or occupancy of the Leased Premises or the Common Areas, or resulting from Tenant’s activities in or about the Leased Premises, with combined single limit coverage of not less than the amount of Tenant’s Required Liability Coverage (as set forth in Article I), which insurance shall contain a “broad form liability” endorsement insuring Tenant’s performance of Tenant’s obligation in indemnifying Landlord as contained in Article 8.2.

               (2) Fire and property damage insurance or “fire and extended coverage” insuring Tenant against loss from physical damage to Tenant’s personal property, inventory, trade fixtures and improvements within the Leased Premises with coverage for the full actual replacement cost thereof;

               (3) Plate-glass insurance, at actual replacement cost;

               (4) Pressure vessel insurance, if applicable;

               (5) Product Liability insurance (including, without limitation, if food and/or beverages are distributed, sold and/or consumed within the Leased Premises, to the extent obtainable, coverage for liability arising out of the distribution, sale or consumption of food and/or beverages [including alcoholic beverages, if applicable] at the Leased Premises) for not less than Tenant’s Required Liability Coverage (as set forth in Article 1);

               (6) Worker’s compensation insurance and any other employee benefit insurance sufficient to comply with all Laws; and

               (7) With respect to making of alterations or the construction of improvements or the like undertaken by Tenant, contingent liability and builder’s risk insurance, in an amount and with coverage satisfactory to Landlord.

          B. Each policy of liability insurance required to be carried by Tenant pursuant to this Paragraph or actually carried by Tenant with respect to the Leased Premises (i) shall, except with respect to insurance required by Subparagraph A(6) above, name Landlord, and such others as are designated by Landlord, as additional insured; (ii) shall be primary insurance providing that the insurer shall be liable for the full amounts of the loss, up to and including the total amount of liability set forth in the declaration of coverage, with the right of contribution from or prior payment by any other insurance coverage of Landlord; (iii) shall be in a form satisfactory to Landlord; (iv) shall be carried with companies reasonably acceptable to Landlord; (v) shall provide that such policy shall not be subject to cancellation, lapse or change except after at least thirty days prior written notice to Landlord; and (vi) shall contain a so-called “severability” or “cross liability” endorsement. Each policy of property insurance maintained by Tenant with respect to the Leased Premises or any property therein (i) shall provide that such policy shall not be subject to cancellation, lapse or change except after at least thirty days prior written notice to Landlord and (ii) shall contain a waiver and/or a permission to waive by the insurer of any right of subrogation against Landlord, its principals, employees, agents and contractors, which might arise by reason of any payment under such policy or by reason of any act or omission of Landlord, its principals, employees, agents or contractors.

          C. Prior to the time Tenant or any of its contractors enters the Leased Premises, Tenant shall deliver to Landlord, with respect to each policy of insurance required to be carried by Tenant pursuant to the Article, a copy of such policy (appropriately authenticated by the insurer as having been issued, premium paid) or a certificate of the insurer certifying in form satisfactory to Landlord that a policy has been issued, premium paid, providing the coverage required by this Paragraph and containing the provisions specified herein. With respect to each renewal or replacement of any such insurance, the requirements of this Paragraph must be complied with not less than thirty days prior to the expiration or cancellation of the policy being renewed or replaced. Landlord may, at any time and from time to time, inspect and/or copy any and all insurance policies required to be carried by Tenant pursuant to this Article. If Landlord’s Lender, insurance broker or advisor or counsel reasonably determines at any time that the amount of coverage set forth in Paragraph 9.1A for any policy of insurance Tenant is required to carry pursuant to this Article is not

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adequate, then Tenant shall increase the amount of coverage for such insurance to such greater amount as Landlord’s Lender, insurance broker or advisor or counsel reasonably deems adequate; provided, however, such increased level of coverage may not exceed the level of coverage for such insurance commonly carried by comparable business similarly situated and operating under similar circumstances.

     9.2 LANDLORD’S INSURANCE

     With respect to insurance maintained by Landlord:

          A. Landlord shall maintain, as the minimum coverage required of it by this Lease, fire and property damage insurance in so-called “fire and extended coverage” form insuring Landlord (and such others as Landlord may designate) against loss from physical damage to the Building with coverage of not less than ninety percent of the full actual replacement cost thereof and against loss of rents for a period of not less than six months. Such fire and property damage insurance, at Landlord’s election but without any requirement on Landlord’s behalf to do so, (i) may be written in so-called “all risk” form, excluding only those perils commonly excluded from such coverage by Landlord’s then property damage insurer; (ii) may provide coverage for physical damage to the improvements so insured for up to the entire full actual replacement cost thereof; (iii) may be endorsed to cover loss or damage caused by any additional perils against which Landlord may elect to insure, including earthquake and/or flood; (iv) may provide coverage for loss of rents for a period of up to twelve months; and/or (v) may contain “deductibles” not exceeding One Thousand Dollars per occurrence (or up to five percent of the Building’s replacement value in the case of earthquake and/or flood insurance). Landlord shall not be required to cause such insurance to cover any of Tenant’s personal property, inventory and trade fixtures, or any modifications, alterations or improvements made or constructed by Tenant to or within the Leased Premises.

          B. Landlord shall maintain comprehensive general liability insurance insuring Landlord (and such others as are designated by Landlord) against liability for personal injury, bodily injury, death, and damage to property occurring in, on or about, or resulting from the use or occupancy of the Project, or any portion thereof, with combined single limit coverage of at least Two Million Dollars. Landlord may carry such greater coverage as Landlord or Landlord’s Lender, insurance broker or advisor or counsel may from time to time determine is reasonably necessary for the adequate protection of Landlord and the Project.

          C. Landlord may maintain any other insurance, which in the opinion of its insurance broker or advisor or legal counsel is prudent to carry under the given circumstances.

     9.3 MUTUAL WAIVER OF SUBROGATION

     Landlord hereby releases Tenant, and Tenant hereby releases Landlord and its respective partners and officers, agents, employees and servants, from any and all liability for loss, damage or injury to the property of the other in or about the Leased Premises which is caused by or results from a peril or event or happening which would be covered by insurance required to be carried under the terms of this Lease, or is covered by insurance actually carried and in force at the time of the loss, by the party sustaining such loss; provided, however, that such waiver shall be effective only to the extent permitted by the insurance covering loss and to the extent such insurance is not prejudiced thereby.

ARTICLE 10: DAMAGE TO LEASED PREMISES

     10.1 LANDLORD’S DUTY TO RESTORE

     If the Leased Premises are damaged by any peril after the Effective Date of this Lease, Landlord shall restore the Leased Premises, as and when required by this Paragraph, unless this Lease is terminated by Landlord pursuant to Paragraph 10.2 or by Tenant pursuant to Paragraph 10.3. All insurance proceeds available from the fire and property damage insurance carried by Landlord shall be paid to and become the property of Landlord. If this Lease is terminated pursuant to either Paragraph 10.2 or 10.3, all insurance proceeds available from insurance carried by Tenant which cover loss to property that is Landlord’s property or would become Landlord’s property on termination of this Lease shall be paid to and become the property of Landlord, and the remainder of such proceeds shall be paid to and become the property of Tenant. If this Lease is not terminated pursuant to either Paragraph 10.2 or 10.3, all insurance proceeds available from insurance carried by Tenant which cover loss to property that is Landlord’s property shall be paid to and become the property of Landlord, and all proceeds available which cover loss to property which would become the property of Landlord upon the termination of this Lease shall be paid to and remain the property of Tenant. If this Lease is not to terminated, then upon receipt of the insurance proceeds (if the loss is covered by insurance) and the issuance of all necessary governmental permits, Landlord shall commence and diligently prosecute to completion then restoration of the Leased Premises, to the extent then allowed by Law, to substantially the same condition in which the Leased Premises existed as of the Lease Commencement Date. Landlord’s obligation to restore shall be limited to the Leased Premises and interior improvements constructed by Landlord. Landlord shall have no obligation to restore any other improvements to the Leased Premises or any of Tenant’s personal property, inventory or trade fixtures. Upon completion of the restoration by Landlord, Tenant shall forthwith replace or fully repair all of Tenant’s personal property, inventory, trade fixtures and other improvements constructed by Tenant to like or similar conditions at the time of such damage or destruction.

     10.2 LANDLORD’S RIGHT TO TERMINATE

     Landlord shall have the option to terminate this Lease in the event any of the following occurs, which option may be exercised only by delivery to Tenant of a written notice of election to terminate within thirty days after the date of such damage or destruction:

          A. The Building is damaged by any peril covered by valid and collectible insurance actually carried by Landlord and in force at the time of such damage or destruction (an “insured peril”) to such an extent that the estimated cost to restore the Building exceeds the lesser of (i) the insurance proceeds available from insurance actually carried by Landlord, or (ii) seventy-five percent of the then actual replacement cost thereof;

          B. The Building is damaged by an uninsured peril, which peril Landlord was required to insure against pursuant to the provisions of Article 9 of this Lease, to such an extent that the estimated cost to restore the Building exceeds the lesser of (i) the insurance proceeds which would have been available had Landlord carried such required insurance, or (ii) seventy-five percent of the then actual replacement cost thereof;

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          C. The Building is damaged by an uninsured peril, which peril Landlord was not required to insure against pursuant to the provisions of Article 9 of this Lease, to any extent.

          D. The Building is damaged by any peril and, because of the Laws then in force; the Building (i) can not be restored at reasonable cost or (ii) if restored, cannot be used for the same use being made thereof before such damage.

     10.3 TENANT’S RIGHT TO TERMINATE

     If the Leased Premises are damaged by any peril and Landlord does not elect to terminate this Lease or is not entitled to terminate this Lease pursuant to this Article, then as soon as reasonably practicable, Landlord shall furnish Tenant with the written opinion of Landlord’s architect or construction consultant as to when the restoration work required of Landlord may be complete. Tenant shall have the option to terminate this Lease in the event any of the following occurs, which option may be exercised in the case of A or B below only by delivery to Landlord of a written notice of election to terminate within seven days after Tenant receives from Landlord the estimate of the time needed to complete such restoration:

          A. The Leased Premises are damaged by any peril and, in the reasonable opinion of Landlord’s architect or construction consultant, the restoration of the Leased Premises cannot be substantially completed within nine months after the date of such damage; or

          B. The Leased Premises are damaged by any peril within nine months of the last day of the Lease Term and, in the reasonable opinion of Landlord’s architect or construction consultant, the restoration of the Leased Premises cannot be substantially completed within ninety days after the date such restoration is commenced; or

          C. Landlord does not complete the restoration of the Leased Premises within nine months from the date of the damage, provided that such nine-month period of time shall be extended for such number of days as Landlord may be delayed by reason of Force Majeure.

     10.4 TENANT’S WAIVER

     Landlord and Tenant agree that the provision of Paragraph 10.3 above, captioned “Tenant’s Right to Terminate”, are intended to supersede and replace the provisions contained in California Civil Code, Section 1932, Subdivision 2, and California Civil Code, Section 1934, and accordingly, Tenant hereby waives the provisions of said Civil Code Sections and the provisions of any successor Code Sections or similar Laws hereinafter enacted.

     10.5 ABATEMENT OF RENT

     In the event of damage to the Leased Premises, which does not result in the termination of this Lease, the Base Monthly Rent (and any Additional Rent) shall be temporarily abated during the period of restoration in proportion to the degree to which Tenant’s use of the Leased Premises is impaired by such damage.

ARTICLE 11: CONDEMNATION

     11.1 LANDLORD’S RIGHT TO TERMINATE

     Subject to Paragraph 11.3, Landlord shall have the option to terminate this lease if, as a result of a taking by means of the exercise of the power of eminent domain (including inverse condemnation and/or a voluntary sale or transfer by Landlord to an entity having the power of eminent domain under the threat of condemnation), (i) all or any part of the Leased Premises is so taken, (ii) more than thirty-three and one-third percent of the Building’s leasable area is so taken, (iii) more than thirty-three and one-third percent of the Common Areas is so taken, or (iv) because of the Laws then in force, the Leased Premises may not be used for the same use being made thereof before such taking, whether or not restored as required by Paragraph 11.4 below. Any such option to terminate by Landlord must be exercisable within a reasonable period of time; to be effective as of the date possession is taken by the condemnor.

     11.2 TENANT’S RIGHT TO TERMINATE

     Subject to Paragraph 11.3, Tenant shall have the option to terminate this Lease if, as a result of any taking by means of the exercise of the power of eminent domain (including inverse condemnation and/or a voluntary sale or transfer by Landlord to an entity having the power of eminent domain under threat of condemnation), (i) all of the Leased Premises is so taken, (ii) thirty-three and one-third percent or more of the Leased Premises is so taken and the part of the Leased Premises that remains cannot, within a reasonable period of time, be made reasonably suitable for the continued operation of the Tenant’s business or, (iii) there is a taking of a portion of the Common Areas, as a result of such taking, Landlord cannot provide parking spaces within the Project (or within a reasonable distance therefrom) equal in number to at least sixty-six and two-thirds percent of Tenant’s Number of Parking Spaces (as set forth in Article 1), whether by rearrangement of the remaining parking areas in the Common Area (including, if Landlord elects, construction of multi-deck parking structures or restriping for compact cars where permitted by Law), or by providing alternative parking facilities on other land within reasonable walking distance of the Leased Premises. Tenant must exercise such option within a reasonable period of time, to be effective on the later to occur of (i) the date that possession of that portion of the Common area or the Leased Premises that is condemned and taken by the condemnor or (ii) the date Tenant vacates the Leased Premises.

     11.3 TEMPORARY TAKING

     If any portion of the Leased Premises is temporarily taken for one year or less, this Lease shall remain in effect. If any portion of the Leased Premises is temporarily taken for a period which either exceeds one year or which extends beyond the natural expiration of the Lease Term, then Landlord and Tenant shall each independently have the option to terminate this Lease, effective on the date possession is taken by the condemnor.

     11.4 RESTORATION AND ABATEMENT OF RENT

     If any part of the Leased Premises is taken by condemnation and this Lease is not terminated, then Landlord shall repair any damage occasioned thereby to the remainder of the Leased Premises to a condition reasonably suitable for Tenant’s continued operations and otherwise, to the extent practicable, in the manner and to the extent provided in Paragraph 10.1. As of the date possession is taken by the condemning authority, (i) the Base Monthly Rent shall be reduced in the same proportion that the area of that part of the Leased Premises so taken (less any addition to the area of the Leased

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Premises by reason of any construction) bears to the area of the Leased Premises immediately prior to such taking, and (ii) Tenant’s Proportionate Share shall be appropriately adjusted.

     11.5 DIVISION OF CONDEMNATION AWARD

     Any award made for any condemnation of the Project, the Building, the Common Areas or the Leased Premises, or any portion thereof, shall belong to and be paid to Landlord, and Tenant hereby assigns to Landlord all of its right, title and interest in any such award; provided, however, that Tenant shall be entitled to receive any condemnation award that is made directly to Tenant (i) for the taking of personal property, inventory or trade fixtures belonging to Tenant, (ii) for the interruption of Tenant’s business or its moving costs, (iii) for loss of Tenant’s goodwill, or (iv) for any temporary taking where this Lease is not terminated as a result of such taking. The rights of Landlord and Tenant regarding any condemnation shall be determined as provided in this Article, and each party hereby waives the provisions of Section 1265.130 of the California Code of Civil Procedure, and the provisions of any similar law hereinafter enacted, allowing either party to petition the Superior Court to terminate this Lease and/or allocating condemnation awards between Landlord and Tenant in the event of a taking of the Leased Premises.

ARTICLE 12: DEFAULT AND REMEDIES

     12.1 EVENTS OF TENANT’S DEFAULT

     Tenant shall be in default of its obligations under this Lease if any of the following events occur:

          A. Tenant shall have failed to pay Base Monthly Rent or any Additional Rent when due; or

          B. Tenant shall have done or permitted to have been done any act, use or thing in its use, occupancy or possession of the Leased Premises or in its use of the Common Areas which is prohibited by the terms of this Lease; or

          C. Tenant shall have failed to perform any term, covenant or condition of this Lease, except those requiring the payment of Base Monthly Rent or Additional Rent, within ten days after written notice from Landlord to Tenant specifying the nature of such failure and requesting Tenant to perform same.

          D. Tenant shall have sublet the Leased Premises or assigned or encumbered its interest in this Lease in violation of the provisions contained in Article 7, whether voluntarily or by operation of Law; or

          E. Tenant shall have abandoned the Leased Premises; or

          F. Tenant or any Guarantor of this Lease shall have permitted or suffered the sequestration or attachment of, or execution on, or the appointment of a custodian or receiver with respect to, all or any substantial part of the property or assets of Tenant (or such Guarantor) or any property or asset essential to the conduct of Tenant’s (or such Guarantor’s) business, and Tenant (or such Guarantor) shall have failed to obtain a return or release of the same within thirty days thereafter, or prior to sale pursuant to such sequestration, attachment or levy, whichever is earlier; or

          G. Tenant or any Guarantor of this Lease shall have made a general assignment of all or a substantial part of its assets for the benefit of its creditors; or

          H. Tenant or any Guarantor of this Lease shall have allowed (or sought) to have entered against it a decree or order which: (i) grants or constitutes an order for relief, appointment of a trustee, or confirmation of a reorganization plan under the bankruptcy laws of the United States; (ii) approves as property filed a petition seeking liquidation or reorganization under said bankruptcy laws or any other debtor’s relief law or similar statute of the United States or any state thereof; or (iii) otherwise directs the winding up or liquidation of Tenant; provided, however, if any decree or order was entered without Tenant’s consent or over Tenant’s objection, Landlord may not terminate this Lease pursuant to this Subparagraph if such decree or order is rescinded or reversed within thirty days after its original entry.

          I. Tenant or any Guarantor of this Lease shall have availed itself of the protection of any debtor’s relief law, moratorium law or other similar Law, which does not require the prior entry of a decree or order.

     12.2 LANDLORD’S REMEDIES

     In the event of any default by Tenant, and without limiting Landlord’s right to indemnification as provided in Article 8.2, Landlord shall have the following remedies, in addition to all other rights and remedies provided by law or otherwise provided in this Lease, to which Landlord may resort cumulatively, or in the alternative:

          A. Landlord may, at Landlord’s election, keep this Lease in effect and enforce, by an action at law or in equity, all of its rights and remedies under this Lease including, without limitation, (i) the right to recover the rent and other sums as they become due by appropriate legal action, (ii) the right to make payments required of Tenant, or perform Tenant’s obligations and be reimbursed by Tenant for the cost thereof with interest at the then maximum rate of interest not prohibited by Law from the date the sum is paid by Landlord until Landlord is reimbursed by Tenant, and (iii) the remedies of injunctive relief and specific performance to prevent Tenant from violating the terms of this Lease and/or to compel Tenant to perform its obligations under this Lease, as the case may be.

          B. Landlord may, at Landlord’s election, terminate this Lease by giving Tenant written notice of termination, in which event this Lease shall terminate on the date set forth for termination in such notice. Any termination under this Subparagraph shall not relieve Tenant from its obligation to pay to Landlord all Base Monthly Rent and Additional Rent then or thereafter due, or any other sums due or thereafter accruing to Landlord, or from any claim against Tenant for damages previously accrued or then or thereafter accruing. In no event shall any one or more of the following actions by landlord, in the absence of a written election by Landlord to terminate this Lease, constitute a termination of this Lease:

               (1) Appointment of a receiver or keeper in order to protect Landlord’s interest hereunder;

               (2) Consent to any subletting of the Leased Premises or assignment of this Lease by Tenant, whether pursuant to the provisions hereof or otherwise; or

               (3) Any other action by Landlord or Landlord’s agents intended to mitigate the adverse effects of any breach of this Lease by Tenant, including, without limitation, any action taken to maintain and preserve the Leased Premises or any action taken to relet the Leased Premises, or any portion thereof, for the account of Tenant and in the name of Tenant.

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          C. In the event Tenant breaches this Lease and abandons the Leased Premises, Landlord may terminate this Lease, but this Lease shall not terminate unless Landlord gives Tenant written notice of termination. No act by or on behalf of Landlord intended to mitigate the adverse effect of such breach, including those described by Subparagraphs B(1), (2) and (3) immediately preceding, shall constitute a termination of Tenant’s right to possession unless Landlord gives Tenant written notice of termination. If Landlord does not terminate this Lease by giving written notice of termination, Landlord may enforce all its rights and remedies under this lease, including the right to recover rent as it becomes due under this Lease as provided in California Civil Code Section 1951.4, as in effect on the Effective Date of this Lease.

          D. In the event Landlord terminates this Lease, Landlord shall be entitled, at Landlord’s election, to damages in an amount as set forth in California Civil Code Section 1951.2, an interest rate equal to the maximum rate of interest then not prohibited by Law shall be used where permitted. Such damages shall include, without limitation:

               (1) The worth at the time of award of the amount by which the unpaid rent for the balance of the term after the time of award exceeds the amount of such rental loss that Tenant proves could be reasonably avoided, computed by discounting such amount at the discount rate of the Federal Reserve Bank of San Francisco at the time of award plus one percent; and

               (2) Any other amount necessary to compensate Landlord for all detriment proximately caused by Tenant’s failure to perform Tenant’s obligations under this lease, or which in the ordinary course of things would be likely to result therefrom, including, without limitation, the following (i) expenses for cleaning, repairing or restoring the Leased Premises; (ii) expenses for altering, remodeling or otherwise improving the Leased Premises for the purpose of reletting, including removal of existing leasehold improvements and/or installation of additional leasehold improvements (regardless of how the same is funded, including reduction of rent, a direct payment or allowance to a new tenant, or otherwise); (iii) broker’s fees, advertising costs and other expenses of reletting the Leased Premises; (iv) costs of carrying the Leased Premises, such as taxes, insurance premiums, utility charges and security precautions; (v) expenses incurred in removing, disposing of and/or storing any of Tenant’s personal property, inventory or trade fixtures remaining therein; (vi) attorney’s fees, expert witness fees, court costs and other reasonable expenses incurred by landlord (but not limited to taxable costs) in retaking possession of the Leased Premises, establishing damages hereunder, and releasing the Leased Premises; and (vii) any other expenses, costs or damages otherwise incurred or suffered as a result of Tenant’s default.

     12.3 LANDLORD’S DEFAULT AND TENANT’S REMEDIES

     In the event Landlord fails to perform any of its obligations under this Lease, Landlord shall nevertheless not be in default under the terms of this Lease until such time as Tenant shall have first given Landlord written notice specifying the nature of such failure to perform its obligations, and then only after Landlord shall have had a reasonable period of time following its receipt of such notice within which to perform such obligations. In the event of Landlord’s default as above set forth, then, and only then, Tenant shall have the following remedies only:

          A. Tenant may then proceed in equity or at law to compel Landlord to perform its obligations and/or to recover damages proximately caused by such failure to perform (except as and to the extent Tenant has waived its right to damages as provided in this Lease).

          B. Tenant, at its option, may then cure any default of Landlord at Landlord’s cost. If, pursuant to this Subparagraph, Tenant reasonably pays any sum to any third party or does any act that requires the payment of any sum to any third party at any time by reason of Landlord’s default, the sum paid by Tenant shall be immediately due from Landlord to Tenant at the time Tenant supplies Landlord with an invoice therefore (provided such invoice sets forth and is accompanied by a written statement of Tenant setting forth in reasonable detail the amount paid, the party to whom it was paid, the date it was paid, and the reasons giving rise to such payment), together with interest at twelve percent per annum from the date of such invoice until Tenant is reimbursed by Landlord. Tenant may not offset such sums against any installment of rent due Landlord under the terms of this Lease.

     12.4 LIMITATION ON TENANT’S RECOURSE

     If Landlord is a corporation, trust, partnership, joint venture, unincorporated association, or other form of business entity, Tenant agrees that (i) the obligations of Landlord under this Lease shall not constitute personal obligations of the officers, directors, trustees, partners, joint venturers, members, owners, stockholders, or other principals of such business entity and (ii) Tenant shall have recourse only to the assets of such business entity for the satisfaction o such obligations and not against the assets of such officers, directors, trustees, partners, joint venturers, members, owners, stockholders or principals (other than to the extent of their interest in the assets owned by such business entity). Additionally, if Landlord is a partnership, then Tenant covenants and agrees:

          A. No partner of Landlord shall be sued or named as a party in any suit or action brought by Tenant with respect to any alleged breach of this Lease (except to the extent necessary to secure jurisdiction over the partnership and then only for that sole purpose);

          B. No service of process shall be made against any partner of Landlord except for the sole purpose of securing jurisdiction over the partnership; and

          C. No writ of execution shall be levied against the assets of any partner of Landlord other than to the extent of his interest in the assets of the partnership.

     12.5 TENANT’S WAIVER

     Landlord and Tenant agree that the provisions of Paragraph 12.3 above are intended to supersede and replace the provisions of California Civil Code 1932(1), 1941 and 1942, and accordingly, Tenant hereby waives the provisions of Section 1932(1), 1941 and 1942 of the California Civil Code and/or any similar or successor Law regarding Tenant’s right to terminate this Lease or to make repairs and deduct the expenses of such repairs from the rent due under this Lease. Tenant hereby waives any right to redemption or relief from forfeiture under the Laws of the State of California, or under any other present or future Law, in the event Tenant is evicted or Landlord takes possession of the Leased Premises by reason of any default by Tenant.

ARTICLE 13: GENERAL PROVISIONS

     13.1 TAXES ON TENANT’S PROPERTY

     Tenant shall pay before delinquency any and all taxes, assessments, license fees, use fees, permit fees and public charges of whatever nature or description levied, assessed or imposed against

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Tenant or Landlord by a governmental agency arising out of, caused by reason of or based upon Tenant’s estate in this Lease, Tenant’s ownership of property, improvements made by Tenant to the Leased Premises, improvements made by Landlord for Tenant’s use within the Leased Premises, Tenants use (or estimated use) of public facilities or services or Tenant’s consumption (or estimated consumption) of public utilities, energy, water or other resources. On demand by Landlord, Tenant shall furnish Landlord with satisfactory evidence of these payments. If any such taxes, assessments, fees or public charges are levied against Landlord, Landlord’s property, the Building, or the Project, or if the assessed value of the Building or the Project is increased by the inclusion therein of a value placed upon the same, then Landlord, after giving written notice to Tenant, shall have the right, regardless of the validity thereof, to pay such taxes, assessment, fee or public charge and bill Tenant, as Additional Rent, the amount of such taxes, assessment, fee or public charge so paid on Tenant’s behalf. Tenant shall, within ten days from the date it receives an invoice from Landlord setting forth the amount of such taxes, assessment, fee or public charge so levied, pay to Landlord, as Additional Rent, the amount set forth in said invoice. Failure by Tenant to pay the amount so invoiced within said ten-day period shall be conclusively deemed a default by Tenant under this Lease. Tenant shall have the right, and with Landlord’s full cooperation if Tenant is not then in default under the terms of this Lease, to bring suit in any court of competent jurisdiction to recover from the taxing authority the amount of any such taxes, assessment, fee or public charge so paid.

     13.2 HOLDING OVER

     This Lease shall terminate without further notice on the Lease Expiration Date (as set forth in Article 1). Any holding over by Tenant after expiration of the Lease Term shall neither constitute a renewal nor extension of this Lease nor give Tenant any rights in or to the Leased Premises except as expressly provided in this Paragraph. Any such holding over shall be deemed an unlawful detainer of the Leased Premises unless Landlord has consented to same. Any such holding over to which Landlord has consented shall be construed to be a tenancy from month to month, on the same terms and conditions herein specified insofar as applicable, except that the Base Monthly Rent shall be increased to an amount equal to one hundred fifty percent of the Base Monthly Rent payable during the last full month immediately preceding such holding over.

     13.3 SUBORDINATION

     This Lease is subject and subordinate to all deeds of trust, which affect the Building and are of public record as of the Effective Date of this Lease, and to all renewals, modifications, consolidations, replacements and extensions thereof. However, if any Lender holding any such deed of trust shall advise Landlord that it desires or requires this Lease to be made prior and superior thereto, then, upon written request of Landlord to Tenant, Tenant shall promptly execute, acknowledge and deliver any and all documents or instruments which Landlord and such Lender deem necessary or desirable to make this Lease prior thereto. Tenant hereby consents to Landlord’s encumbering the Building as security for future loans on such terms as Landlord shall desire, which future deeds of trust shall be subject and subordinate to this Lease. However, if any Lender holding such future deed of trust shall desire or require that this Lease be made subject and subordinate to such future deed of trust, then Tenant agrees, within ten days after Landlord’s written request therefore, to execute, acknowledge and deliver to Landlord any and all documents or instruments requested by Landlord or such Lender as may be necessary or proper to assure the subordination of this Lease to such future deed of trust; but only if such Lender agrees to recognize Tenant’s rights under this Lease and not to disturb Tenant’s quiet possession of the Leased Premises so long as Tenant is not in default under this Lease.

     13.4 TENANT’S ATTORNMENT UPON FORECLOSURE

     Tenant shall, upon request, attorn (i) to any purchaser of the Building at any foreclosure sale or private sale conducted pursuant to any security instrument encumbering the Building, or (ii) to any grantee or transferee designated in any deed given in lieu of foreclosure of any security interest encumbering the Building.

     13.5 LENDER PROTECTION

     In the event of any default on the part of the Landlord, Tenant will give notice by certified mail to any Lender who shall have requested, in writing, to Tenant that it be provided with such notice, and Tenant shall offer such Lender a reasonable opportunity to cure the default, including time to obtain possession of the Leased Premises by power of sale of judicial foreclosure or other appropriate legal proceedings if reasonably necessary to effect a cure.

     13.6 ESTOPPEL CERTIFICATES

     Tenant will, following any request by Landlord, promptly execute and deliver to Landlord an estoppel certificate (i) certifying that this Lease is unmodified and in full force and effect, or, if modified, stating the nature of such modification and certifying that this Lease, as so modified, is in full force and effect, (ii) stating the date to which the rent and other charges are paid in advance, if any, (iii) acknowledging that there are not, to Tenant’s knowledge, any uncured defaults on the part of Landlord hereunder, or specifying such defaults if any are claimed, and (iv) certifying such other information about this Lease as may be reasonably requested by Landlord. Tenant’s failure to execute and deliver such estoppel certificate within ten days after Landlord’s request therefore shall be a material default by Tenant under this Lease, and Landlord shall have all of the rights and remedies available to Landlord as Landlord would otherwise have in the case of any other material default by Tenant, including the right to terminate this Lease and sue for damages proximately caused thereby, it being agreed and understood by Tenant that Tenant’s failure to so deliver such estoppel certificate in a timely manner could result in Landlord being unable to perform committed obligations to other third parties which were made by Landlord in reliance upon this covenant of Tenant. Landlord and Tenant understand that any statement delivered pursuant to this Paragraph may be relied upon by any Lender or purchaser or prospective Lender or purchaser of the Building, the Project, or any interest therein.

     13.7 TENANTS’ FINANCIAL INFORMATION

     Tenant shall, within ten business days after Landlord’s request therefore, deliver to Landlord a copy of a current financial statement and any such other information reasonably requested by Landlord regarding Tenant’s financial condition. Landlord shall be entitled to disclose such financial statements or other information to its Lender, to any present or prospective principal of or investor in Landlord, or to any prospective Lender or purchaser of the Building, the Project or any portion thereof or interest therein. Any such financial statement or other information which is marked “confidential” or “company secrets” (or is otherwise similarly marked by Tenant) shall be confidential and shall not be disclosed by Landlord to any third party except as specifically provided in this Paragraph, unless the same becomes a part of the public domain without the fault of Landlord.

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     13.8 TRANSFER BY LANDLORD

     Landlord and its successors in interest shall have the right to transfer their interest in the Building, the Project, or any portion thereof at any time and to any person or entity. In the event of any such transfer, the Landlord originally named herein (and in the case of any subsequent transfer, the transferor), from the date of such transfer, (i) shall be automatically relieved, without any further act by any person or entity, of all liability for the performance of the obligations of the Landlord hereunder which may accrue after the date of such transfer and (ii) shall be relieved of all liability for the performance of the obligations of the Landlord hereunder which have accrued before the date of transfer if its transferee agrees to assume and perform all such prior obligations of the Landlord hereunder. Tenant shall attorn to any such transferee. After the date of any such transfer, the term “Landlord” as used herein shall mean the transferee of such interest in the Building or the Project.

     13.9 FORCE MAJEURE

     The obligations of each of the parties under this Lease (other than the obligation to pay money) shall be temporarily excused if such party is prevented or delayed in performing such obligation by reason of any strikes, lockouts or labor disputes; inability to obtain labor, materials, fuels or reasonable substitutes therefore; governmental restrictions, regulations, controls, action or inaction; civil commotion; inclement weather, fire or other acts of God; or other causes (except financial inability) beyond the reasonable control of the party obligated to perform (including acts or omissions of the other party) for a period equal to the period of any such prevention, delay or stoppage.

     13.10 NOTICES

     Any notice required or desired to be given by a party regarding this Lease shall be in writing and shall be personally served, or in lieu of personal service may be given by depositing such notice in the United States mail, registered or certified, postage prepaid, addressed to the other party as follows:

          A. If addressed to Landlord, to Landlord at its Address for Notices (as set forth in Article 1).

          B. If addressed to Tenant, to Tenant at its Address for Notices (as set forth in Article 1).

     Any notice given by registered mail shall be deemed to have been given on the third business day after its deposit in the United States mail. Any notice given by certified mail shall be deemed given on the date receipt was acknowledged to the postal authorities. Any notice given by mail other than registered or certified mail shall be deemed given only if received by the other party, and then on the date of receipt. Each party may, by written notice to the other in the manner aforesaid, change the address to which notices addressed to it shall thereafter be mailed.

     13.11 ATTORNEY’S FEES

     In the event any party shall bring any action, arbitration proceeding or legal proceeding alleging a breach of any provision of this Lease, to recover rent, to terminate this Lease, or to enforce, protect, determine or establish any term or covenant of this Lease or rights or duties hereunder of either party, the prevailing party shall be entitled to recover from the non-prevailing party as a part of such action or proceeding, or in a separate action for that purpose brought within one year from the determination of such proceeding, reasonable attorney’s fees, expert witness fees, court costs and other reasonable expenses incurred by the prevailing party. In the event that Landlord shall be required to retain counsel to enforce any provision of this Lease, and if Tenant shall thereafter cure (or desire to cure) such default, Landlord shall be conclusively deemed the prevailing party and Tenant shall pay to Landlord all attorney’s fees, expert witness fees, court costs and other reasonable expenses so incurred by Landlord promptly upon demand. Landlord may enforce this provision by either (i) requiring Tenant to pay such fees and costs as a condition to curing its default or (ii) bringing a separate action to enforce such payment, it being agreed by and between Landlord and Tenant that Tenant’s failure to pay such fees and costs upon demand shall constitute a breach of this Lease in the same manner as a failure by Tenant to pay the Base Monthly Rent, giving Landlord the same rights and remedies as if Tenant failed to pay the Base Monthly Rent.

     13.12 DEFINITIONS

     Any term that is given a special meaning by any provision in this Lease shall, unless otherwise specifically stated, have such meaning whenever used in this Lease or in any Addenda or Amendment hereto. In addition to the terms defined in Article 1, the following terms shall have the following meaning:

          A. REAL PROPERTY TAXES: The term “Real Property Tax” or “Real Property Taxes” shall each mean (i) all taxes, assessments, levies and other charges of any kind or nature whatsoever, general and special, foreseen and unforeseen (including all installments of principal and interest required to pay any general or special assessments for public improvements and any increases resulting from reassessments caused by any change in ownership or new construction), now or hereafter imposed by any governmental or quasi-governmental authority or special district having the direct or indirect power to tax or levy assessments, which are levied or assessed for whatever reason against the Project or any portion thereof, or Landlord’s interest therein, or the fixtures, equipment and other property of Landlord that is an integral part of the Project and located thereon, or Landlord’s business of owning, leasing or managing the Project or the gross receipts, income, or rentals from the Project: (ii) all charges, levies or fees imposed by any governmental authority against Landlord by reason of or based upon the use of or number of parking spaces within the Project, the amount of public services or public utilities used or consumed (e.g. water, gas, electricity, sewage, or surface water disposal) at the Project, the number of persons employed by tenants of the Project, the size (whether measured in area, volume, number of tenants or whatever) or the value of the Project, or the type of use or uses conducted within the Project; and (iii) all costs and fees (including attorneys’ fees) incurred by Landlord in contesting any Real Property Tax and in negotiating with public authorities as to any Real Property Tax. If, at any time during the Lease Term, the taxation or assessment of the Project prevailing as of the Effective Date of this Lease shall be altered so that in lieu of or in addition to any Real Property Tax described above there shall be levied, assessed or imposed (whether by reason of a change in the method of taxation or assessment, creation of a new tax or charge, or any other cause) an alternate, substitute, or additional tax or charge (i) on the value, size, use or occupancy of the Project or Landlord’s interest therein or (ii) on or measured by the gross receipts, income or rental from the Project, or on Landlord’s business of owning, leasing or managing the Project or (iii) computed in any manner with respect to the operation of the Project, then any such

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tax or charge, however designated, shall be included within the meaning of the terms “Real Property Tax” or “Real Property Taxes” for purposes of this Lease. If any Real Property Tax is partly based upon property or rents unrelated to the Project, then only that part of such Real Property Tax that is fairly allocable to the Project shall be included within the meaning of the terms “Real Property Tax” or “Real Property Taxes”. Notwithstanding the foregoing, the terms “Real Property Tax” or “Real Property Taxes” shall not include estate, inheritance, transfer, gift or franchise taxes of Landlord or the federal or state income tax imposed on Landlord’s income from all sources.

          B. LANDLORD’S INSURANCE COSTS: The term “Landlord’s Insurance Costs’ shall mean the costs to Landlord to carry and maintain the policies of fire and property damage insurance for the Project and general liability insurance required, or permitted, to be carried by Landlord pursuant to Article 9, together with any deductible amounts paid by Landlord upon the occurrence of any insured casualty or loss.

          C. PROJECT MAINTENANCE COSTS: The term “Project Maintenance Costs” shall mean all costs and expenses (except Landlord’s Insurance Costs and Real Property Taxes) paid or incurred by Landlord in protecting, operating, maintaining, repairing and preserving the Project and all parts thereof, including without limitation, (i) professional management fees (not to exceed three percent of the Project’s scheduled gross rental income), (ii) the amortizing portion of any costs incurred by Landlord in the making of any modifications, alterations or improvements required by any governmental authority as set forth in Article 6, which are so amortized during the Lease Term, and (iii) such other costs as may be paid or incurred with respect to operating, maintaining and preserving the Project, such as repairing and resurfacing the exterior surfaces of the buildings (including roofs), repairing and resurfacing paved areas, repairing structural parts of the building, and replacing, when necessary, electrical, plumbing, heating, ventilating and air conditioning systems serving the buildings.

          D. READY FOR OCCUPANCY: The term “Ready for Occupancy” shall mean the date upon which (i) the Leased Premises are available for Tenant’s occupancy in a broom clean condition and (ii) the improvements, if any, to be made to the Leased Premises by Landlord as a condition to Tenant’s obligation to accept possession of the Leased Premises have been substantially completed and the appropriate governmental building department (i.e. the City building department, if the Project is located within a City, or otherwise the County building department) shall have approved the construction of the improvements as complete or is willing to so approve the construction of the improvements as complete subject only to compliance with specified conditions which are the responsibility of Tenant to satisfy.

          E. TENANT’S PROPORTIONATE SHARE: The term “Tenant’s Proportionate Share” or “Tenant’s Share”, as used with respect to an item pertaining to the Building, shall each mean that percentage obtained by dividing the leasable square footage contained within the Leased Premises (as set forth in Article 1) by the total leasable square footage contained within the Building as the same from time to time exists or, as used with respect to an item pertaining to the Project, shall each mean that percentage obtained by dividing the leasable square footage contained within the Leased Premises (as set forth in Article 1) by the total leasable square footage contained within the Project as the same from time to time exists, unless, as to any given item, such a percentage allocation unfairly burdens or benefits a given tenant(s), in which case Landlord shall have the exclusive right to equitably allocate such item so as to not unfairly burden or benefit any given tenant(s). Landlord’s determination of any such special allocation shall be final and binding upon Tenant unless made in bad faith.

          F. BUILDING’S PROPORTIONATE SHARE: The term “Building’s Proportionate Share” or “Building’s Share” shall each mean that percentage which is obtained by dividing the leasable square footage contained within the Building by the leasable square footage contained within all buildings located within the Project, unless, as to any given item, such a percentage allocation unfairly burdens or benefits a given building(s), in which case Landlord shall have the exclusive right to equitably allocate such item so as to not unfairly burden or benefit any given building(s). Landlord’s determination of any such special allocation shall be final and binding upon Tenant unless made in bad faith.

          G. LAW: The term “Law” shall mean any judicial decision and any statute, constitution, ordinance, resolution, regulation, rule, administrative order, or other requirement of any municipal, county, state, federal, or other governmental agency or authority having jurisdiction over the parties to this Lease, the Leased Premises, the Building or the Project, or any of them in effect either at the Effective Date of this Lease or at any time during the Lease Term, including, without limitation, any regulation, order, or policy of any quasi-official entity or body (e.g. a board of fire examiners or a public utility or special district).

          H. LENDER: The term “Lender” shall mean the holder of any Note or other evidence of indebtedness secured by the Project or any portion thereof.

          I. RENT: The term “rent” shall mean collectively Base Monthly Rent and all Additional Rent.

     13.13 GENERAL WAIVERS

     One party’s consent to or approval of any act by the other party requiring the first party’s consent or approval shall not be deemed to waive or render unnecessary the first party’s consent to or approval of any subsequent similar act by the other party. No waiver of any provision hereof or any breach of any provision hereof shall be effective unless in writing and signed by the waiving party. The receipt by Landlord of any rent or payments with or without knowledge of the breach of any other provision hereof shall not be deemed a waiver of any such breach. No waiver of any provision of this Lease shall be deemed a continuing waiver unless such waiver specifically states so in writing and is signed by both Landlord and Tenant. No delay or omission in the exercise of any right or remedy or be construed as a waiver of any such breach theretofore or thereafter occurring. The waiver by either party of any breach of any provision of this Lease shall not be deemed to be a waiver of any subsequent breach of the same or any other provisions herein contained.

     13.14 MISCELLANEOUS

     Should any provision of this Lease prove to be invalid or illegal, such invalidity or illegality shall in no way affect, impair or invalidate any other provision hereof, and such remaining provisions shall remain in full force and effect. Time is of the essence with respect to the performance of every provision of this Lease in which time of performance is a factor. Any copy of this Lease, which is executed by the parties, shall be deemed an original for all purposes. This Lease shall, subject to the provisions regarding assignment, apply to and bind the respective heirs, successors, executors, administrators and assigns of Landlord and Tenant. The term “party” shall mean Landlord or Tenant as the context implies. If Tenant consists of more than one person or entity, then all members of Tenant shall be jointly and severally liable hereunder. This Lease shall be construed and enforced in accordance with the Laws of the State in which the Leased Premises are located. The language in all parts of this Lease shall in all cases be construed as a whole according to its fair meaning, and not strictly for or against either Landlord or Tenant. The captions used in this Lease are for convenience

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only and shall not be considered in the construction or interpretation of any provision hereof. When the context of this Lease requires, the neuter gender includes the masculine, the feminine, a partnership or corporation or joint venture, and the singular includes the plural. The terms “must”, “shall”, “will” and “agree” are mandatory. The term “may” is permissive. When a party is required to do something by this Lease, it shall do so at its sole cost and expense without right of reimbursement from the other party unless specific provision is made therefore. Where Tenant is obligated not to perform any act or is not permitted to perform any act, Tenant is also obligated to restrain any others reasonably within its control, including agents, invitees, contractors, subcontractors and employees, from performing said act. Landlord shall not become or be deemed a partner or a joint venturer with Tenant by reason of any of the provisions of this Lease.

ARTICLE 14: CORPORATE AUTHORITY, BROKERS AND ENTIRE AGREEMENT

     14.1 CORPORATE AUTHORITY

     If Tenant is a corporation, each individual executing this Lease on behalf of said Corporation represents and warrants that Tenant is validly formed and duly authorized and existing, that Tenant is qualified to do business in the State in which the Leased Premises are located, that Tenant has the full right and legal authority to enter into this Lease, that he is duly authorized to execute and deliver this Lease on behalf of Tenant in accordance with the bylaws and/or a board of directors’ resolution of Tenant, and that this Lease is binding upon Tenant in accordance with its terms. Tenant shall, within thirty days after execution of this Lease, deliver to Landlord a certified copy of the resolution of its Board of Directors authorizing or ratifying the execution of this Lease, and if Tenant fails to do so, Landlord at its sole election may elect to (i) extend the intended Commencement Date by such number of days that Tenant shall have delayed in so delivering such corporate resolution to Landlord or (ii) terminate this Lease.

     14.2 BROKERAGE COMMISSIONS

     Tenant warrants that it has not had any dealings with any real estate broker(s), leasing agent(s), finder(s) or salesmen, other than those persons or entities named in Article 1 as the “Brokers” with respect to the Lease by it of the Leased Premises pursuant to this Lease, and that it will indemnify, defend with competent counsel, and hold Landlord harmless from any liability for the payment of any real estate brokerage commissions, leasing commissions or finder’s fees claimed by any other real estate broker(s), leasing agent(s), finder(s) or salesmen to be earned or due and payable by reason of Tenant’s agreement or promise (implied or otherwise) to pay (or have Landlord pay) such a commission or finder’s fee by reason of its leasing the Leased Premises pursuant to this Lease.

     14.3 ENTIRE AGREEMENT

     This Lease, the Exhibits (as described in Article 1) and the Addenda (as described in Article 1), which Exhibits and Addenda are by this reference incorporated herein, constitute the entire agreement between the parties, and there are no other agreements, understanding or representations between the parties relating to the Lease by Landlord of the Leased Premises to Tenant, except as expressed herein. No subsequent changes, modifications or additions to this Lease shall be binding upon the parties unless in writing and signed by both Landlord and Tenant.

     14.4 LANDLORD’S REPRESENTATIONS

     Tenant acknowledges that neither Landlord nor any of its agents made any representations or warranties respecting the Project, the Building or the Leased Premises, upon which Tenant relied in entering into this Lease, which are not expressly set forth in this Lease. Tenant further acknowledges that neither Landlord nor any of its agents made any representations as to (i) whether the Leased Premises may be used for Tenant’s intended use under existing Law or (ii) the suitability of the Leased Premises for the conduct of Tenant’s business or (iii) the exact square footage of the Leased Premises, and that Tenant relied solely upon its own investigations respecting said matters. Tenant expressly waives any and all claims for damage by reason of any statement, representation, warranty, promise or other agreement of Landlord or Landlord’s agent(s), if any, not contained in this Lease or in any Addenda hereto.

     IN WITNESS WHEREOF, Landlord and Tenant have executed this Lease as of the respective dates below set forth with the intent to be legally bound thereby as of the Effective Date of this Lease first above set forth.

		AS LANDLORD:
		Tasman V, LLC
Dated:	9/19/06	Jack E. Horton
		AS TENANT:
		Adeza Biomedical Corporation
Dated:	9/15/06	Mark D. Fischer-Colbrie
		Vice President, Finance and Administration
		and Chief Financial Officer

     If Tenant is a CORPORATION, the authorized officers must sign on behalf of the Corporation and indicate the capacity in which they are signing. This Lease must be executed by the Chairman of the Board, President or Vice-President, and the Secretary, Assistant Secretary, the Chief Financial Officer or Assistant Treasurer, unless the bylaws or a resolution of the Board of Directors shall otherwise provide, in which event a certified copy of the bylaws or a certified copy of the resolution, as the case may be, must be attached to this Lease.

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ADDENDUM TO INDUSTRIAL SPACE LEASE

This Addendum relates to that Net Industrial Space Lease (“Lease”) dated July 12, 2006 for reference purposes, between Tasman V, LLC, as Landlord and Adeza Biomedical Corporation, as Tenant.

The Addendum shall be part of the Lease and shall include the following provisions:

     15.1 PAYMENT OF PROJECT MAINTENANCE COSTS

     Landlord shall have the option to deliver to Tenant a written estimate of Tenant’s share of the Project Maintenance Costs for the ensuing lease year. In the event that Landlord delivers such a written estimate to Tenant, Tenant shall then pay to Landlord the estimated amount of the Project Maintenance Costs in twelve (12) equal installments, in advance, commencing on the first day of each month provided that such written notice shall be delivered to Tenant ten (10) days in advance of the due date. Within sixty (60) days after the end of each lease year, Landlord shall furnish to Tenant a statement showing in reasonable details the actual Project Maintenance Costs incurred by Landlord during such lease year. If Tenant paid more than Tenant’s proportionate share, Landlord shall either credit the amount of such overpayment toward the next subsequent payment or payments due for Project Maintenance Costs that would otherwise become due, or refund in cash the amount of such overpayment. If Tenant did not pay Tenant’s proportionate share in full, then Tenant shall pay to Landlord the sum of such underpayment within ten (10) days from Landlord’s written demand. Landlord reserves the right to change from time to time the method of billing Tenant for Tenant’s proportionate share of the Project Maintenance Costs.

     15.2 CONDITION OF THE PREMISES

     Tenant has inspected the premises and agrees to accept possession of the premises in the “as is” condition, without warranty, expressed or implied.

     15.3 OPTION TO EXTEND

     Provided Tenant is not in default under any provision of the Lease, Landlord hereby grants to Tenant two one year options to extend the term of this Lease for an additional term when the existing term expires, on the terms and conditions set forth in this paragraph. Tenant may exercise this option by giving Landlord written notice of its intention not less than sixty (60) days prior to the expiration of the existing term of this Lease. If this Option is exercised, the Base Monthly Rent for the Premises shall equal the then current fair market monthly rent (“Fair Market Rent”), which shall not be less than $19,860.00 per month for the Premises as of the commencement date of the applicable extended term. If the parties cannot agree on the amount of the “Fair Market Rent” and the annual adjustment to such Fair Market Rent within sixty (60) days prior to the commencement of such extended term, then the Fair Market Rent and the annual adjustment thereto shall be determined by an appraisal. All other terms and conditions contained in the Lease and this Addendum, as the same may be amended from time to time by the parties in accordance with the provisions of the Lease, shall remain in full force and effect and shall apply during the Option term.

     If the fair market rental value for the Premises needs to be determined by appraisal, Landlord and Tenant shall either agree to select one real estate appraiser or three real estate appraisers. Any real estate appraiser selected shall be a member of the American Institute of Real Estate Appraisers, shall have at least five (5) years experience appraising commercial space located in the vicinity of the Premises, and shall act in accordance with the rules of the American Institute of Real Estate Appraisers. The Fair Market Rent shall be based on rental of space of the same age, construction, size and location as the Premises with the improvements installed therein. If only one appraiser is selected, then each party shall pay one-half of the fees and expenses of that appraiser. If proceeding with three appraisers, each party shall select one appraiser, who in turn shall select the third appraiser. If three appraisers are selected, each party shall bear the fees and expenses of the appraiser it selects and one-half of the fees and expenses of the third appraiser.

     15.4 EFFECT OF ADDENDUM

     Each term used herein with initial capital letters shall have the meaning ascribed to such term in the Lease unless specifically otherwise defined herein. In the event of any inconsistency between this Addendum and the Lease, the terms of this Addendum shall prevail.

LANDLORD:		TENANT:
Tasman V, LLC		Adeza Biomedical Corporation
By:	Jack E. Horton
		By:	/s/ Mark D. Fischer-Colbrie
			Mark D. Fischer-Colbrie
			Vice President, Finance and Administration and Chief Financial Officer
Date:	9/19/06	Date:	9/15/06

20

EX-31.1

Exhibit 31.1

CERTIFICATION PURSUANT TO RULE 13a-14(a)
OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED

I, Emory V. Anderson, certify that:

1. I have reviewed this Quarterly Report of Adeza Biomedical Corporation;

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(s) 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 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 financial 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 officers 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 function):

(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.

November 7, 2006

By:	/s/ Emory V. Anderson Emory V. Anderson
	Chief Executive Officer

EX-31.2

Exhibit 31.2

CERTIFICATION PURSUANT TO RULE 13a-14(a)
OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED

I, Mark D. Fischer-Colbrie, certify that:

1. I have reviewed this Quarterly Report of Adeza Biomedical Corporation;

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(s) 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 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 financial 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 officers 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 function):

(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.

November 7, 2006

By:	/s/ Mark D. Fischer-Colbrie Mark D. Fischer-Colbrie
	Chief Financial Officer

EX-32.1

Exhibit 32.1

ADEZA BIOMEDICAL CORPORATION

CERTIFICATION 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 Quarterly Report of Adeza Biomedical Corporation (the “Company”) on Form 10-Q for the period ended September 30, 2006, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Emory V. Anderson, President and Chief Executive Officer of the Company, 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) or 15(d) 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.

/s/ Emory V. Anderson Emory V. Anderson

President and Chief Executive Officer

November 7, 2006

EX-32.2

Exhibit 32.2

ADEZA BIOMEDICAL CORPORATION

CERTIFICATION 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 Quarterly Report of Adeza Biomedical Corporation (the “Company”) on Form 10-Q for the period ended September 30, 2006, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Mark D. Fischer-Colbrie, Vice President of Finance and Administration and Chief Financial Officer of the Company, 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) or 15(d) 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.

/s/ Mark D. Fischer-Colbrie Mark D. Fischer-Colbrie

Vice President, Finance and Administration and

Chief Financial Officer

November 7, 2006